Early data received by the Melbourne-based Land Values Research Group for the second half of 2008 indicate that the ratio of property sales to GDP in Australia has fallen almost 30% from its peak in 2007-8. This is the largest fall since the 31.4% plunge that preceded the recession of 1990-1. Since 1972, recession has followed whenever this ratio has fallen more than 17.5% year-on-year.
The PCA/IPD indices of Australian commercial property, together with the various indices of home prices cited by the RBA in its latest
Statement on Monetary Policy, show that the fall in sales is accompanied by falling prices, confirming that Australia’s long-running property bubble has burst. Stephen Mayne’s article further supports that diagnosis.
Australia is therefore on the threshold of a domestic credit crunch caused by falling collateral values — the same mechanism that precipitated the “subprime” recession in the USA and similar recessions NZ, the UK, Ireland and continental Europe. We are entering recession not because of the rest of the world, but in imitation of the rest of the world, because we did what they did: we pumped up a property bubble.
By itself, the decline in the ratio of property sales to GDP indicates a recession starting no later than 2009-10, and possibly before the end of 2008-9. The speed of that decline, combined with auction data showing that it continued into calendar year 2009, suggest an earlier onset of recession. Combining this with more commonplace considerations (terms of trade, employment, retail sales, and capital expenditure), I have offered the following tip concerning the upcoming National Accounts release:
On balance, then, let us say that the chances of a recession beginning in the December quarter of 2008 are somewhat less than 50%, that the chances of a recession beginning in the March quarter of 2009 are somewhat more than 50%, and that the chances of avoiding recession through 2009 are somewhere between zero and Buckley’s. In short, the question to be answered by Wednesday’s release of the December-quarter GDP result is “When DID the recession start?”
Those who claim that the recession will be fully imported may well agree with me on the timing. But they have no idea how bad it’s going to be.
Remember this article and others in Crikey warning of the Australian housing bubble.
When myths about the lack of supply sustaining high prices dissipates and Australian mortgages go into meltdown.
Also about Australia being immune or not indulging in risky sub-prime like mortgages
When ACA and Today tonight scream ‘ORDINARY AUSSIES HAD NO WARNING’.
All I can see is warnings.
Crikey,
Where do you find all these expert wankers.
Whoop-de-doo the sky is falling … again and again.
Give it a rest
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It would have been nice if you could have included the graph of the KP ratio in the article.
For what it’s worth I’ve been tracking house prices (2 years worth) in inner city Melbourne in the $500 – $600k bracket. They levelled in the last quarter of 2008, but surprisingly in early 2009 have jumped back to where they were 12 months ago. I’m not seeing any evidence of a softening.