More Kouk spruik Posted by Unconventional Economist in Australian Property on June 28, 2013 | 30 comments
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By Leith van Onselen
In Business Spectator today, Stephen Koukoulas (aka ‘the Kouk’) provides an incredibly bullish view on why conditions are ripe for Australian house prices to boom over the next few years:
House prices are marching higher again and are back on track for a 10 per cent rise this year.
After a temporary lull in April and May, where house prices fell 1.7 per cent over the two months, so far in June there has been a strong rebound with prices regaining those losses with a rise of 1.7 per cent. According to RP Data, house prices have now risen 2.7 per cent since the start of 2013 and will record a rise of a little more than 3.5 per cent in 2012-13 as a whole.
At the start of the year, I was forecasting that “house prices could rise by around 10 per cent this year” (All signs point to a house price hike, January 10).
That forecast is more or less on track, despite the dip in April and May, with strong seasonal gains set to be recorded in the latter part of 2013. If house prices rise by around 1 per cent per month on average between now and year end, the gain for the year will be close to 10 per cent…
Whether or not house prices rise 10 per cent this year or not, there have been very few times in the past three or so decades where conditions have been better for those wanting to get into the property market and it seems a no brainer to make a forecast that house prices will rise strongly over the next couple of years.
In coming up with his house price forecast, the Kouk specifically cites in order:
Low interest rates with further cuts likely; Favourable housing affordability; Solid employment growth; and Strong population growth relative to dwelling approvals.
There are a number of issues with the Kouk’s spiel.
Just last month, he effectively argued that the RBA should further cut rates in order to support Australian housing values which, at the time, had fallen according to the RP Data index:
House prices are falling again. If these falls are the start of a new trend lower rather than just a bit of a blip, it could be a very unpleasant signal that will require a policy reaction from the Reserve Bank.
…the recent Reserve Bank policy bias to further cut interest rates will only be reinforced by the recent house price declines. If the price falls gain momentum, there could even be a scenario when the central bank drops the cash rate more than the futures market is currently pricing – say to around 2.0 per cent. In a worst case, official interest rates could be 1 point something per cent which I suspect would be enough to underpin house prices and fend off the nasty effects of a house price bust.
Surely, consistency would dictate that if house prices were to begin rising strongly, the RBA would need to lift rates in order to choke-off the price rises? Why hasn’t the Kouk mentioned this possibility?
The above exerpts also raise the issue of why the Kouk is so enamoured with the daily RP Data index? As with most economic data it is the trend that matters and when one looks across the gamut of house price indexes – from the ABS, Residex, APM and RP Data – it is obvious that the trend has been a slow climb since the bottom. Jumping on every move in the RP Data daily index, which is not seasonally adjusted and is inherently volatile, is likely to lead to equally wild commentary.
Further, the Kouk makes no mentioned of headwinds facing the Australian economy, which are likely to weigh on house price growth. Chief amongst these concerns are the deleterious impact that the unwinding of the mining boom will have on disposable incomes, employment and growth.
National disposable income per capita is already falling as the terms-of-trade retraces back towards its longer-run average, whereas per capita GDP has grown by only 3.5% since mid-2008 – slower than the recoveries after the 1970s, 1980s, and 1990s recessions (see next chart). Both are likely to remain weak for the forseeable future.
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Despite the benign official unemployment rate, the labour market is also weak, as evident by a swag of partial indicators – from the ABS, ANZ and DEEWR job vacancies/job ads series to the unofficial Roy Morgan labour force survey – all heading south. And with roughly 10% of Australia’s labour force employed in mining-related industries, the lion’s share of which relates to mining investment, Australia is facing a potential labour shock as the mining capex boom retreats from record highs (see next chart).
ScreenHunter_22 Jun. 28 11.21
Throw into the mix the ageing of the population and the steady rise in the dependancy ratio, and its hard to see how dwelling values will rise strongly in the years ahead, even without a sudden shock to the Chinese economy (another potential vulnerability).
Overall, the Kouk gives far too much weight to short-term movements in the RP Data index, and has failed to account for risk. As such, his forecasts appear overly optimistic.
