American House Prices Continue to Fall While the Same Can’t Be Said About Australian House Prices


Today, you’ll get a break from your regularly scheduled Daily Reckoning program. Courtesy of our friend John Mauldin and his “Outside the Box” e-letter, Dr. Horace “Woody” Brock tells us how a high debt-to-GDP ratio can be a precursor to “economic and social collapse.”

It’s not all disaster and doom though!

Dr. Brock also suggests that deficits can end up boosting productivity and growth in the long run-as long as government spending is eventually curtailed and as long as the spending actually leads to new growth, rather than just more consumption. He also has a bit to say on “stimulating” pent-up demand and how big government deficits can lead to higher interest rates. We think it’s a fairly even-handed treatment of a subject we prefer to be high-handed about.

A quick look at the markets shows us that we’re not out of the housing collapse woods yet. Falling U.S. home prices are still having an impact on global financial and commodity markets. In the U.S. April housing starts were down 12% from March to the lowest level since 1959. Applications for permits to build new homes fell to a record low as well.

The Dow and S&P both closed lower and copper, which has been surfing the whole “green shoots” recover/Chinese stockpiling theme slipped too. Oil managed to close over US$60 while gold slipped to $925.

You wonder why anyone is building houses in America at all. Unlike Australia, there is a huge surplus of housing inventory in the States. America over-built its housing stock to epic bubble levels during the boom. It’s that inventory-in addition to the millions of homeowners that currently have negative equity-that lead us to believe that median U.S. house prices are headed lower and have not, Alan Greenspan to the contrary, bottomed.

House prices are generally a local phenomenon. For example, the median house price in Saginaw, Michigan is $30,300. Meanwhile, in Honolulu, Hawaii it’s $570,000. Nationally, it averages about $169,000, down about 26% from 2005. In the areas that over-built and over-lent (Florida, California, Nevada, Arizona) prices are off more than 50%.

But what did all America’s local housing markets have in common? A mortgage boom that went global. Local lenders may have originated loans. But through the wonders of securitisation and mega-banks, those loans were sold to investors, freeing up even more money to make more loans.

In fact, one of the points Dr. Bock makes in his essay is that leverage drove the excesses of the mortgage boom far more than “greed,” the bogeyman du jour. Government regulators could reduce leverage and insist on higher capital ratios to rein in speculative excess. But that would dent future campaign contributions.

It’s much easier and far more popular to rail against executive pay, while not tinkering with the rules that give financial firms and their directors the ability to take big risks with borrowed money. Plus, if you’re in government, you have to make sure you don’t burn any bridges with your future private sector employers.

Had it not been possible for investment banks and financial institutions to use off-balance sheet vehicles to lever up 40-1 on assets-and use all that borrowed money to speculate in collateralised debt obligations and credit derivatives-the American mortgage boom could never have gone global.

Of course there were many other credit-backed booms in other asset classes, markets, and countries. It’s simplistic to blame the 5% contraction in global GDP since the crisis started all on American sub-prime borrowers. All over the world investors believed the same things: house prices always rise, leverage is an easy way to get rich with borrowed money, and that government intervention in the markets can stave off a real reckoning of the real mistakes people made with capital.

The good news is that American house prices are falling to a level where even your editor would consider having a look. The same can’t be said, we’re afraid, with Australian house prices. Which brings us to a note we got overnight from Chris Newton from the Housing Industry Association. In the interest of fairness, we’ll reproduce it in its entirety below.

Dear Mr. Denning,

I note the quote that you attribute to me in the last sentence of your article entitled, ‘China Performs a Kind of Financial Alchemy’. You have abbreviated my actual quote.

In a HIA press release issued 18 May 2009 I stated as follows, “notwithstanding current economic conditions for many aspiring home buyers there has never been a better time to enter home ownership”.

My comments were made in the context of an improvement in housing affordability, which is now at a seven year high.

Assessments of housing affordability do not provide any assessment of future price movements.

Yours sincerely,

Chris Lamont

Fair enough. We don’t think including the worlds “not withstanding current economic conditions for many aspiring home buyers” improves your case much, especially when it comes to affordability, though. The press release on the HIA site also says, “Over the March 2009 quarter the average home loan repayment fell by 11 per cent to $1,831 per month, significantly lower than the previous amount of $2,056. A further improvement in affordability is expected in the June quarter.”

It seems correct to measure affordability by the size of the monthly mortgage payment. But if homes are only ‘affordable’ now because of historically low-interest rates, does that mean they are really affordable? Interest rates will surely rise again (see why below). Doesn’t this mean the buyers who get in at the lower end of the market (where prices have risen to compensate for the first home buyer’s grant) will face much higher monthly payments in the near future?

Of course anyone is free to take any interest rate risk he’d like. But we have serious doubts that new home buyers have put a lot of thought into how much it would cost them to stay in a house if interest rates doubled from these levels. They don’t hear a lot about that in the press. They do hear a lot about how affordable houses are now.

The two other factors in “affordability,” we reckon, are the stability of your income and the price of the house. And on those two counts we’d also be concerned. The IMF, the Australian Treasury, and our bartender at the George Public Bar on Fitzroy Street all think unemployment will be higher by the end of this year, not lower. There is ample evidence that house prices have more to do with employment as they do interest rates.

Ultimately, to be absolutely clear, we think the current economic conditions suck. With Australian house prices still at such large multiples of incomes, with unemployment rising, and with the accumulation of government deficits set to put upward pressure on interest rates, it’s hard for us to believe this is the best time in seven years to buy a house. But who knows? Anything’s possible.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. Dan,

    Oh dear Dan Brock still has some catching up to do if this is accurate

    “Dr. Brock also suggests that deficits can end up boosting productivity and growth in the long run-as long as government spending is eventually curtailed and as long as the spending actually leads to new growth, rather than just more consumption”

    First, the little gem or cornel that eats at the back of this is that private deficit spending must be OK as it will inevitably be better spent than public deficit spending. Well nuh.

    Look at historical Australian bank lending per sector and benchmark it. Look at the major industries having had to walk away from the excessive credit wrapping banking rents and having to go directly to the securities markets for funding.

    So we had Australian banking led unproductive urban asset inflating destruction based overwhelmingly on a misdirection of the massively increased aggregate overseas sourced funding. And to deal with the ACCC and anti-trust issue and retain their “franchise without a licence fee 4 pillar status” and get the tick from Henry, MacFarlane, Keating, Howard and Costello all they had to do was make a few tens of millions for the little guys that knew their place in the oligarchy like John Symonds (who knew that as minor credit wrappers the big guys could take them out on the offshore funding differentials and AU distribution costs any day of the week). The classic Aussie crony corruption story.

    And the public spending on the infrastructucture to connect the renovated monstrosities in the gentrified suburbs or the McMansions to the greater city regions lagged as never before despite user pays fees and reduced land releases that helped to dive up the asset bubble related to the land. So we have a whole heap of unproductive debt inflated dots with no connections or urban cohesion (little rent sucking snobby central islets as planned by the Clover Moores separated from Mad Maxville greater city regions aside) and no household debt service capability as wages readjust to the lack of foreign debt multiplier impetus in the services economy.

    And you wouldn’t find anyone less opposed than me to the reactionary Labor Rex Connor / Khemlani loans affair culture, or the Black Jack McEwen culture.. But the losers of the likes of Ken Henry have been hanging their unaccountable selves under the fear of us remerging under those skirts for their whole careers.

    Funny isn’t it how the AOFM is quietly out in the middle east doing just what Connor did except doing the salesmanship as much on behalf of the 4 pillar cronies as they are of their new AU treasuries? There will be more 4 pillar board seats to retire from public service than ever before.

    But it is surely time to move on and send out signals of the death of the 80’s crews dodo sloganising era of “J curves” and lets pretend that “we don’t pick winners” erstwhile they get out and do exactly that by feeding the cronies, the party funds and a short term unsustainable bubble of the tax receipts. All those from policy makers to policy takers that have nurtured the least productive parts of the economy to the detriment of capital spending to support national income.

    The first move we should make in a new economy is for the licenced banks and any other regulatory or planning permission derived oligarchies (like shopping centres) to have to bid retain or obtain the taxpayers licence to maintain their individual franchises. They can bid based on the competitivenness of their fees or make cash payments to treasury or both. And forced divestment provisions must become part of strong new anti-trust legislation.

  2. cnn money says the median is $62000 and the average is 259000 while median family income is $32000. not sure if u can believe cnn etc
    but here is where i got data

  3. “You wonder why anyone is building houses in America at all. Unlike Australia, there is a huge surplus of housing inventory in the States”

    By the ABS stats we have 830,000 dwellings unoccupied in 2006. Is this not cansidered a huge surplus? By my calcs that would support about a further 6-8% (1.6-1.8 people per house) of the total Australian total Population. If there are 80,000 homeless well then what are the other 750,000 houses being used for if not excess capacity?

    In fact in the 5 years between 2001 and 2006 population grew a total of 5.7% while housing grew at 8.2% so how is it we have a housing shortage now while we didn’t in 2001?

  4. Luke: the only thing that makes that ABS assessment dodgy is the market, which shows a stable rental situation and (for the time being at least) stable housing market. ABS showing 830000 unoccupied might be confounded by data collection problems rather than a reflection of the true number of empty houses.

    That being said I do agree that claims of a housing shortage in Australia is also difficult to believe.

  5. The average house in Perth has 4 bedrooms and holds ?3 people. My parents fitted 8 people into a 4 bedroom house, my inlaws had 8 in a 3 bedroom house.If we were in Asia the occupancies would even be higher. It’s obvious that we have a potentially massive oversupply of housing. If push came to shove there would be many empty houses or landlords being forced to either drop their rent or accept higher occupancy rates

    guy buters
    May 20, 2009
  6. Dan: (re: Luke)
    It’ll change pretty soon. You still have people who are in the RE market SOLELY for capital gains and tax purposes. Yes, SOLELY.

    You might wonder why people would be crazy enough to own a house and not rent it! Hell, i’m not rich enough to do that. Reasons include:

    – holiday homes
    – houses that are not currently rented (and can’t get tennants at $2000 a week)
    – houses belonging to people who are overseas
    – houses belonging to flippers (flippers buy, renovate and sell, but most don’t occupy)
    – houses belonging to rich people
    – houses in rural areas that are just too expensive for people to buy, or perhaps the town is just not expanding its population (some might be contracting)
    – houses belonging to deceased person(s)
    – houses caught up in a legal issue
    …i’m sure there’s more, and perhaps some I listed above are not that significant

    So, some people buy and hold, hoping for higher prices. In a falling market, just watch the rats scurry. For all those “yes, it’s a small 8% correction, but it’ll be even higher soon because house prices always double every 7 to 10 years” types – they are in for a nice surprise when their ‘investment'(?) gets into negative equity.

    Now of course there are some who own property outright, and still play this game. However it wouldn’t surprise me one little bit if councils and states ramp up property taxes (inc. rates) to cover shortfalls from RE market stamp duty and taxes.

    That is just one more thing that makes holding an empty just that much harder, even if you don’t owe anything on it.

    All the signs are down, down, down. The only potential ‘up’ (albeit temporary) is potential Gov. intervention. The market will always win.

  7. Pete: You’re right of course (my point being though that quantifying the likely shift is a bit difficult). Everything is looking pretty ugly at the moment in real estate – that people are even contemplating ‘investing’ in real estate, especially on debt, is beyond crazy in this climate – yet those people are around – almost like the people who walked _towards_ the sea when the tide withdrew just before the Tsunami.

  8. Can someone tell me what the HIA “Average annual household income” is for this quarter; total and disposable income
    I would like a graph of that going back to 2000

  9. Great tsunami analogy, I love it! :)

    It will definitely take some time for the “doubling every 7 to 10 years” idea to go away. But house prices will be falling severely well before that idea has gone.

    Hindsight won’t be very helpful for todays property speculators. But they can’t say there wasn’t any way they could know the market would fall – there are a few sites like this that have been suggesting it for quite a while.

  10. Ha, ha, Pete. Your last words to me were: “Enjoy your comfortable retirement at the expense of future generations!” Laughed at your feeble attempt to lay the guilt on thick… . Rentals are still making us _much better money_ than any other asset class. (But I must acknowledge that Bill Bonner’s prediction of an Obama Bounce helped us get in and out of the ASX, FAST, again… making tax-free megabux in Super! Thanks again, Bill!!) :)

    Biker Pete
    May 21, 2009
  11. Vote two for tsunami analogy! I gotta say though I really do feel sorry for them.
    I made good money on the real estate boom purely through good luck rather than good managment. I’m a renter now though. I suppose you have to remember that real estate performance is greatly affected by participants who dont have much investor discipline.

  12. Well, I prefer the Great Mogumbu’s analogy of lemmings blindly following (LBF) the herd over the cliff. It pays to be contrarian, or counter-cyclical. Whenever you see a herd of groupthink rodents scurrying by, squeaking ‘Safety in numbers, safety in numbers!’ watch out. The smart money is to be made by buying when no-one else is, not when there’s heated competition. (What’s this new’renter’ term? Has ‘tenant’ become politically-incorrect? Is it demeaning, Lachie?!)

    May 21, 2009
  13. Ha,ha, Dan! Doubted you’d let _THAT_ one through… . Too close to home, I guess. (Funnily enough, the term ‘ratbike’ is in use quite widely (google it, sometime) so your portrayal of me as a scurrying rodent isn’t entirely inappropriate!!! :)

    May 21, 2009
  14. Apologies, Dan. Rereading, I see it was Pete who bestowed rodentship on me! Thought you were far too courteous for that! :)

    Biker Pete
    May 21, 2009

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