Working Papers

The House Price Bust that Wasn’t

Remember those 20-30% declines in house prices that were meant to have thrown Australia into recession by now?  Neither do I.  The ABS median established house price index rose 3.1% q/q and 6.4% y/y for the June quarter, based on a weighted average of capital cities.  The weighted average once again concealed considerable variation between capital cities, ranging from a 0.5% y/y decline in Sydney to a 35.4% y/y increase in Perth. 

The ABS has been doing a lot of work trying to improve the quality of its data on house prices, partly in response to RBA demands for a more timely series that is less prone to compositional distortions.  The latest data suggest that the trough in the weighted average of capital city house prices was seen in the March quarter of 2005, when house prices were essentially flat compared to the March quarter 2004.  This coincided with the peak decline in Sydney house prices of -5.9% y/y.  This was enough for Robert Shiller to pronounce that Australia had suffered a burst housing ‘bubble,’ yet with the exception of Sydney and Canberra, none of the other capital cities recorded a decline in nominal house prices at an annual rate.  Melbourne got down to +0.4% y/y at the end of 2004, one quarter ahead of the Sydney trough.  Cities like Perth never even managed a decline over a quarter, much less a year.

The upswing in global commodity prices that began in 2002 explains much of this regional variation, adding to incomes in the resource-rich states and driving the inter-state migration flows that the RBA has identified as an important source of weakness in Sydney house prices, which have now largely converged back to the same ratio to other capital cities seen in the early 1990s.  While many people have argued that, but for the commodities boom, the rest of Australia would look like Sydney, it is more plausible to argue that Sydney is only as weak as it is because the commodities boom has drawn people away from Australia’s largest city.  What many analysts saw as a prospective national house price bust emanating from Sydney that would wreck the Australian economy was in fact just one aspect of an exogenous commodity price boom that has been anything but harmful.

posted on 24 August 2006 by skirchner in Economics

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Stephen, you’ve lost a lot of credibility on this issue in recent months, especially now that the US housing market is in free fall.  To claim that the Sydney market is weak because people are flocking to Perth is simply absurd.  There is no question in my mind that the commodities boom rescued the Australian economy from recession just as the housing bubble burst.  The Perth market would be flat as a tack right now if not for the commodities boom.

Your views on the inflationary impact of recent income tax cuts have also been contradicted by the RBA governor himself.

This blog is almost as silly as the doomsday blogs becuase your views are every bit as sunny as the doomsdayers forecasts are gloomy.  I find your unshakeable faith in markets (and benign “consenting adults” view of staggering deficits and debts) naive and cornucopian.

Sometimes I wonder if you think there are any problems in the world today?  Apparently there was no house price bust, there’s no problem with household saving or personal debt, massive CADs in the US and Australia are a good thing, climate change doesn’t exist, and doubtless high oil prices are due solely to Chinese demand, ‘geopolitical factors’ and limited refining capacity.

I’m looking for some balanced discussion, and all I can find on the internet these days is doom-and-gloom or don’t-worry-be-happy.

Posted by .(JavaScript must be enabled to view this email address)  on  08/26  at  09:11 AM


I don’t recall saying the US housing market would not experience a downturn, just that the macro implications will not be nearly as devestating as commonly assumed.  It will be a while before the US downturn fully plays out, so I think my credibility is safe for a while yet. 

Have a read of the Hansard of Macfarlane’s testimony before the House Economics committee to see what Macfarlane really had to say on the subject of tax:


To the charge of being an optimist, I plead guilty, because I happen to think markets work well most of the time.  The doom-mongers, whether they realise it or not, are effectively saying markets don’t work.

Posted by skirchner  on  08/26  at  01:16 PM

I’m going to go wildly off-topic here, but what the hell, I think this is way more important than house prices and interest rates…

I agree that markets work well most of the time, but the market (as it is) will work against us, not for us, when dealing with climate change.

Its a very convenient out for you (and many other pro-market economists) to just say “climate change doesn’t exist”, but lets suppose for a moment it does, and that it can and should be tackled.  Will the market solve this problem for us?

IMHO, the answer is: Yes, a modified market *could* be our most effective tool in tackling climate change, but left as it is the market will inevitably push us towards increasing use of coal, the most greenhouse intensive fuel.

Unfortunately, while reserves of oil (and in particular cheap oil) are running down, coal is in plentiful supply.  Not only that, the biggest coal reserves are in the United States, China and India, which are likely to be the three biggest consumers of energy in the future.  As oil becomes more scarce and more expensive, technologies such as coal-to-oil conversion will become economically viable.

Now, as a free market economist you say fine, the market is doing its job, but think of the implications for CO2 emissions.  Conventional crude is an extremely efficient energy source.  The energy returned on energy invested (EROEI) for Saudi crude is about 10:1, but the EROEI for oil alternatives such as coal-to-oil, the tar sands of Canada, oil shale etc is much closer to 1:1.  i.e. you have to burn the equivalent of 1 barrel of oil to make a barrel of oil.

High oil prices will undoubtedly drive technological advances in fuel efficiency (the market doing its job again) but even a 100mpg car will be producing more CO2 per kilometre driven because it has cost so much (in terms of energy and CO2 emitted) to produce the fuel in the first place.

The answer (IMHO) is to put a dollar cost on CO2 emitted.  Once that happens the market will work for us not against us.  As it is, our economic system places no cost on putting CO2 in the air.  Why this is the case I don’t know.  We pay to have all our other waste removed, why not CO2?

I find it curious that the ALP is promoting market-based solutions to CO2 reduction; cap-and-trade, MRET, carbon taxes etc, while the Howard Government is spending taxpayers money on ‘picking winners’ (and some very dubious ‘winners’ at that); ‘clean coal’ aka CCS or geosequestration, solar cities, nuclear power enquiry etc.

These are the biggest economic issues (along with the ageing population) that we will face in coming years.  I’d love to hear your thoughts on this, without resorting to some Tim Blair style dogma that its just a bunch of crackpot scientists trying to protect their funding.

Posted by .(JavaScript must be enabled to view this email address)  on  08/27  at  12:43 PM

I have never said climate change doesn’t exist, since there is some data to support it.  To what extent it is anthropogenic is more debatable.  There was climate change well before people were around.

Posted by skirchner  on  08/27  at  10:56 PM

Ok, I’ll restate it:  Its a convenient out for pro-market economists such as yourself to say that *anthropogenic* global warming does not exist.

Its also a convenient out to ignore questions like these.  This is why I don’t buy your don’t-worry-be-happy view of the world.  Perhaps if you had good answers to these questions I might, but denial of the problem is not an answer.

Posted by .(JavaScript must be enabled to view this email address)  on  08/27  at  11:08 PM

Predictions of environmental doom have a very poor historical track record, for the same reasons as predictions of economic doom.  So don’t worry.  Be happy!

Posted by skirchner  on  08/28  at  12:20 PM

While is it true that economists have predicted 10 out of every 3 recessions, and similarly environmentalists have predicted 10 out of every 3 environmental disasters, they do occasionally get it right.

Perhaps the best recent example was the hole in the ozone layer.  Was that not an example of environmental doom predicted and avoided buy co-ordinated global action via the Montreal Protocol?  Is the evidence for AGW any less compelling than it was for the connection between CFCs and ozone depletion?

Apart from some (possible) sloppy science in one study (the infamous ‘hockey stick’) I don’t know of any credible study that casts doubt over AGW.

At what point do you say, the evidence is overwhelming and we must do something?  When the Barrier Reef is destroyed by a major coral bleaching event?  When a major city or town runs out of water?  When the snow stops falling at Perisher?  When?

Posted by .(JavaScript must be enabled to view this email address)  on  08/28  at  03:26 PM

“Perhaps the best recent example was the hole in the ozone layer.  Was that not an example of environmental doom predicted and avoided buy co-ordinated global action via the Montreal Protocol?”

You’re sounding more optimistic already!

Posted by skirchner  on  08/28  at  04:11 PM

Yes, but we did something about the ozone hole.  We’re doing absolutely bugger all about climate change.

Unlike the Montreal protocol the world is hopelessly divided into two camps; one believing catastrophe is imminent (Blair, Gore, Europe…) and the other in complete denial there is even a problem (Bush, Howard, Murdoch…)

One of those groups is gonna look pretty bloody stupid in 2020, and for the sake of the world I hope its Blair and Gore.

Posted by .(JavaScript must be enabled to view this email address)  on  08/28  at  04:47 PM

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