| Australia's staggered housing booms Today I want to try and add a whole new chapter to our understanding of Australia's $4 trillion housing market. The chart below illustrates the change in these raw median prices over time. While at first it is hard to make head or tail of the chart, if you look closely you are able to see apparent regime shifts in the state-wide capital growth rates: in particular, NSW, the ACT, and Victoria experience very robust dwelling price gains between 2000 and 2003, which, to varying degrees, stops or slows-down thereafter. With the above insights in mind, our research team has shown that about 96 per cent of the increase in median house prices in Australia between 1985 and today can be explained by changes in household borrowing capacity resulting from the long-term reduction in mortgage rates combined with the growth in family incomes (see first chart below). we have not even discussed the supply-side at this stage). Yet there appears to be another story to be told. Whereas in the decade 1990 to 1999 the highest state median price was, on average, about 200 per cent the size of the lowest, this differential soared to 321 per cent by the end of 2002. And, comfortingly, it has stayed around this level since 2006. One explanation for the phenomenon highlighted might be variations in income growth rates, and hence purchasing power, across the states. The chart also seems to suggest that, setting aside supply-side considerations, asset values did run ahead of income- and interest-rate linked fundamentals in the years after 2002-2003. The 41 per cent decline in home loan costs has, of course, enabled families to boost the amount of mortgage debt they are able to service for any given level of income. Indeed, as at December 2011, it was off a touch at 149. As night follows day, average variable home loan rates have also plummeted to 7. Importantly, it has not increased any further since this pre-GFC apogee - that is, for the last six years, housing credit has expanded at about the same rate as family incomes. The final chart demonstrates that the same dynamics in housing cost dispersion have asserted themselves even after deflating by state incomes: namely, a very large increase in the housing valuation gap from 1995 to 2002-2003, when the highest state price-to-income ratio was around 200 per cent the size of the lowest. That is to say, housing costs had converged to their pre-boom levels. The second replicates my earlier analysis by dividing the highest state ratio by the very lowest. We can try to address this issue by deflating state house prices by state disposable incomes. The red line tackles dispersion another way: it subtracts the difference between the highest and lowest state medians and then divides this number by the national median price. Irrespective of which measure one uses, the analysis shows us that house prices across Australia underwent an enormous break in the early 2000s fuelled by NSW, Victoria and the ACT, which was only remedied in the years after 2003 by catch-up growth across the other states. Between 1980 and 1995 inflation in Australia averaged 6. 7 per cent. Just as housing costs across this slab of the eastern seaboard started to freeze or slow-down, an even more striking boom was gathering momentum in the mining states of Western Australia, Queensland and the Northern Territory. Most readers should now be aware of the well-trodden explanation of what factors first drove the unusually sharp house price appreciation in Australia during the 1990s and 2000s. Dwelling prices in the Northern Territory also accelerate alongside Western Australia, albeit at a lower rate. Unsurprisingly, variable home loan rates also averaged an astonishingly - for anyone under the age of 35 - high 12. And by 1995, the value of total housing debt held by families divided by their disposable incomes was only about 55 per cent. Here again one sees another difference: while Queensland and Western Australia suffer house price falls during the GFC, which they claw back in 2009 and 2010, home values in the Northern Territory appear to keep appreciating during the crisis until they finally run out of steam at the end of 2009. To more precisely measure the time-series divergence in national housing costs I created two new benchmarks which are highlighted in the next chart. Average headline inflation has dropped 58 per cent from its 1980 to 1995 level to just 2. And so Australia's mortgage debt-to-household income ratio started rising from its 55 per cent level in 1995 to a peak of 156 per cent by 2006. House price inflation in Queensland, South Australia, and Tasmania step-ups with a lag, but, importantly, continues to kick-on after 2003, recording healthy capital growth right through to end 2007. |
Tuesday 15 May 2012
Australia's staggered housing booms
