Monday, October 17, 2011

Australian Prices to Rise According to BIS Shrapnel

Sydney, Perth house prices to rise by 20 per cent
Economists are predicting a double-edge sword for Sydney's property market, forecasting the median price to boom from $644,000 to $770,000 in the next three years - on the back of the housing crisis.
The report, prepared by BIS Shrapnel, says the underlying strength of the Australian economy, stable interest rates in the short term, high immigration and a dire shortage of houses in Sydney, will be the main drivers of this growth.
It forecasts the Sydney median house will lift by 19 per cent to $770,000 over the three years to June 2014.
This compares with 20 per cent in Perth, 16 per cent in Brisbane, 8 per cent in Canberra and only 6 per cent in Melbourne.

Let's assume this is correct, and look at some related numbers.
Total housing credit issued in Australia through Sept 2011
This is the total housing debt in Australia. You can see what a trajectory it's been on since financial industry deregulation really got going (specifically in securitization). That bend upward circa 1999 occurs on most westernized countries' graphs. It's really quite remarkable. Occupy Wall Street notwithstanding, the structural reasons behind the growth in the supply side of credit is not the issue of this post.

The issue is should BIS Shrapnel's prediction come true, the total housing credit in Australia must accelerate upward to account for the ballooning in total housing "value". Housing valuations are debt on the other side of the equation. Without increased access to credit the next round of buyers cannot outbid to win their properties at rates in excess of inflation, so that additional money has to come from somewhere. The next graph shows the problem.

Credit issued in Australia through Sept 2011 for business and real estate

That excess credit that got poured into ever larger habitations of wood, plaster, tile, and marble came out of the pockets of business people looking to expand. Note the whack and subsequent decline in credit being issued to business while housing credit soured onward and upward, unabated. Where are the increasing economic gains and therefore increasing employment and wages going to come from if housing is expected (hoped for even!) to choke off credit for business even more over the next three years?

I'll leave you with a little snapshot record of BIS Shrapnel's house price and growth predictions for 2010 from the Oct 2009 report (line 1) and their actual numbers from the Oct 2010 report (line 2). They were wildly wrong (low, but wrong).

BIS Shrapnel predictions, tan line Oct 2009, blue line Oct 2010

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