Steve Keen yesterday criticises Ric Battellino for suggesting that the Australian housing market was at its “hottest” in 2003. He bases this critique on the fact Australian house prices, after a dip in 2004, continued to rise through to the present. It is not stretching the imagination to suggest that a normal interpretation of “hottest” would refer to the period at which house prices were rising at their quickest rate. To this end here are some annual % changes in weighted average capital city house prices as calculated by the ABS:
(12 months to:)
- June 2003 18.1%
- Dec 2003 18.9%
- June 2004 10.9%
- Dec 2004 2.7%
- June 2005 0.1%
- Dec 2005 2.3%
- June 2006 6.4%
- Dec 2006 8.3%
- June 2007 9.2%
- Dec 2007 12.3%
- June 2008 8.2%
I can’t find the figures pre-2003 although from other sources it appears the percent increase figures in 2002 were also higher than anything in recent times. Therefore not only is the suggestion by Battellino not “Orwellian” as suggested by Keen — it is correct.
Keen hails the 1.8% quarterly decline in house prices last quarter as somehow supporting his argument. How is this figure inconsistent with Battellino’s general theme — as stated by Keen himself — that he sees “no reason to expect them to fall that much”? Such a modest decrease coming as it did on the back of a long series of interest rate rises over the preceding year which were designed to, among other things, cool the housing market.
He suggests the RBA ignores other relevent statistics and refers to the higher ratio of mortgage levels to disposable income in Australia than in the US. As disposable income is a function of mortgage levels (i.e. it takes into account mortgage repayments) it is inappropriate to compare ratios between countries — as obviously any difference is going to be exaggerated.
Keen implies that Battellino is not being “objective” because he has not focussed on other factors Keen holds in such high esteem, yet there is no focus by Keen, for instance, on rent yields — which of course are always one of the basic measures of an asset’s worth. These remain strong notwithstanding the increase in house prices and is a factor supporting a view that house prices are not as overvalued as Keen purports.
Further, Keen states, when presuming incorrectly that Battellino was referring merely to a peak in prices rather than a peak in acceleration of prices, that “we indeed live in a Lucky Country, if house prices rise when the market cools”. Wouldn’t that be indicative of stagflation and, thus, rather concerning?
Well I guess no-one likes to be criticised.
My reading of Prof Keens article is that he is pointing out the absurdity of Bettellino claiming the Australian market had peaked in 2003 when, in fact, it has increased 27% since then. It therefore follows that we can’t be three years ahead of the US, whatever that means, and are presumably ‘pre-crash’ rather than ‘post-crash’ as Batellino hopes. The recent dip in prices might, therefore, be a shape of things to come.
Your view that the ‘hottest’ point of the market is when prices are increasing fastest is not a figure Keen appears to have used. However it clearly does not pick the peak in prices, which is what is being discussed here, since prices increased fastest from a low base in the early part of the boom according to the figures you have provided. At your ‘hottest’ point in 2003, median prices in Canberra were $145 000 lower than they are right now.
As for rental yields, well no they have no kept pace with prices. Unfortunately I can’t post graphs here, but the average rental yeild across 6 capitals was actually at a high of 8-9% in the late 80s. It dropped from about 5% in 2000 to below 3% in 2003 and has only gradually recovered to its dizzying heights of a few points below cash. It has, until the recent crash, always yielded less in rent than earnt by shares over this time.
The point, which I really do understand, is that current house prices represent at least an opportunity cost of 1.5% gross yeild on cash. Since people don’t invest to lose money, until prices increase or rents increase substantially then property is over-valued as an investment vehicle. Since many think rents or prices can’t increase much, that leaves the option of house prices dropping until the yeilds justify the price (at least for investors).
The point was rental yields havn’t decreased dramatically, if at all, despite the increase in house prices (ie rent prices have kept pace). If houses were dramatically overpriced, just like when a stock is overpriced, the yield would fall away.
So the whole article is a ‘furphy’ because you disagree with one of 5-6 points made? (of which you failed to understand the significance anyway).Ridiculous.
Sorry Mr Johns, but rents have not kept pace. Rents have tracked CPI for a good many years, and have not grown above 10% YoY at any time in the past decade. For the same period (June 2002 – June 2008) house prices have increased by 64% over the course of a decade, while rents have increased by 25%. And this takes into account the advent in recent years of ‘rents through the roof’! So you are wrong.
There are also massive deviations from other fundamentals, such as price in terms of household income.
I’m sorry, but rent yields don’t remain strong at all. What a complete furphy this article is.
Rental yeilds in my area are, at best, 6% gross – allowing for no expenditure on maintainance or rates and assuming 100% occupancy. Cash is running at over 7% in bank deposits. Being below the no-risk return is not a good support for the price of an investment.