Thursday, October 21, 2010

No wood, all trees...

According to Banking Day:
In a speech to a Finsia financial services conference, [RBA boffin Luci] Ellis argued that far from being complacent about a bubble, the RBA was searching for danger signs.

But, she said, it was important to go beyond statistical averages to understand the housing market. As an example, she set out new detailed data on housing loans suggesting that loan-to-valuation ratios are rising because there are fewer low-ratio loans, not because there are more high-ratio ones (see graph).

Ellis argued that simple ratios based on average data had wrongly led some observers to conclude, in the mid-2000s, that the US was less likely to have a housing price bubble than many other countries. In fact, while the average US borrower was safe, one group of US borrowers was taking out loans they could not pay back.

Prudential supervisors needed to see “the concentrations of risk, not just what is happening on average,” she said.

In riposte, this blogger will simply note an old expression that goes something like 'can't see the wood for the trees'. Below find an average that speaks for itself. Presenting updated charts of the earlier Housing Velocity post:

And just to prove its all damn lies and statistics, this blogger found a chart at the ABS which shows all of the established dwelling sales in this series are grossly underestimated. The below is owner-occupier sales only so if we add investor sales then the total turnover numbers rocket above the APM aggregates. Despite the discrepancy, the ABS data only strengthens the overall point. From 1997 to 2007 established dwelling sales were up 74% versus population growth of 15%.

We've been trading houses like footy cards since the nineties.


The Lorax said...

Sure, but what does that last chart look like expressed as a percentage of total housing stock? If established dwelling sales are flat and new builds are falling then doesn't that support the Chris Joye view that its all a supply problem?

David Llewellyn-Smith said...

I'm not sure why more people equals more established dwelling sales, even if there is a shortage...people aren't moving more because there's more people. The supply argument, if credited, may rationalise high growth in prices because there are more bidders but the point I'm making is that if more people have joined that trade, it's still, most assuredly, a bubble (I only see the supply issue working very much at the margin anyway...)

The Lorax said...

Well, in a sane housing market I'd imagine that a certain percentage of established dwellings change hands every year, lets say 3%. If Australia's population has grown 10% over the past decade, then you'd expect 10% more established housing transactions wouldn't you?

Now if the percentage is growing -- like it appeared to in the late nineties / early noughties -- then we need to look for other reasons like increasing mobility in the workforce, or more likely, freely available credit and manic housing speculation.

But in percentage terms it looks like housing turnover has declined recently, which IMO, doesn't support the idea that we're in the midst of a speculative mania.

P.S. Why the gaps in the data 2003-2005 and 2008?

David Llewellyn-Smith said...

I made those points in the original Housing Velocity post.

As Tolstoy wrote, "Happy families are all alike; every unhappy family is unhappy in its own way."

The Oz housing bubble is unique in its duration, depth, economic circumstances and degree of government support. That doesn't men it isn't a bubble, only that it's a bubble in its own way.

Government and regulator attempts to backfill the bubble have worked to some extent and, I think, after the passing of the FHBG, the GFC has also made punters a bit more debt-averse.

So percentages have dropped but remain elevated and despite that, prices are falling, hinting at how much activity is required to keep the balloon aloft.

ABS was sipping cocktails in the Bahamas those years...