Earlier today there was this announcement from Australia or if you prefer the south china territories.
Residential property prices rose 1.9 per cent in the June quarter 2017, according to figures released today by the Australian Bureau of Statistics (ABS)……..Through the year growth in residential property prices reached 10.2 per cent in the June quarter 2017. Sydney and Melbourne recorded the largest through the year growth of all capital cities, both rising 13.8 per cent followed by Hobart, which rose 12.4 per cent.
So we see something which is a familiar pattern as we see a country with a double-digit rate of inflation in this area albeit only just. Also adding to the deja vu is that the capital city seems to be leader of the pack.
However there is quite a bit of variation to be seen on the undercard so to speak.
“Residential property prices, while continuing to rise in Melbourne and Sydney this quarter, have begun to moderate. Annual price movements ranged from -4.9 per cent in Darwin to +13.8 per cent in Sydney and Melbourne. These results highlight the diverse housing market and economic conditions in Australia’s capital cities,” Chief Economist for the ABS, Bruce Hockman said.
The statistics agency seems to be implying it is a sort of race if the tweet below is any guide.
“Sydney and Melbourne drive property price rise of 1.9%” – how did your state perform?
There was something added to the official house price release that will lead to smiles and maybe cheers at the Reserve Bank of Australia.
The total value of Australia’s 9.9 million residential dwellings increased $145.9 billion to $6.7 trillion. The mean price of dwellings in Australia rose by $12,100 over the quarter to $679,100.
Central bankers will cheer the idea that wealth has increased in response to the house price rises but there are plenty of issues with this. Firstly you are using the prices of relatively few houses and flats to give a value for the whole housing stock. Has anybody made an offer for every dwelling in Australia? I write that partly in jest but the principle of the valuation idea being a fantasy is sound. Marginal prices ( the last sale) do not give an average value. Also the implication given that wealth has increased ignores first-time buyers and those wishing or needing to move to a larger dwelling as they face inflation rather than have wealth gains.
This sort of thinking has also infested the overall wealth figures for Australia and the emphasis is mine.
The average net worth for all Australian households in 2015–16 was $929,400, up from $835,300 in 2013–14 and $722,200 in 2005-06. Rising property values are the main contributor to this increase. Total average property values have increased to $626,700 in 2015–16 from $548,500 in 2013–14 and $433,500 in 2005-06.
If we look at impacts on different groups we see it driving inequality. One way of looking at this is to use a Gini coefficient which in adjusted terms for disposable income is 0.323 and for wealth is 0.605 . Another way is to just simply look at the ch-ch-changes over time.
One factor driving the increase in net wealth of high income households is the value of owner-occupied and other property. For high wealth households, average total property value increased by $878,000 between 2003-04 and 2015-16 from $829,200 to $1.7 million. For middle wealth households average property values increased by $211,200 (from $258,000 to $469,200). Low wealth households that owned property had much lower growth of $5,600 to $28,500 over the twelve years.
As you can see the “wealth effects” are rather concentrated as I note that the percentage increase is larger for the wealthier as well of course as the absolute amount. Those at the lower end of the scale gain very little if anything. What group do we think central bankers and their friends are likely to be in?
This has been rising too.
Average household debt has almost doubled since 2003-04 according to the latest figures from the Survey of Income and Housing, released by the Australian Bureau of Statistics (ABS).
ABS Chief Economist Bruce Hockman said average household debt had risen to $169,000 in 2015-16, an increase of $75,000 on the 2003-04 average of $94,000.
The ABS analysis tells us this.
Growth in debt has outpaced income and asset growth since 2003-04. Rising property values, low interest rates and a growing appetite for larger debts have all contributed to increased over-indebtedness. The proportion of over-indebted households has climbed to 29 per cent of all households with debt in 2015-16, up from 21 per cent in 2003-04.
They define over-indebtedness as having debts of more than 3 years income or more than 75% of their assets. That must include rather a lot of first-time buyers.
Younger property owners in particular have taken on greater debt.
Also the statistic below makes me think that some are either punting the property market or had no choice but to take out a large loan.
“Nearly half of our most wealthy households (47 per cent) who have a property debt are over-indebted, holding an average property debt of $924,000. This makes them particularly susceptible if market conditions or household economic circumstances change,” explained Mr Hockman.
So something of an illusion of wealth combined with the hard reality of debt.
Ever more familiar
Such situations invariably involve “Help” for first-time buyers and here it is Aussie style.
In Australia every State government provides first home buyer with incentives such as the First Home Owners Grant (FHOG) ( FHBA)
In New South Wales you get 10,000 Aussie Dollars plus since July purchases up to 650,000 Aussie Dollars are free of state stamp duty.
If we head north to China we see a logical response to ever higher house prices.
Local governments are directly buying up large quantities of houses developers haven’t been able to sell and filling them with citizens relocated from what they call “slums”—old, sometimes dilapidated neighborhoods. ( Wall Street Journal).
We have discussed on here more than a few times that the end game could easily be a socialisation of losses in the property market which of course would be yet another subsidy for the banks.
The scale of the program is large, accounting for 18% of floor space sold in 2016, according to Rosealea Yao, senior analyst at Gavekal Dragonomics, and is being partly funded by state policy banks like China Development Bank. ( WSJ)
Will they turn out to be like the Bank of Japan in equity markets and be a sort of Beijing Whale? Each time the market dips the Bank of Japan provides a put option although of course there are not that many Exchange Traded Funds for it to buy these days because it has bought so many already.
There is a fair bit to consider here so let me open with a breakdown of changes in the situation in Australia over the last decade or so.
This growth in household debt was larger than the growth in income and assets over the same period. The mean household debt has increased by 83% in real terms since 2003-04. By comparison, the mean asset value increased by 49% and gross income by 38%.
Lower interest-rates have oiled the difference between the growth of debt and income. But as we move on so has the rise in perceived wealth. The reason I call it perceived wealth is that those who sell genuinely gain when they do so but for the rest it is simply a paper profit based on a relatively small number of transactions.
If we move to the detail we see that if there is to be Taylor Swift style “trouble,trouble, trouble” it does not have to be in the whole market. What I mean by that is that lower wealth groups have gained very little if anything from the asset price rises so any debt issues there are a problem. Also those at the upper end may be more vulnerable than one might initially assume.
High income households were also more likely to be over-indebted. One quarter of the households in the top income quintile were over-indebted compared to one-in-six (16%) low income households (in the bottom 20%).
Should one day they head down the road that China is currently on then the chart below may suggest that those who have rented may be none too pleased.
Never Tear Us Apart ( INXS )
I was standing
You were there
Two worlds collided
And they could never ever tear us apart