Major House Price Correction

Are we in the early days of a Major Hosing correction in Australia?

Is our lived experience of property not providing the full picture.

The long-term data is painting the last few decades as having carried us into concerning territory.

Data source is from DOWNLOAD and covers period from 1870 to 2020. I guess we are all pretty familiar with the last few years and could fill in the last few data points - safe to say new highs.

Nominal house price index back to 1870.



In real terms we are above trend to an extent not experienced since the 1890's boom and have been so since the Mining boom thanks to post GFC monetary conditions.


On a price to wage multiple we are also in territory only previously experienced in the 1890's


I'm not that well up on my housing history but a bit of googling on the 1890's is fascinating. Seems like it was our biggest ever downturn - Larger than we experienced in the 1930's great depression which was more USA focused. It appears the Government contract statistician went bankrupt during the period, so data is not plentiful.

But what I have gleaned was prior excess and a catalyst of rising interest rates and contracting credit. A lot of the credit was sourced from abroad - mainly England. No reserve bank in place but organizing control of credit was through a co-ordination of major banks and government.

Banking crises peaked around 4-5 years after 89 peaks in house prices

Eventual Lows in Nominal terms 6+ years after peak.

Recover in nominal terms took 29 years until 1918.

Recover in CPI adjusted real terms took 61 Years until 1950.

Pricing to income multiple not surpassed for 118 Years until 2007.

How much store should we place in history? Is this current dip just another blip on the way to even more expensive housing as it has been for the last few decades or is the longer-term historical trends going to prevail and the excess of the last few decades get worked off and will it play out fast or slow?

This is the Westpac (most exposed bank to Australian residential mortgages) share price, it is my Canary in the coal mine. With house price still at historically elevated multiples, I'm not prepared to consign long term history to the bin until its share price down trend is broken.


Patience grasshopper.

 

With our country’s level of debt the equation is simple.


Rates go up, house prices go down.

 

Alan Kohler has been doing a bit on the Australian Housing Bubble. As I understand it, Japan had one of the greatest housing bubbles in History. Australia has just past it. What will be interesting is if we get a sudden collapse or longer Japanese style decline.



The sudden collapse lends itself to a US style collapse where mortgage holders can throw back the keys to the bank.

I suspect in Australia, most will try to hold on to their homes as long as possible. So we could see a big pull back in consumer spending, which will lead to closures in restaurants and small retail. This could then cause cascading job losses over a period of a decade as people dedicate a larger percentage of household disposable income to paying off their share of the housing bubble.

 

That chart is a disturbing comparison. Not only does our housing look expensive relative to our own history but also relative to other countries turning points. And we now face the same trigger of higher rates and large debt.

 

As someone living in Japan, with an economics degree from Japan, there are a couple of similarities between aus and japan but many critical current or probable differences.

Both have debt fueled asset bubbles. Say what you like about house prices, the record high household debt levels, vs both our own history and internationally, is a clear signal.

But key differences include less corporate debt, better lending standards, very healthy growth in population and working age population, and if our bubble burst like Japan’s did, the high likelihood that our government wouldn’t be as completely incompetent as Japan’s was in waiting over a decade before taking the medicine to fix its banks.

 

I agree. For our housing market to look like Japan's, we would need at the very least, similar demographics - which we do not have.

 

And unlike Japan at the time, we don’t have Zaitech Financial Engineering where accounting standards allowed Capital Gains to be presented as income.

 

One could look at the other way as a lot of people bought into the argument that Equities always pay above 8% -Then back it up with statistics..The statistics are part of economics history, and that sample is history not the future ..
Property Is a whole different game ,and one only has to have a look on you tube concerning property as its populated with Gurus from book sellers who change their opinions each week as some think the world ended last week.
The only advantage of the constant information that is lying in front of your eyes is people ignored the information that we do not see.

 

Anything is possible...

 

from the 90s, 15% rise to 20%, that's 33% increase in rates.
now it is 2.35% from 0.1%, that's 2250% increase in rates and more coming.
go figure.

 

NZ housing market is starting to look like having a proper correction. Wellington prices are down 22% year on year.

REINZ says August house prices 'weaker than expected'

Don't know if our correction will be as steep but it sure feels like we are heading in the same direction.

 

Maybe the question is why wouldn't we head in the same direction. It's what is actually happening from a similar economy 6 months in front of us in their tightening cycle. They had all the same ingredients that people are saying will hold our market. High replacement inflation, low unemployment, tight rental market etc etc. Those justifications didn't hold, It also appears that the rental market may now be swinging to a tenants market over there.

 

I've been looking intently at a target suburb in the East and whilst there's some softening ie lower than peak prices being achieved, it certainly hasn't been anywhere near 20%. I don't know where people are getting the money but anything not inflated is being snapped up, and anything well positioned even more so.

 

The main difference is the kiwis are selling up and moving here.

 

There was a time when Auckland was substantially cheaper than Syd. That gap closed over the years.

IMHO, NZ's market got more overheated than any capital in Oz, particularly Auckland and Q'town.

 

Yes, they had saint jacinda effect and the covid free nirvana.

 

This is my feeling too.
Was looking at very nice 3/2/2 unit, final sale price was 20% over price guide. Maybe guide was intentionally low, but it was a high price IMO.
Sentiment definitely lower than the peak, also some room for negotiation, but good properties in good locations are selling if price not outrageous.

 

Is linear trend line best choice? Exponential looks like a better fit, on this basis we are under long term average, and pressure is building for prices to rise from here:


I'm just stirring, i have no idea!

 

You make a fair point. These trend lines are based on the prior 130 years so it tells us more about the past relative to the future and less about the future!