Crowded house is packed to the rafters

Crowded house is packed to the rafters.

“The Bureau of Statistics has made substantial changes to population and household estimates in recent years, suggesting that the number of people per household or dwelling has reversed course,” CommSec’s chief economist, Craig James, says in a report released today.

I thought this was an interesting article. One of my arguments against a property crash in Australia (notwithstanding localised cycles), is that there is a level of pent-up demand of people who just can’t get on the ladder. I know plenty of people in their late 20s and early 30s who would love to own their own home but can’t quite afford it. If prices started to fall, they would be the ones preventing the so-called ‘rush to the exits’.

The ‘kidult’ phenomenon, with kids staying at home much longer, even before renting let alone buying is another example of this pent up demand. It’s not demand that would cause prices to rise (they’d need higher incomes or access to credit to do that) and it’s also demand that only applies at a certain submarket.

This article seems to lend some weight to that, with the ABS confirming the anecdotal evidence. I think there are two ways to look at it:

  1. The increasing number of people per household reduces the number of dwellings demanded, putting negative pressure on house prices
  2. The increasing number of people represents the gap between demand from first-time home buyers and the supply of entry level housing. That pent up demand will absorb and supply that comes as a result of prices falling.

It’s important, because it’s really the size of households that determines demand for dwellings. If it’s a cultural/structural shift, then it may have a large negative impact for residential property in Australia. If it’s just people ‘getting by’ by living in an arrangement that’s not ideal for them, it will have a positive impact.

I favour the latter interpretation.

The US housing market part 3: That’s not a crash

That’s not a knife. THIS is a knife…

I would never suggest that the US housing market is not in a bad way. People are hurting, there is negative equity and prices still haven’t stabilised. The leveraged nature of the asset class magnifies the pain and it flows onto other sectors due to people feeling poorer as their house goes down in value.

That said, does it really stack up as a crash when we compare it to some other crashes over time? Firstly, let’s review the housing the ‘Housing Crash of 2007′. Bad news yes, particularly if you’re a new buyer…


1929 is the benchmark for crashes and I hear this housing ‘crash’ mentioned in the same breath far too regularly. That’s not a crash, THIS is a crash:

DJIA 1920 1940  annotated

Source: (annotated)

Yes, it’s bad. And when we look at some of the submarkets like Nevada, it’s certainly a crash, but not everywhere. Some states have barely noticed.

In 1929 values of many companies went to zero. Stockholders were left with nothing. In this ‘crash’ investors still have land and a house that can earn rent. Home owners still have a roof over their head. To me (and may real estate investors and home owners), THAT is the value of real estate. It’s real, it’s tangible and along with food, water and clothing, provides one of the necessities of life. There will always be some intrinsic value in a home (we’ll tackle the $1 Detroit houses in a future post!)

Considering the role of housing in sparking the current crisis (securitisation of sub-prime mortgages, predatory lending, etc.), I think it’s a testament to the asset class that despite being probably the most maligned sector in the world right now, it’s down -5% over 12 months, -17% over 5 years and positive over 7 years (an average property cycle btw). Compare that to 1929.

That’s not a knife. THIS is a knife.

The US housing market part 2: The states

Following on from part 1, how have the states fared? As I mentioned, I’m keenly interested in how submarkets perform compared to the overall trend.

US House Price Index 1991-2011 by state

US States over time

Source: FHFA raw data + my own analysis

I hope my point is now made that submarkets behave very differently. Take a look at Nevada (NV). An unfortunate soul purchasing property in 2006 would have suffered a whopping 56% fall in value! However, over the same period in the same (US) market, a property-owner in Texas (TX) enjoyed a 4% increase in value.

The exact reasons will be the subject of endless debate, but I believe that Wendell Cox and the Unconventional Economist might be on to something with their theory that restrictive land-use policies cause the volatility, as cities with responsive policies and easily bring on new supply and keep the price equilibrium fairly stable.

The US housing market part 1: National changes in prices over 20 years

One of the common themes you’ll find on this blog is about housing submarkets. I have a whole series on this coming up, but for the purposes of this post, I will say this:

Whilst macro factors absolutely affect housing markets, submarkets respond very differently, and submarkets within submarkets. If you’re a central banker, you care about the aggregated numbers. If you’re a REIT manager or investor, you probably care about a pretty big submarket. But if you’re a real estate investor, you care much more about your street, your suburb and your city.

You could be forgiven for thinking that every house in the US was almost worthless. If we look at the data though, we’ll see some prices have crashed, some have fallen, some have flatlined and some have increased throughout the housing ‘crash’.

I say’crash’ because whilst the falls in some submarkets have been severe, they’ve been relatively benign in others.

The following analysis is based on HPI (house price index) data through to Q1 2011 from the Federal Housing Finance Agency. It is computed from repeated transactions for mortgages arranged through Fannie Mae and Freddie Mac. I.e., not every transaction, but a very large sample. A detailed methodology is available here.

So, firstly, the big picture:

  US Housing Price Index 1991-2011

US Housing Price Index 1991-2011

  Source: FHFA

This is the entire US market over the last 20 years. Not unsurprisingly, there was a large run-up in prices, followed by a correction starting around 2007.

There is no doubting there’s been a large correction, but it this really a crash? Before I actually looked at the data, I expected much more severe falls than that.

As we’ll see in part 2, some submarkets have recorded precipitous falls indeed, but others not…

Notes on Case Schiller

When I first analysed the data, I was surprised the correction wasn’t steeper. I think one of the causes is that the most quoted house price index in the mainstream is Case Schiller. In my opinion, Case Schiller exaggerates movements by:

- Restricting to the 20 largest metro areas
- Value weighting transactions, such that more expensive houses skew the market

To illustrate, here is the shape of Case Schiller composite 20 over the same time period.

Case schiller total only

Clearly volatility has been more severe in the major metropolitan markets. If we’re going to talk about the ‘US Housing Market’, I see no reason to restrict to major metro markets and for that reason, will be sticking to the FHFA data where possible.

First, the disclaimers

I believe any blog handling finance/investment/economic themes really should be up-front about the interests of the author.

With that in mind, at the time of writing, I have exposure to the following markets:

- Sydney residential
- NSW regional residential
- Atlanta, GA, USA
- Australian stocks via managed/index funds
- International stocks as above

In terms of weighting, property is the most significant. Thus, it’s my interest for property, particularly in NSW to appreciate.

That said, the purpose of the blog is not to move the market (as if it could anyway), but rather to capture my own thoughts, research, analysis etc. and where it provides something useful for anyone else, all the better.

Also, I’ll often talk about whether something is ‘good’ or ‘bad’ for real estate. It will depend on the context of the article, but usually i’m talking about it’s impact on prices. So, as an investor, ‘good’ or ‘bad’ applies to me. However, that’s not to say I think high real estate prices are good for Australia as a whole. I think it diverts too much money away from other, more productive industries (more on that some other time)

As an aside, the purpose of such disclaimers, such as those politicians must make by declaring interest in business ventures, tabling share transactions etc. etc. is to prevent any sort of insider trading…. turns out it doesn’t always work out that way! Check out this academic report showing Congressmen in the US make over 6% better returns in their share portfolios than your average Joe. Go figure.

Finally, nothing in this site constitutes financial advice. I’m not qualified to provide it, so don’t treat it as such.