Have we reached a new normal with property prices?

by Alistair Helm in

House prices.jpg

I was attracted to an article today posted by Realestate.com.au entitled “Expect slow house price rises, says RBA” – now given the fact that Australia seemed to have skipped the last property price crash allied to the GFC I thought this was a very interesting headline and article, certainly worth reading and sharing.

The article referenced a speech by Luci Ellis, the head of The Reserve Bank of Australia’s financial stability department delivered this week in Sydney.

Now I am not an economist. I have an interest in the subject and with an eye for statistics and trends I was fascinated to delve a little deeper into this hypothesis presented by Ms Ellis that we are at, or at least close to, a new normal that may well see slower increases in house prices and more occasions when prices are  falling.

The full text of her speech and contextual charts are available to read and I would encourage a review as they are very enlightening. I hope someone may be motivated at Statistics NZ or the Reserve Bank here in NZ to produce similar charts to see how paralleled our markets and economies are in this regard.

To summarise the hypothesis. The view is that the move to lower inflation through the 80’s and 90’s lead to lower interest rates. As this occurred, lenders were more comfortable to increase the scale of lending without driving up loan-to-income ratios. In the view of the presenter, this resulted in almost a doubling of the amount households could borrow. This rise in borrowing capacity almost had to result in higher property prices which eventuated in the past decade or so.

Reserve Bank of Australia, Financial Stability Dept: April 23 2013

Reserve Bank of Australia, Financial Stability Dept: April 23 2013

After this adjustment worked through the system the household debt-to-income has in Australia remained largely flat. The capacity to repay debt grew in the same period in someways replacing ‘old fashioned’ savings which in total edged down to zero although has crept back up as house prices have stabilized.

Reserve Bank of Australia, Financial Stability Dept: April 23 2013

Reserve Bank of Australia, Financial Stability Dept: April 23 2013

The view is that these adjustments, having now worked through the system, have created a less volatile environment where house prices are less likely to experience significant rises and may self correct with price falls.

What is very interesting in studying the charts within the presentation is the similarity between Australia and NZ on issues such as scale of new construction, urbanization, immigration and land availability. These similarities whilst no guarantee that this hypothesis will be experienced in NZ, certainly give pause for thought around the much discussed and often debated view as to the future of house prices here in NZ.