As reported in this news media article, BIS Shrapnel just released an report,
Australia’s housing affordability crisis is expected to dramatically worsen during the next five years, with property prices forecast to rise by as much as 40 per cent.
Economic forecaster BIS Shrapnel says housing affordability, already at record lows, will decline even further in the years ahead as demand continues to outstrip supply.
This is an example of misinformation and ‘analysis’ by those who should know better.
Firstly, this is an example of turkey thinking (see Example of a financial turkey: Australian Property Monitors), as the article said:
The figures quoted by Mr Gelber are largely in line with Australian Bureau of Statistics (ABS) data.
Calculations, based on the ABS established house price index, show that during the 10 years to December 2007, house prices rose an average of 9.9 per cent a year. The index rose 12.3 per cent in 2007.
In the 10 years before that, house prices rose an average six per cent a year.
In the past 20 years they have risen an average 7.9 per cent a year.
The journalist who wrote that article was implying that since property prices had been rising so many percent over the past so many years, therefore what happened in the past is consistent to what will happen in the future as ‘predicted’ by BIS Shrapnel. Turkey thinking is the primary reason why the majority is always wrong (see our guide Why are the majority so wrong at the same time and in the same ways?).
Secondly, this type of analysis is too simplistic. Basically, it is simplistically saying that since demand is greater than supply, then prices will rise. It looks to us that BIS Shrapnel is looking at the Australian property market as a monolithic whole. In reality, as we said before in Myths on the Australian housing/rental crisis & its implications, the problem is not really simplistically due to outright shortage. Rather, the real problem is the mismatch between demand and supply. In Sydney alone, there are some areas suffering from over-demand and others suffering from over-supply. Blindly increasing the supply alone will not solve the problem.
Can Australia’s already excessive debt levels increase further to feed further property price boom? This is another flaw in BIS Shrapnel’s analysis. The only way for house price to rise further is for debt levels to increase. If Australia’s high levels of debts are already strangling the average Australians with excessive debt stress (e.g. mortgage debts) at a time of record low unemployment, how can debt levels increase any further to feed the further substantial increase in house prices? As the business cycle turns, unemployment will increase, which will result in de-leveraging of the highly leveraged households. The higher the leverage, the more painful the de-leveraging will be. The more painful de-leveraging is, the greater pressure will be on asset prices (see What can tip Australia into a downward property price spiral?).
Where is the housing ‘demand’ going to come from as credit becomes more expensive? The only way for most people to buy a property is to borrow money. If credit becomes more expensive (i.e. harder to borrow money), obviously the ‘demand’ for properties will fall as well. As we said before in Rising price of money through the demise of ?shadow? banking system, the global financial system is undergoing a credit crunch whereby money is getting more and more expensive. Along with that, the ‘demand’ for houses will slowly disappear as well.
BIS Shrapnel had also shown itself to be economically challenged. As the article said,
Mr Gelber says the current environment of rising interest rates has compounded the problem, with people choosing to wait before buying or building property.
This also meant that when interest rates stopped rising or eventually started to fall, there would likely be a surge in demand for housing which could result in another price explosion.
If it ever comes a day when the Reserve Bank of Australia (RBA) has to cut interest rates, it will be a day when the Australian economy is in deep trouble, when debt deflation grips the nation. That will NOT be good for property prices. In fact, this is currently happening in the US right now when money-printer Ben Bernanke (see Peering into the soul of Ben Bernanke) is busy trying to fight asset price deflation (see Recipe for hyperinflation).
We are astounded that even a leading industry research organisation can produce such nonsense.
Tags: BIS Shrapnel, credit, debt, deflation, Property
