The bulls are roaring, house prices are rising, and all's well with the world.
Or maybe not. Certainly house prices have risen -- and contrary to popular opinion, I expected price rises this year, since mortgage debt has been accelerating since the beginning of 2012 (see Figure 1). One of my many economic heresies is the argument that asset prices are driven by rising debt. Rising asset prices -- in this case, houses -- require accelerating debt (in this case, mortgage debt), and that’s indeed what we’ve had since the beginning of 2012.
Figure 1: Mortgage debt has been accelerating since early 2012
But I’ve also said that I expect this to be a sucker’s rally, and today I want to delve a bit more into that argument -- with one final caveat motivated by my recent trip to Hong Kong, where I was a speaker at the recent Institute for New Economic Thinking annual conference. (Click here for my panel with Robert Lord Skidelsky and Norberg Haring.)
The basic reason that I expect this rally to peter out is that Australians haven’t de-levered from mortgage debt in the way that Americans have. Mortgage debt peaked at 86 per cent of GDP in America in March 2009, declined to 68 per cent, and is now rising slightly (see Figure 3). In Australia, debt peaked at over 87 per cent (with the First Home Vendors’ Boost reversing a trend to declining mortgage debt to GDP in 2008) and barely dropped -- just a 3 per cent fall from 2010 till 2012, after which it has risen slightly.
Figure 2: America delevered, Australia hovered
This in turn means that the potential for further debt-financed house price appreciation is limited here, whereas deleveraging has created some headroom in the USA. If mortgage debt continues to accelerate, then sooner rather than later the ratio of mortgage debt to GDP has to rise. Since we’re still within cooee of the all-time mortgage debt peak, we will have to go into even more uncharted debt burden waters to keep the appreciation going. Maybe we could end up joining the world-record-holding Dutch on something like 110 per cent of mortgage debt to GDP, but I simply don’t believe that will happen.
The ratios also conceal some important information on this topic that the raw numbers reveal. From those, it’s obvious that the US has been deleveraging since early 2008 -- that uptick in the mortgage debt to GDP ratio in 2008-2009 was in fact due not to rising mortgage debt, but to the country’s GDP falling faster than the decline in mortgage debt.
Figure 3
Australian mortgage debt, on the other hand, seems to have been growing unstoppably. But there the sheer bulk of debt also disguises some important changes. Though mortgage debt has been growing, it’s growing more slowly (see Figure 4). For the last year, it’s been bouncing around at about $50 billion per annum -- half the pace of the mid-2000s.
Figure 4
One further drill down uncovers another crucial fact: behind an apparently stable to rising level of demand for housing is a market that is increasingly dominated by speculators rather than owner-occupiers. Owner-occupier mortgage borrowing has been falling steadily ever since the First Home Vendors Boost ended, from almost $70 billion per annum then to just over $30 billion now. The revival in mortgage debt growth since 2012 has been more than 100 per cent due to additional speculation: the decline in owner-occupier borrowing from $40 billion per annum at the start of 2012 to $32 billion per annum now has been more than outweighed by the increase in speculative mortgages from 11.5 billion per annum to $21.8 billion today (see Figure 6).
Figure 5
The mortgage acceleration data confirms that the current upward impetus to prices is coming entirely from speculators rather than owner-occupiers. Both were trending up from early 2012, but as of the middle of 2012 owner-occupier mortgage debt was decelerating again, and it’s still heading south (see Figure 6).
Figure 6
So the current rise in prices is occurring predominantly because speculators as a group are betting that prices will rise, and they’re busily competing not only First Home Buyers but also existing owner-occupiers out of the market. Given that production of and demand for new houses has also dropped off a cliff, the market is therefore being held aloft by a bunch of speculators hoping to get rich off demand for second-hand houses from other speculators.
Buy a place now, hold on to it and wait for its price to double in seven years, and then sell it for a profit to another speculator. What could possibly go wrong with that?
The Reverse China Syndrome
Actually, there is one factor that could result in a happy ending for the current crop of speculators: rather than attempting to sell their bricks and mortar to each other, they could end up selling them to rich pollution refugees from China.
I’ve heard plenty of anecdotal reports of unbearable pollution in China, and in the last week I’ve had a small taste of it myself in Hong Kong -- which has barely any industry of its own but cops the pollution downwind from some of China’s major industrial areas (and adds to the burning of diesel fuel on the world’s third-busiest port). That haze between me and the other side of Hong Kong isn’t rain or fog: it’s pollution. The distance across the harbour is less than that from Circular Quay to North Sydney (or roughly the same as New York to New Jersey across the Hudson, or say three times the width of the Thames at Westminster).
Figure 7: I can see unclearly now...
A couple of hours in that chemical soup, and all I wanted to do was get back where the air was filtered -- inside the hotel. Were I a wealthy Hong Kong local -- let alone someone from the mainland -- then one trip to Sydney (or New York or London even) would have me consulting their real estate guides.
Then it comes down to (a) how easy is it for non-residents to buy residential property and (b) whether domestic housing policy puts the interests of residents and owner-occupiers ahead of non-residents and speculators. In Australia’s case, the answers -- as Chris Vedelago has exposed so well by his thus far futile attempts to get any information from Australia’s Foreign Investment Review Board about the proportion of property sales that are to non-residents -- are (a) “Dead easy” and (b) “You’re joking, right?”
So the facts that public policy in Australia is tilted in favour of speculators against homeowners, and property prices against young would-be home-owners, might yet bring home the bacon for all those speculators playing ‘flip that house’ right now.
