Australia faces both falling house prices and a falling money supply

This morning has brought us up to date with news from what the Men at Work described as.

Living in a land down under
Where women glow and men plunder
Can’t you hear, can’t you hear the thunder?

That is of course what was called Australis and then Australia and these days in economic terms can be considered to be the South China Territories. The monetary policy statement from the Reserve Bank of Australia (RBA)  reinforces the latter point as you can see.

The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy.

One needs to read between the lines of such rhetoric as for a central banker “remains reasonable” is a little downbeat in reality as we note the following use of “declined” “softened” and “slower”.But he was providing a background to this.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

In essence the heat is on for another interest-rate cut and if you are wondering why? There is this.

GDP rose by just 0.2 per cent in the December quarter to be 2.3 per cent higher over 2018. Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets. The drought in parts of the country has also affected farm output.

I will come to the central bankers fear of negative wealth effects from what they call an “adjustment in housing markets” in a moment as we note they cannot bring themselves to mention lower house prices. The pattern of GDP growth looks really rather poor as we see that the trend goes 1.1%,0.8% and then 0.3% and now 0.2%. So we see a familiar pattern of much weaker growth in the second half in 2018 which if we see again in the first half of this year will see the annual rate of growth halve. Actually it may be worse than that as the only factor driving growth according to Australia Statistics was this.

Government final consumption expenditure increased 1.8% during the quarter contributing 0.3 percentage points to GDP growth.

So without it the economy would have shrunk and Australia might be on course for something it has escaped for quite a while which is a recession. Also according to the Australia Treasury Budget from earlier it is planning a dose of austerity.

The total turnaround in the budget balance between 2013-14 and 2019-20 is projected to be $55.5 billion, or 3.4 per cent of GDP.

The Government’s plan for a stronger economy ensures it can guarantee essential services while returning the budget to surplus.

This budget year will see a surplus of $7.1 billion, equal to 0.4 per cent of GDP.

Budget surpluses will build in size in the medium term and are expected to exceed 1 per cent of GDP from 2026-27.

So as you can see it seems unlikely that government spending will continue to boost the economy. Also as they are assume growth of 2.25% then those numbers as so often seem rooted in fantasy rather than reality. Next if we switch back to the RBA the austerity plan comes at this time.

 In Australia, long-term bond yields have fallen to historically low levels.

In fact they fell to an all time low for the benchmark ten-year at 1.72% recently and is spite of a bounce back are still at a very low 1.82%. So yet again we are observing a situation where countries borrow heavily when it is expensive and try in this instance not to borrow at all when it is cheap. I know it is more complicated than that but we also have this into an economic slow down.

The Government is focused on reducing net debt as a share of the economy, which is expected to peak in 2018-19 at 19.2 per cent of GDP.

The Government is on track to eliminate net debt by 2029-30.

So it may look to be Keynesian but reality seems set to intervene especially on the economic growth forecasts.

House Prices

Again we see that the Governor of the RBA cannot bring himself to say, falling house prices. It is apparently just too painful.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low.

Even worse it has implications for “the precious”.

 At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased.

Indeed a central banker would have his/her head in their hands as they see the negative wealth effects in the latest quarterly national accounts.

Real holding losses on land and dwellings were $170.8b. This marks a fourth consecutive quarter of losses and reflects the falling residential property prices over the past year. ……The real holding losses have translated into the first fall in household assets (-1.5%) since the September quarter 2011. Household liabilities increased 1.0%.

Some of the latter was falling equity prices which have since recovered but house prices have not. Here is ABC News on the first quarter of 2019.

On a national basis, the average house price fell 2.4 per cent to $540,676, and apartment prices dropped 2.2 per cent to $484,552 during that period.

CoreLogic observed that markets which experienced their peaks earlier had experienced sharper downturns.

Darwin and Perth property prices skyrocketed during the mining boom, but peaked in 2014. Since then dwelling values in both capitals have fallen by 27.5 per cent and 18.1 per cent respectively.

So it seems likely that the value of the housing stock fell again. If we move to the official series we see that in the rather unlikely instance you could sell all of Australia’s houses and flats in on e go then from the end of 2015 to early 2018 the value rose by one trillion Aussie Dollars from a bit below 6 trillion to a bit below 7. Now in a development to pack ice round a central bankers heart it has fallen to 6.7 trillion officially and if we factor in other measures is now 6.6 trillion Aussie Dollars and to quote Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’


Australia escaped the worst of the credit crunch via its enormous natural resource base. According to the RBA index of commodity prices that has not ended.

Preliminary estimates for March indicate that the index decreased by 0.9 per cent (on a monthly average basis) in SDR terms, after increasing by 5.3 per cent in February (revised)…….Over the past year, the index has increased by 11.0 per cent in SDR terms, led by higher iron ore, LNG and alumina prices. The index has increased by 16.6 per cent in Australian dollar terms.

But now we see that the domestic economy has weakened whilst the boost from above has faded. If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February. If we switch to the seasonally adjusted series we see that growth faded and went such that the recent peak last August of Aussie $ 357.1 billion was replaced by Aussie $356.1 billion in February so we are seeing actual falls on both nominal and real terms. Thus the outlook for the domestic economy remains weak and could get weaker.



17 thoughts on “Australia faces both falling house prices and a falling money supply

  1. Hi Shaun, this follows on nicely from the question you asked last night, I was agreeing with Forbin that the time for governments to invest is during downturns and it seems Oz is about to follow Italy down the yellow brick road of pro cyclical policy, it crackers.

    It is simply not the job of governments to balance budgets or reduce debt especially Oz which is ludicrously low. The job of the state is to balance the economy and make sure there is Full Employment at all times. My definition of FE is 0% un or under employment recognising there will always be some unemployment as people move jobs etc.

    Oz has so far avoided mass financialisation but it’s coming.

    • Bill,

      As highlighted by your namesake Prof Mitchell of MMT fame previous attempts by OZ governments to achieve a surplus have been self defeating with poor economic outcomes, higher unemployment etc ?

  2. Hello Shaun,

    As Bill posted , Oz has natural resources we can only dream about . Italy and Greece have issues with tax collection but Oz pay up.

    I can see little reason for them not to expand their debt to get the economy going ( unless its just on beer and BBQs !! eheheheh ) , they’re not in the same trap…..


    • Hi Forbin

      It is an interesting situation because a national debt to GDP ratio of 41% is low for these times and at a 1.8% ten-year yield is not expensive to run. The current government seems to plan to run a pro-cyclical policy where the debt has risen relatively in the good times and now plans to reduce it into a slow down. So a type or reverse Keynesianism.

  3. Good to see shelter becoming more affordable, lets hope it continues as its good for society and the economy.


      but the TBTF Banks ! will somebody think of the Banks !




  4. Ah Shaun, the SCT, when China sneezes OZ catches the flu. Shame they are so dead set against using some of those natural resources for themselves. Its a race between SA, California and the UK who will experience first major blackouts, my money is on SA. The problems they have experienced to date are small potatoes compared to what’s round the corner.

  5. Great blog as usual, Shaun.
    Having an annual real GDP growth rate of 2.3% in 2018Q4 but only a quarterly growth rate of 0.2% sounds like a real nice problem to have. By comparison, Canada had an annual growth rate of 1.6% in 2018Q4 but only a quarterly growth rate of 0.1%, even though it was the second highest annual growth rate in the G7 after the US.
    Possibly you are right and Australia is now headed for a recession. If so, the country still has a remarkable record for staying out of recession. Notably, it stayed out of recession during the global financial crisis, which, as Branko Milanović noted, might more accurately be called the trans-Atlantic financial crisis. Some of the credit for this should go to the Reserve Bank of Australia being the only G-20 central bank whose target inflation indicator is based on a net acquisitions approach to owner-occupied housing index from the September 1998 quarter forward. One can quibble with the details of the approach, for example, the inclusion of property rates and charges, which are excluded from the Eurostat experimental OOHPIs. Nevertheless, it has been a real success story, and, within limits, is a model for other inflation targeting central banks to follow.

    • Hello Andrew,

      I did wonder if Forbin’s constant could be applied to Canada and Austrialia’s GDP figures to get a more realistic rate ?


      PS: forbin’s constant is to take 2 away from any annual GDP figure to get the actual result ( due to manipulations of all GDP components by governments)
      ie, a GDP figure of 3% growth is actually 1% ( there is a error factor of -/+ 0.5% so with the example it would be 1% -/+ 0.5% )*

      * some calculations indicate the Forbin constant is closer to 1.5

      • Very good, Forbin. I worked in the Canadian System of National Accounts for years so probably feel more defensive about the Canadian estimates than most people, but no question there are big measurement problems in them and they do sometimes lead to an overvaluation of output. My friend Dick Richards noticed that the quarterly approach to calculating the value of physical change (VPC) of farm inventories in the quarterly estimates could produce bizarre results. In fact in 1988 it led to a NEGATIVE annual implicit price for barley. I delivered a paper in Washington in 2005 based on his work:

        The annual approach favoured by both Agriculture Division for their farm accounts and the monthly and annual GDP by industry estimates was much better and the logical thing to do was to standardize the three sets of estimates to the annual approach. Instead there was a misguided effort to get everyone to standardize to the quarterly approach, which succeeded with Input-Output Division in 2005, but not with Agricultural Division. As you can see, in the scandalous barley case of 1988, the use of the quarterly approach did make growth look stronger than it was: a CAN$87.5M increase in VPC, when there should have been a CAN$169.5M decrease. I don’t think the aim was really to doctor the growth estimates. The people involved just believed everything should be done quarterly as a Communist zealot might believe that everything should be done by the state. Logic simply could not sway them.

  6. Shaun, thanks for sharing some detail, I’d heard of falls but the NeoLiberal media don’t want this kind of news spread about so it is effectively supressed for the benefit of “my precious”.

    I’d expect falling house prices to seriously crimp consumer spending, reducing the asset value against which all loans are tied.

    Its not yet clear that folk are heavily affected.

    • Cheers Eric

      There are some gems in there.

      “”And it truly is a unique property and I haven’t seen anything like it for a very long time.” Er…..

      “He said the price guide has tempted a few first home buyers, but they soon change their mind when they see it.

      “It does need a lot of work,” Orly admits.”

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