Housing credit increased by 0.5 per cent over September (see the RBA Release for details), but this involved a further deceleration of mortgage debt…..
….The most recent figures—that prices fell 1.2% over the June to September 2011 quarter, and 2.2% from September 2010 to September 2011 (see the ABS Release for details)—confirm that mortgage debt acceleration, and not “population pressure” etc., is the key determinant of house prices.
The book This Time Is Different identifies inflated real estate prices as one sign of possible banking crises. It lists various real estate market collapses across decades and across countries and most are in the range of a 20-40% drop. Past crashes in Australia have been in the range of 30-40% – in 1961, 1974, 1982 and the last in 1989.
Most commentaries attribute booms to easy availability of funds, as Steve Keene has observed. What is even more demonstrable is that crashes have all been precipitated by a sharp contraction in access to funds. Prior to 1989 all real estate crashes were preceded by the Reserve Bank calling in funds from the banks. Having deregulated banks in 1983, the contraction in 1989 was Australia’s first private enterprise credit squeeze. Deregulation had encouraged lending practices that made some banks technically insolvent, so when the economy slowed, the banks called in loans, creating a 40% fall in prices of many properties. Since then the development of securitisation has produced an almost limitless supply of funds for real estate lending, supporting price growth with no major setbacks for 20 years.
Steve is correct in an indirect way. The drivers of price increases are complex – undersupply, price competition between owners and investors etc., but what makes Steve correct is that the reason there has been no decisive crash is that the continuing supply of finance means that there is no specific trigger for a major price reduction. The big threat is if banks come under pressure that forces them to pull in their lending. That would put pressure on property prices, which would put more pressure on banks, which could precipitate a sharp spiral down – don’t hold your breath waiting, but don’t be surprised, because as the book says, it has all happened before and there is no reason to believe that This Time Is Different.
David, I agree that real estate bubbles are the primary cause of banking crises, with stocks taking second place. But as Anna Schwartz said: “There is only one kind of bubble and that is a debt bubble.”