The world according to GRP — Monday, July 24, 2006:
The "housing recovery" myth
"REAL estate is booming again," panted the Melbourne Age on July 12, 2006. Quoting Bureau of Statistics figures, the Age continued:
[A]n astonishing surge in real estate turnover — by owner-occupiers and investors alike — has pushed lending well above the record set in 2003.
In May alone, borrowers brushed aside the Reserve Bank's rate hike, to lift lending by 4.5 per cent.
While construction lending remained flat, lending to buy existing homes soared by more than 5 per cent in the month, and by 24 per cent in the year.
Now let's take a deep breath and consider the implications of the news buried in the subordinate clause introducing the last sentence: construction lending remained flat.
An increase in turnover in the property market can be driven on the supply side (more owners wanting to sell) or the demand side (more prospective buyers) or both at once. To the extent that the latest surge in turnover was driven on the demand side, it should have induced borrowing for the usual mixture of new and existing homes, so that borrowing for construction should have increased. But it didn't. So the cause of the rise in turnover is to be found on the supply side, excluding new construction — in other words, pressure to sell.
If the increase in turnover is indeed driven by selling pressure, what other evidence should there be? A slump in prices? Not necessarily, because if the selling pressure is concentrated at the top or bottom of the market, it will skew median prices up or down, respectively. But, for what it's worth, the same report in the Age went on to say:
Interestingly, the number of new borrowers has risen more rapidly than the size of loans.
The average loan to owner-occupiers buying existing homes in May was $233,100, 7 per cent higher than the $217,400 a year earlier. There is no sign of that growth accelerating.
Of course, selling pressure doesn't just happen; it is caused. What might have caused it? That's easy: investors who bought at the height of the price bubble accepted ridiculously low rental yields in pursuit of capital gains. Their rental incomes are now insufficient to service their loans, and their hopes of capital gains have been dashed. They held on to their investments as long as they could, causing a contraction in the supply of properties for sale and thereby propping up prices, enabling mainstream commentators to claim that the market had plateaued rather than crashed. But now reality has set in: investors have started defaulting on their loans, and lenders have started foreclosing.
Indeed, the Murdoch press reported in mid-July that mortgage defaults, foreclosures, and repossessions rose rapidly in the first half of 2006. But this fact did not receive nearly as much overall coverage as the alleged housing recovery, and the coincidence between the surge in foreclosures and the surge in turnover was not pointed out.
Making the reasonable assumption that the mortgage defaults are occurring preferentially among the more ambitious investors, we should expect the resulting sales to be concentrated at the upper end of the market, which would easily account for the slight increase in the average size of loans.
So there you have it: the media have managed to portray an outbreak of distress sales as a resurgence of the property boom. When turnover plummeted and prices didn't, that was called a plateau. Now that turnover is surging and prices aren't, this is called a boom. Then, turnover was irrelevant and price was everything; now, price is irrelevant and turnover is everything. Such is the relationship between the media and the property industry.
Copyright © Gavin R. Putland except as otherwise attributed. Posted at The world according to GRP under the title The "housing recovery" myth. You may republish this item verbatim on your website or blog provided that you include this notice (with hyperlinks).
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