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Fundamentals of Australian House Price Inflation
There is a lot of ill-informed offshore commentary about Australian house price inflation, with anecdotal reports suggesting that some hedge funds are putting on trades designed to capitalise on what they see as an inevitable Australian house price bust.
We have heard all this before from a local debate about house prices that goes back to at least 2003 and substantially predates international interest in this issue since 2007. In 2005, Robert Shiller declared that Australia had suffered a burst housing bubble the previous year, a proposition that has become even more laughable with the passage of time.
Chris Joye reviews the latest data in his presentation for offshore investors.
posted on 02 September 2010 by skirchner in Economics, Financial Markets, House Prices
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What Did They Know and When Did They Know It: Ex-Ante Views on US Housing
Looking through all the after-the-fact wisdom and hand-wringing, a Boston Fed discussion paper examines the ex ante views of economists in relation to the US housing market:
From our review of the pre-crisis housing literature from the early-to-mid-2000s, it is apparent that well-trained and well-respected economists with the best of motives could and did look at the same data and come to vastly different conclusions about the future trajectory of U.S. housing prices. This is not such a surprising observation once one realizes that the state-of-the-art tools of economic science were not capable of predicting with any degree of certainty the collapse of U.S. house prices that started in 2006.
The paper has mostly fatal implications for the idea that the authorities can actively manage cycles in house prices.
posted on 17 August 2010 by skirchner in Economics, Financial Markets, House Prices
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Did Cheap Credit Fuel the US Housing Boom?
No, according to Ed Glaeser and his co-authors:
Interest rates do influence house prices, but they cannot provide anything close to a complete explanation of the great housing market gyrations between 1996 and 2010. Over the long 1996-2006 boom, they cannot account for more than one-fifth of the rise in house prices. Their biggest predictive influence is during the 2000-2005 period, when long rates fell by almost 200 basis points. That can account for about 45% of the run-up in home values nationally during that half-decade span. However, if one is going to cherry-pick time periods, it also must be noted that falling real rates during the 2006-2008 price bust simply cannot account for the 10% decline in FHFA indexes those years. There is no convincing evidence from the data that approval rates or down payment requirements can explain most or all of the movement in house prices either.
The authors also note that Robert Shiller’s ‘irrational exuberance’ is a non-explanation:
even if Case and Shiller are correct, and over-optimism was critical, this merely pushes the puzzle back a step. Why were buyers so overly optimistic about prices? Why did that optimism show up during the early years of the past decade and why did it show up in some markets but not others? Irrational expectations are clearly not exogenous, so what explains them? This seems like a pressing topic for future research. Moreover, since we do not understand the process that creates and sustains irrational beliefs, we cannot be confident that a different interest rate policy wouldn’t have stopped the bubble at some earlier stage. It is certainly conceivable that a sharp rise in interest rates in 2004 would have let the air out of the bubble. But this is mere speculation that only highlights the need for further research focusing on the interplay between bubbles, beliefs and credit market conditions.
A more fruitful line of inquiry would be to investigate fundamental factors such as the role of US housing GSEs in distorting the allocation of global capital.
posted on 04 August 2010 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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Yet Another New Tax on NSW Housing
The NSW government has introduced yet another new tax on housing transactions. Yesterday, I gave a post-budget presentation to a business group in Western Sydney, together with Westpac’s Matthew Hassan. Matthew presented some stunning charts showing the growth in the tax burden on housing in each state, with NSW the clear winner. Indeed, the tax burden on a new house and land package on Sydney’s suburban fringe is now such as to make it unprofitable to bring to market, which helps explain why new housing supply in the state is running at 1950s levels.
If only some of the outrage directed against negative gearing and capital gains tax concessions by ignorant journalists and commentators could be marshalled against the taxes and charges that are really responsible for putting upward pressure on house prices.
posted on 13 May 2010 by skirchner in Economics, House Prices
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The US Housing ‘Bubble’ that Wasn’t
Some refreshing ‘bubble’ scepticism from Casey Mulligan:
Adjusted for inflation, residential property values were still higher at the end of 2009 than 10 years ago. This fact raises the possibility that at least part of the housing boom was an efficient response to market fundamentals.
posted on 07 May 2010 by skirchner in Economics, House Prices
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The Market Believes the RBA is Targeting House Prices
The weighted average of capital city established house prices rose a Steve Keen-busting 4.8% q/q and 20% y/y for the March quarter, with gains in Sydney and Melbourne in excess of 20% y/y. This saw three-year bond futures savaged by around 7 basis points and the implied probability of a 25 basis points tightening from the RBA tomorrow surge from around 50% to around 65% on iPredict. The ugly 3.4% annualised result for the trimmed mean of the TD-MI inflation gauge released an hour earlier should be more important for the RBA’s deliberations, but it is house prices that are grabbing the market’s attention.
posted on 03 May 2010 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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