House prices soar in city's hot suburbs - Page 5

See this chart below. It feels like on a roller-coaster uphill ride for the last 10 years. Whew!!!

People that say that always refer to this interpretation of Nigel Stapledon's research. And it's a very deceptive one.

Australian Property Prices | Stubborn Mule

Look at the quality and inflation adjusted chart, look at the side bar too:




The graph is purposefully deceptive. The scaling has been adjusted so that he could put a straight line through it. He would have recognised the huge jump as he adjusted it so he could talk down house price mania, so he is deluding himself, too.

See that massive jump at the end? Doubling in price in real terms in about 10 years. That is a direct reflection of mortgage debt going ballastic, to the tune of increases of 300%. This is not sustainable.

How were we paying for these increases? Oh, look at this...





2% a year for something that needs maintainance to retain value would make this invesment class a white elephant. That includes the massive bubble at the end...

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The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. - John Maynard Keynes

If you took the time to read the post, you would see that the post starts with an unscaled history of property prices:

It then explains the reason for a shift to a logarithmic scale:

Of course, asset prices tend to exhibit exponential growth, so it is far better to look at historical prices on a logarithmic scale.

The fact that the resulting chart does closely approximate a straight line shows nothing more or less than the fact that prices have grown at an exponential rate.


Of course this chart does not take account of inflation or quality changes, which leads to the chart you showed:


While this is not quite as close to a straight line, it still shows that prices have been increasing at something like an exponential rate since the late 1950s.

That's just data, no deception! In fact, I would have thought the chart would be grist to the mill of those who think the market is a bubble, as it may be reasonable to conclude that it cannot possibly be sustainable for prices (adjusted for inflation and quality) to continue to grow at around 2% per annum. Why should they after all? I myself struggle to see it as sustainable. Still, as for predicting a bursting of the bubble, you have to answer the question, why now when the growth has been going on for so long?

Anyway, my point is that understanding the context of the chart and knowing some basic mathematics are all that is required to interpret the chart. It is not misleading.

Thanks for the info Stubborn mule. Very interesting...

But what I can't get my head around is Stapledon argues that:

"while income is expected to be a major influence on prices, there is no theoretical reason for any fixed relationship between prices and income or between rents and income "

So if wage inflation is consistently less than property price inflation, then Stapledon can't see this being an issue for house prices?
Then were is the money going to come from? If it keeps going at this rate then mortgage payments a couple of generations down the track could be over 300% compared to income?
IMHO I believe wages will need to have a dramatic increase in order to support the current prices, and in the current economic climate I can't see this happening...

SM, fair enough. I apologise. I had it referred to me last week by someone last week (and previously by a real estate agent) using it to show house prices just keep rising (also saying they have done 10% a year for 200 years in UK). I recognise the fact you use a logarithmic scale to demonstrate the exponential nature of the price increases. For casual observers, however, it has consistently been used to show that price increases he been reasonable. Most people don't understand the implications of exponential growth. Your blog complements the work of Steve Keen, showing that Australia's love affair with houses and the debt to pay for them started far earlier than the craziness of the last 10 years.

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The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. - John Maynard Keynes

This is only my interpretation, but I'd say the key term is fixed. Clearly, total incomes will constrain total expenditure on property, but over time various factors can change that muddy the relationship between aggregate income growth and property price growth. Examples could include:

• Change in the relative expenditure on property compared to other things (e.g. transport, holidays, leisure) as a result of changing lifestyle priorities.
• Change in return on other investment assets, leading investors to accept lower (or demand higher) rental returns.
• Geographic drift: as individual families become wealthier, they bid up prices in their preferred areas, driving others to fringe areas.

Nigel's main point it that if real yields (and hence inflation-adjusted rental yields) fall, prices can rise further than incomes. Of course, rental yields cannot fall forever!

Matt,

In regards to soaring debt levels, you might be interested in this post which argues that we should not worry too much about rising government debt but we should be worrying about rising private sector debt. This chart, highlighting the fact that the two tend to move in opposite directions, is not dissimilar to some of Steve's charts:


Note that the red shading represents Labor governments and the white Coalition governments.

I would be very interested in the recent changes to government debt. The stimulus package has spent or allocated;

• $16,200 million - education
• $800 million - community infrastructure
• $1,200 million - rail
• $1,100 million - road
• $5,238 million - building social housing
• $1,400 million - home insulation
• $12,200 million - "bonus payment" (direct handouts)

The government has also purchased most of the home loans issued by smaller banks and building societies through the Residential Mortgage Backed Securities purchase program;

• $11,153 million (max $16,000 Million)

I suspect that these will have changed the graph for government debt as part of the international movement to move private debt to the public sector.

I have been planning to update the post. I'll put a link here when I do,

Accounts for quality? Are you sure? I have looked for data on quality changes before and have found a lack of it.

After a 2 minute search on that website I couldn't find that graph. If you could post a link to it i'd be quite interested in any data accounting for quality changes over time, and the methods used to assess quality.