Odds of Australian house prices beating inflation in 2013 'not good': Steve Keen

The likelihood of house prices rising in real terms in 2013 are “not good”, according to the University of Western Sydney’s professor Steve Keen, who says his 2008 call of a slow 40% fall in Australian house prices over the next 10 to 15 years is looking “healthy”.

According to Keen, for house prices to perform better than the current inflation rate of 2% would require that property price growth start to accelerate.

However, he says the opposite has been happening following a “slight uptick in nominal prices over the last six months”.

According to RP Data, capital city house prices rose 0.4% over the three months to November, following a quarterly fall of 0.6% in October, a 2% gain over the September quarter and a 1.6% gain over the August quarter – to be up just 0.1% year-on-year.

Keen says the argument put forward by “permabulls” like Dr Andrew Wilson of Australian Property Monitors – tipping house prices to rise 3% to 5% nationally in 2013 – and BIS Shrapnel’s Robert Mellor – expecting 2% to 8% growth in Sydney, based on the “usual property mantra that house prices always rise faster than consumer prices because of the “fundamentals” of (a) a rising population and (b) tight supply” – is out of sync with what is actually happening in the property market, where prices have fallen 9.8% in real terms since peaking in June 2010.

Writing for Business Spectator, Keen revived comments that gained him notoriety in 2008, when he said in an interview with Kerry O'Brien on the ABC's Lateline the property prices would fall 40%, though he distanced Australia’s property predicament from that which befell the American housing market.

“While Australia’s house price fall post its bubble peak is clearly different to America’s crash, it’s on par with that experienced in Japan’s long, slow melt,” says Keen.

“That was the basis of the comment that dragged me into the property debate back in 2008, that Japan had experienced a 40% fall from its bubble peak over 10 to 15 years, and I saw no reason for Australia to be different. So that call is looking healthy.”

Keen says he does not accept the argument that an undersupply of housing will prop up the property market, and says the bigger issue is the high-level of debt held by Australian households, which has not diminished as it has in the US.

While mortgage lending is at its slowest on record, Keen says the main point to bear in mind is that it is still growing with mortgage debt at 85% of GDP compared with the situation in the US, where mortgage debt as a percentage of GDP has fallen from 86% in 2009 to 68% in 2012.

The following chart prepared by Keen on his www.debtdeflation.com blog shows the much higher ratio of private sector debt relative to GDP (the blue line) compared with the red line showing the ratio of government debt to GDP, based on RBA data.

Keen says for house prices to rise, “the flow of new mortgages has to exceed the flow of properties onto the market, and that requires mortgage debt to not merely rise, but do so at an accelerating pace”.

And it has sustain this accelerated growth for some time – something that  Keen says will be difficult with the debt burden of Australian households already so “immense”.

“Australia, with a mortgage debt to income ratio that has barely budged from its 87% of GDP peak, has precious little room to maintain accelerating mortgage debt.

“America, on the other hand, has some headroom because of the fall in mortgage debt from 86% to 68% of GDP,” he says.

Keen’s column on Business Spectator drew the usual volley of disparaging remarks about his forecasts.

But they’re unlikely to bother the thick-skinned Keen, whose international reputation is growing at a faster rate than Australians' propensity to take on new mortgages.

Keen recently gave addresses to the US congress on the fiscal cliff and in November took part in an economics debate at Cambridge University.

This year he has also appeared on the BBC’s Question Time to discuss the impact of debt on economies along with addresses at conferences around the world.

He is currently mulling up a more permanent move overseas, telling Property Observer at the end October of his frustration at a decision by the University of Western Sydney to cut economics entirely from its curriculum.

“So we'll soon have a university with no economics courses at all, which I think would be a very dubious first in Australia – and maybe the world,” he said.