Yearly Archives: 2009

Love is Old-Fashioned, Sex Less So

Following on from my post on Visualizing the Hottest 100, I noticed that the UK’s Guardian newspaper has published a list of 1000 songs to hear before you die*. The list was assembled from nominations posted by readers. Even before looking at the list, I suspected that the demographic profile of the Guardian’s readers may be a little different to that of Triple J’s listeners. A look at the distribution of year of release in the two lists bears that out.

	Hottest 100	Guardian 1000
Minimum	1965	1916
1st quartile	1984	1968
Median	1994	1977
3rd quartile	1997	1988
Maximum	2008	2008

Year of Release “Five Number” Statistics

In fact, fully 14% of the tracks in the Guardian’s list were released before the earliest track in the Hottest 100. Interestingly, that track was Bob Dylan’s “Like A Rolling Stone”, which also features in the Guardian’s list.

While the 1000 songs are not presented in any particular rank order, they are grouped by “theme”. The themes are heartbreak, life and death, love, party sonds, people and places, politics and protest and, of course, sex. This allows us to investigate the evolution over time of these different themes.

The chart below is a “box and whisker plot”, also known more prosaically as a “box plot”. It provides a graphical representation of the distribution over songs in each theme by year of release. The box shows the “interquartile range”, from the 1st quartile to the 3rd quartile. This means that half the songs fall inside the box, while a quarter were released in earlier years and a quarter in later years. The solid band shows the median year, which is the year right in the middle of the distribution. The light grey line shows the average year of release. Since most of the distributions are skewed to the left (early years) right (later years) in the interquartile range [see UPDATE below], the mean is a bit higher than the median. The “whiskers” on the plot extend no more than 1.5 times the width of the box. Any outliers beyond the whiskers are shown as points.

Box Plot (II)

Distribution of Year of Release

So what can be made of these distributions? It looks as though love songs are not as popular as they once were and people and places have fared worse still. But while love may be old-fashioned, sex and party songs have become more prevalent and there is still plenty of heartbreak.

And what of the most popular artists? The three most successful artists in Triple J’s Hottest 100 were Nirvana, Jeff Buckley and Radiohead. Nirvana and Radiohead managed one song each in the Guardian’s list: “Lithium” and “Paranoid Android” respectively (both in the life and death theme). Jeff did not make the list, although his father Tim did, with the song “On Top”. The artist with the most entries in the Guardian’s list was Bob Dylan, and the top 12 features a few who did not make it into the Hottest 100 at all, including Randy Newman, Frank Sinatra and The Kinks.

Bob Dylan	24
The Beatles	19
David Bowie	9
Randy Newman	8
The Rolling Stones	8
Elvis Presley	6
Frank Sinatra	6
Madonna	6
Marvin Gaye	6
Prince	6
The Beach Boys	6
The Kinks	6

It’s hard to read much more than that into these numbers, but importantly it gave me the opportunity to use a box and whisker plot which this blog has been sorely lacking.

UPDATE: As Mark has commented, this is a bit of a dodgy explanation. There is only so much that can be deduced about a distribution from a box and whisker plot (appealing though they may be). This histogram shows the distribution of the year of release for life and death songs.

Histogram: Life and Death Year of Release

Life and Death Theme Histogram

Mark also pointed out that the box and whisker plot does not really show the relative popularity of the different themes over time. I haven’t used pie charts yet, but I am not a fan, so I have come up with a mosaic plot instead.

Mosaic (II)

This confirms the decline in popularity of the love theme, but suggests that, while sex boomed in the 1990s, it has lost ground again in the 21st century. Heartbreak and party songs are the most popular themes of the current decade. The chart also shows that there are more songs in the list from the 60s and 70s than from the 90s, again a departure from the Hottest 100.

I have added this chart to the Guardian Datastore photo pool on flickr.

* To be precise, there are only 988 different songs in the list (and six are duplicated, each appearing in two different categories).

Deleveraging and Australian Property Prices

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car-small A few weeks ago, I had a preliminary look at Australian property prices. That post focused on rental yields and argued that the fact that property prices have consisently outpaced inflation over the last 10-15 years can be associated with a steady decline in rental yields which has been matched by a decline in real yields in other asset classes. What I did not address was the argument that debt deleveraging will lead to a collapse in property prices just as it has done in the US. That is the subject of today’s post.

The Bubble

The bubble argument is a compelling one. The chart below shows the growth in Sydney property prices over the last 24 years. Prices rose fairly consistently over this period at an annualised rate of almost 7%. Over this period, inflation averaged around 3% per annum, so property prices grew at a rate of approximately 4%. This means since 1985, the cost of a typical house has risen by a disconcerting 123% over and above inflation. Little wonder that many people see the property market as a bubble waiting to burst.

Sydney Property Prices (1985-2009)*

The fuel driving the property market has been the rapid growth in household debt, most of which has been in the form of mortgage debt. The next chart is taken from Park the Debt Truck!, a post which looks at trends in Government and household debt in Australia. The highlighted regions show the periods of Labor federal governments. Household debt began its upward trajectory during the Hawke and Keating years, but really gathered pace during the Howard years. With the help of continually extended first-time home-buyer grants, growth is yet to slow now that Rudd has come to power.

Govt and Household Debt

Government and Household Debt in Australia

This expansion of debt has been a key factor driving up property prices. Without the easy access to money, the pool of potential home-buyers would be far smaller and with less demand pressure, prices would not have risen so fast. A very similar pattern was evident in the US, but in late 2006 the process began to lose steam. Property prices faltered, debt became harder to obtain, borrowers began to default on their loans leading to foreclosure sales which put further downward pressure on prices. The bubble was bursting.

So far I am in agreement with the property bubble school of thought. Where I part ways is concluding that Australia will inevitably experience the same fate, resuting in a collapse in property prices, possibly in the range of 30 to 40%.

Deleveraging

Words can be powerful. Once you use the word “bubble” to describe price rises, it seems almost inevitable that the bubble must burst. Similarly, “reducing debt” sounds like a good thing, while “deleveraging” sounds like a far more ominous destructive process. But all deleveraging really means is debt reduction and it can happen in a number of ways:

borrowers use savings to gradually pay down debt
borrowers sell assets to pay down debt
borrowers default on their loan

When it comes to borrowers selling assets, in some cases this may be voluntary. But it may be that they are forced to sell. A good example is in the case of margin loans to purchase shares. If the share price falls, the lender will make “margin call”, requiring the borrower to repay some of the loan. Selling some or all of the shares may be the only way to raise the money required. When borrowers default on a secured loan (such as a mortgage), the lender will usually sell the asset securing the loan in an attempt to recover some of the money lent. In this situation the emphasis is usually on ensuring a speedy sale rather than maximising the sale price.

Forced sales are the ideal conditions for a price collapse, particularly if lenders have become reluctant to finance new borrowers. If debt reduction takes the form of gradual repayment, the pressure on prices is far less. There will certainly be less demand for assets than during a period of rapid debt increase, but this can simply result in neglible growth in asset prices for an extended period of time rather than a price collapse.

To understand what form debt reduction will take, it is not enough to consider the amount of debt. The form of the debt is very important. Some of the key characteristics that will influence the outcome include:

the term of the loan (the length of time before it must be repaid)
repayment triggers (such as margin calls)
interest rates

Short-term loans can be very dangerous. In 2007, the non-bank lender RAMS learned this the hard way. It had relied heavily on very short-term funding (known as “extendible asset-backed commercial”) and back when the global financial crisis was simply known as a liquidity crisis, RAMS found itself unable to refinance this debt. It’s business collapsed and it was purchased by Westpac for a fraction of the price at which the company had been listed only months before.

The most common type of loan with repayment trigger is a margin loan. There is no doubt that a significant factor in the dramatic falls in the Australian sharemarket over 2008 was forced selling by investors who had used margin loans to purchase their shares. There are also other sorts of loan features than can be problematic for borrowers. Another one of the corporate victims of the financial crisis was Allco Finance. It turned out that they had a “market capitalisation clause” attached to their bank debt. This was like a margin call on the value of their own company and was an important factor in the collapse of the company.

Even if borrowers have long-term loans and are not forced to repay early, if they are unable to meet interest payments, they will be in trouble. A common feature of the US “sub-prime” mortgages at the root of the financial crisis was that interest rates were initially low but then “stepped up” a couple of years after the mortgage was originated. While the market was strong, this was not a problem due to the popular practice of “flipping” the property: selling it for a higher price before the interest rate increased. Once prices began to fall, the step-ups became a problem and mortgage delinquencies (falling behind in payments) and defaults began to rise. In some states, the phenomenon was exacerbated by laws that allowed borrowers to simply walk away from their property, leaving it to the lender, who had no further recourse to pursue the borrower for losses. On top of all this, rapidly rising unemployment put further stress on borrowers’ ability to service their mortgages.

So, how do Australian mortgages look on these criteria? The standard Australian mortgage is a 25-30 year mortgage with no repayment triggers. Most mortgages are variable rate and, despite the banks not passing through all the central bank rate cuts, mortgage rates are at historically low levels. In part due to the regulatory framework of the Uniform Consumer Credit Code (UCCC), lending standards in Australia have been fairly conservative compared to the US and elsewhere. The Australian equivalent of the sub-prime mortgages, so-called “low doc” or “non-conforming” mortgages, represent a much smaller proportion of the market. Many lenders cap loan-to-value ratios (LVR) at 95% and require the borrower to pay mortgage insurance for LVRs over 80%, which encourages many borrowers to keep their loans below 80% of the value of the property. Interest step-ups are rare. Mortgages are all full recourse.

The result is that while US mortgage foreclosure and delinquency rates have accelerated rapidly, they have only drifted up slightly in Australia. It is not easy to obtain consistent, comparable statistics. For example, deliquency data may be reported in terms of payments that are 30 days or more past due, 60 days or more or 90 days or more. Of course, figures for 30 days or more will always be higher than 90 days or more. Nevertheless, the difference in trends is clear in the chart below which shows recent delinquency rates for a variety of Australian and US mortgages both prime and otherwise. The highest delinquency rates for Australia are for the CBA 30 days+ low doc mortgages. Even so, delinquencies are lower even than for US prime agency mortgages 60 days+ past due.

Delinquency Rates (III) Delinquency Rates in Australia and the US**

All of this means that the foreclosure rate remains far lower in Australia than in the US. Combined with the fact that mortgage finance is still increasing, due largely to the ongoing first-time home-buyers grant, there has still been little pressure on Australian property prices. In fact, reports from RP Data-Rismark suggest prices are on the rise once more (although I will give more credence to the data from the Australian Bureau of Statistics which is to be released in August).

Once the support of the first-time home-buyers grant is removed, I do expect the property market to weaken. Prices are even likely to fall once more with the resulting reduction in demand. However, without a sustained rise in mortgage default rates, I expect deleveraging to take the form of an extended lacklustre period for the property market. Turnover is likely to be low as home-owners are reluctant to crystallise losses, in many cases convincing themselves that their house is “really” worth more. Even investors may content themselves reducing the size of their debt, continuing to earn rent and claim tax deductions on their interest payments.

The biggest risk that I see to the Australian property market is a sharp increase in unemployment which could trigger an increase in mortgage defaults. To date, forecasters have continued to be confounded by the slow increases in unemployment and now the Reserve Bank is even showing signs of optimism for the Australian economy.

Australian property prices have certainly grown rapidly over recent years. Driven by rapid debt expansion, prices have probably risen too far too fast. But, calling it a bubble does not mean it will burst, nor does using the term “deleveraging” mean that prices will inevitably follow the same pattern as the US. In the early 1990s, Australia fell into recession and the commercial property market almost brought down one of our major banks. Meanwhile, house prices in the United Kingdom collapsed. Despite all of this, in Australia, residential prices simply slowed their growth for a number of years. I strongly suspect we will see the same thing happen over the next few years.

* Source: Stapledon

** Source: Westpac, CBA, Fannie Mae, Bloomberg.

By the way, notice anything unusual in the picture at the top?

UPDATE: Thanks to Damien and mobastik for drawing my attention to this paper by Glenn Stevens of the Reserve Bank of Australia. It includes a chart comparing delinquency data for the US, UK, Canada and Australia. The data is attributed to APRA, the Canadian Bankers’ Association, Council of Mortgage Lenders (UK) and the FDIC. Since these bodies do not appear to make the data readily available, I have pinched the data from the chart and uploaded it to Swivel. It paints a very similar picture to the chart above.

Delinquency: US, UK, Canada and Australia Mortgage Delinquency Rates

Park the Debt Truck!

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About two months ago, I tried to bring some perspective to concerns about growing government debt in Australia. Last week the opposition has rolled out the “debt truck” to add to the hysteria about growing government debt, so I feel compelled to return to the subject for another attempt.

Last time I looked at net debt data going back to 1970. The data came from a chart in the Treasury paper “A history of public debt in Australia”. The paper also shows a history of gross debt and although I prefer to use net debt, the gross debt data goes back further, all the way to 1911 and so gives a longer historical perspective. As usual, I have posted the data on Swivel.

The alarmists like to trade in dollar figures, pointing to forecasts that gross government debt will peak in 2014 at $315 billion, which will be an all-time record. Of course, that ignores the effects of inflation, so it makes far more sense to look at the debt as a percentage of gross domestic product (GDP). Expressed this way, the 2014 forecast amounts to an expected 21% of GDP (while net debt will be 14%). As is evident in the charts below, this is about the same as in the years following the recession of the early 1990s and it is nowhere near levels in the more distant past. Immediately after World War II, gross debt reached an enormous 125% of GDP.

History of Government Debt

Figure 1 – Australian Government Debt (1911-2008)

If you are wondering about the shaded bands in these charts, they indicate periods of Labor Governments. The opposition is fond of saying that debt falls under Coalition governments and rises under Labor governments. Looking at the data, it is certainly true that government debt fell through both the Menzies and the Howard years (a pairing that would, I am sure, warm the cockles of our previous prime minister’s heart). Beyond that, the link is not so clear cut. What seems more apparent is that government debt fell during good economic times and rose during bad economic times and, moreover, the Coalition have not had a monopoly on good economic times nor Labor on bad. This pattern should not be the least bit surprising. When the economy booms, tax receipts rise and unemployment falls, reducing the cost of welfare payments and when it falters, the opposite occurs. As a result, the government tends to run fiscal surpluses in the good times, paying down their debt, and deficits in the bad times, increasing debt once more.

Recent History of Government Debt Figure 2 – Australian Government Debt (1960-2008)

What the debt demonisers fail to realise is that this counter-cyclical pattern of government spending is a good thing. The increase in welfare spending in troubled economic times helps boost economic activity, softening the impact of a slowdown, which is why welfare spending is often referred to as an “automatic stabiliser”. In more extreme downturns, such as the one we currently face, the government can supplement the automatic stabilisers with additional stimulus spending.

More importantly, government debt is very different from personal or business debt and is not something to be afraid of. In Australia, we have a currency that is not tied to other currencies, nor to gold or any other commodities. It is “fiat money”, effectively under the control of the government. Furthermore, all of the government’s debt is denominated in Australian dollars. This means that the government can, in fact, never run out of money, unlike individuals or businesses. So, any comparison between government debt and household debt is meaningless. Of course, in practice, governments should control their spending. If they kept increasing spending when the economy was strengthening, there would come a point where this spending would become inflationary. But this is a very different kind of constraint than I face on my spending! To dig deeper into the implications of fiat currency, monetary theory Bill Mitchell has a lot of material on the subject on his blog. A good place to start is his post on gold standard myths.

So, there is no substance to the fear that the opposition is trying to excite with their debt truck. Government debt is not what we should be worrying about. What is more concerning is private debt. Since individuals cannot issue new currency to repay their loans, excessive household debt can be a real concern. And, the chart below shows that there is something to be worried about. While the Coalition may be very proud of the record of government debt reduction during the Howard years, they should not be so happy about what happened to household debt under their watch (and you thought I was being easy on Howard before!). Instead of focusing on the possibility that government debt may reach 14% of GDP by 2014, perhaps the opposition’s debt truck should drive around the country alerting everyone to the fact that household debt is already over 100% of GDP.

Govt and Household Debt

Figure 3 – Household and Government Debt (1976-2008)

Of course, there are some commentators, such as Steve Keen, who are rightly concerned about the excessive levels of household debt. It is very likely that Australia and many other developed countries around the world will experience an extended period of private sector “deleveraging” (debt reduction). As long as consumers are saving rather than spending, this will translate to far lower economic growth than we have been used to in recent years.

To this point, I agree with Keen. Where I disagree is the extent to which this deleveraging will result in massive declines in Australian property prices. But that is a topic for another post, the long awaited sequel to my recent post on property prices.

UPDATE: for a Nobel Prize-winning perspective, here is Paul Krugman arguing that government deficits saved the world.

Visualizing the Hottest 100

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Today radio station Triple J finished broadcasting their Hottest 100 tracks of all time, the first all-time vote since 1998. For those outside Australia and not familiar with the tradition of the Hottest 100, it began back in 1989 and results are determined by listener votes. After two more years the format changed and votes were restricted to tracks released over the previous year, presumably because the top 10 became a list of the usual suspects. Since then 1998 and this year have been the only all-time hottest votes. A traditional favourite, Love Will Tear Us Apart by Joy Division, which was #1 in two of the first three all-time charts only made it to #4 this year, but Nirvana’s Smells Like Teen Spirit was #1 in the third and again in 1989 1998 and this year it made it to #1 for a third time.

Thanks to the wonderful collaborative spirit of Web 2.0, this year’s full list is already up on Wikipedia, complete with the year of release of each track. This allows me to indulge in my data mining hobby, which is why I am posting here rather than over on the The Music Blogs. So, inspired by a suggestion from Mark Lauer, a regular Mule reader (and careful sub-editor), here is a look at the distribution of the hottest 100 tracks by year of release.

chart

Hottest 100 Track Ranking by Year of Release

While the density certainly increases after about 1995, reflecting a lot of new entrants since the early charts, there is no clear trend along the 45 degree line (and, for the technically-minded, the R² is about 0.1%). So, while there are not as many oldies in the chart, those oldies that do make it in are just as likely to rank well as the newer entrants. To make the most of the R code I wrote to produce this chart, here is the same thing showing artist name rather than track name.

artists

Hottest 100 Artist Ranking by Year of Release

To get a better sense of the distribution of rank and year, here is a chart that just shows the location of the tracks by year and rank.

points

Hottest 100 Rank versus Year of Release

Seeing the data just as points like this shows a concentration of tracks released around the mid-90s. A histogram of the year of release confirms this.

hist

Of course, I’m sure this says more about the demographics of voters than the preponderance of true classics in the 90s.

UPDATE: In this tweet, @nicwalmsley suggested an artist scoring system: 100 points for ranking 1st, 1 point for ranking 100th. As he notes, this system puts Radiohead, Jeff Buckley and Nirvana in 1st, 2nd and 3rd place respectively. Here are the top 10 artists by this measure.

Radiohead	343
Jeff Buckley	269
Nirvana	188
Powderfinger	154
Metallica	152
The Beatles	149
The Smashing Pumpkins	139
Pearl Jam	138
Michael Jackson	135
Pink Floyd	13

FURTHER UPDATE: @Warlach has laboured hard to assemble the full Hottest 100 as a blip.fm playlist.

YET ANOTHER UPDATE: In case you are wondering about the geographic mix, as expected the list is dominated by the US and the UK.

USA	45
UK	37
Australia	15
France	2
Jamaica	1

The pedants should note that I’ve counted System of a Down in the USA (rather than USA/Armenia) and Crowded House as Australia (rather than Australia/New Zealand). I hope that doesn’t offend our Kiwi cousins!

No Alternative View of Dubai

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Back in April, I announced that the Mule was to be graced with a guest post providing an alternative, more positive picture of Dubai than the one painted by The Independent. Sad to say, although written, the piece is not going to see the light of day. My guest poster’s employer has ruled out any scope for publishing the piece, even if it is done anonymously.This experience suggests to me that on the score of openness at least, Dubai does not do well!

I was excited at the prospect of the occasional different voice here on the Mule, so if anyone has something they are itching to share with the world, let me know. There could be a guest spot for someone here yet!

Australian Property Prices

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Property prices have always been a popular topic of conversation in Sydney, but the subject has become more contentious since the onslaught of the Global Financial Crisis. Views on prospects for Australian property prices range from the bleakly pessimistic to the wildly optimistic. Iconoclastic economist Dr Steve Keen is one of the more prominent pessimists and expects a fall in property prices of as much as 40%. At the other extreme, research firm BIS Shrapnel recently released forecasts that prices in capital cities will rise by almost 20% over the next three years. Of course, both sides have their critics. Macquarie Bank economist Rory Robertson is so convinced that Keen is wrong that he has offered a wager in which the loser will have to walk to the top of Mount Kosciusko wearing a t-shirt saying “I was hopelessly wrong on home prices! Ask me how”. Meanwhile, many dismiss the optimists as mere shills intent on talking up the market in the interests of their clients.

Faced with a debate like this, the only recourse for the Stubborn Mule is to look at the data. Fortunately, I have been able to get my hands on a rich set of data (and ideas) from University of New South Wales economist Dr Nigel Stapledon*. Stapledon has painstakingly assembled data on Australian property prices back to the 1880s and rental data back to the 1960s. This data underpins a detailed comparison of the Australian and US property markets in Stapledon’s forthcoming paper “Housing and the Global Financial Crisis: US versus Australia” in The Economic and Labour Relations Review, Sydney. By comparison, the House Price Indexes published by Australian Bureau of Statistics (ABS) commence in 1989.

A first glance at Stapledon’s index of Sydney property prices does indeed appear to show a meteoric trajectory that would inflame the passions of the pessimists.

Sydney House Price Index

Sydney House Price Index

Of course, asset prices tend to exhibit exponential growth, so it is far better to look at historical prices on a logarithmic scale. This reveals a striking trend. The growth of Sydney property prices has been remarkably consistent at around 9% per annum over the last 50 years.

Sydney House Price Index (log scale)

Sydney Property Prices (log scale)

Prices for Australia overall show a similar trend, with average prices over the six major capital cities growing at an average of 8.6% per annum since 1955.

Six Capital Cities

Australian Property Prices

What these charts do not take into account is the effect of inflation. Indeed, inflation varied significantly over the last 50 years, so adjusting for the effect of inflation shows that the trend in Sydney house prices has not been so stable. Booms such as those from 1987-1989 and 1997-2003 are made very clear in the chart below. But it is also evident that prices have failed to keep up with inflation over the last few years. Nevertheless, over the last 50 years, Sydney house prices have appreciated an average of 3.1% over inflation and that is before taking rental income into account.

Sydney House Price Index (inflation adjusted)

Sydney Prices (inflation adjusted)

One difficulty with long-run property price data is that fact that observations are typically based on median house prices, which does not take into account changes in the quality of houses. The median house in 2009 may be “better” than the median house in 1955 and changes in price may reflect this change in quality as well as price appreciation. Stapledon has attempted to take this into account by constructing an index for Australian house prices (six capital cities) that is adjusted for both inflation and standardised to “constant quality”. The trend in real prices, adjusted for quality over the period 1955-2009 has been an increase of 2.1% per annum over inflation. This compares to an increase of 2.7% per annum over inflation without adjusting for quality. So, at a national level, quality changes overstate the trend growth rate by 0.7%. While Stapledon has not constructed a quality-adjusted index for Sydney, assuming that the national trend applied would lead to the conclusion that Sydney house prices have a trend growth rate of 2.4% over inflation.

Six Capital Cities (quality adjusted) Australian Prices (quality and inflation adjusted)

Interesting though this historical exploration may be, the question we would like answered is where prices may head in the future.

One approach to the problem is to assume that growth in property values in real terms may change in the short term, but over the long term will revert to a long term trend. Enthusiasts of trend following may see some significance in the fact that Australian prices still appear to be above the longer run trend, while Sydney prices have already fallen below trend. Of course, depending on the time period used to determine the trend, very different conclusions may be reached. If I were to base the trend on the full history from the 1880s, the last 50 years would appear to be well above trend.

Another popular approach is to consider housing affordability. This approach either looks at ratios of house prices to income or ratios of housing servicing costs (whether interest or rent) to income. The assumption is that these ratios should be stable over time and if increases in house prices result in reduced affordability this indicates the prices can be expected to fall in the future. Stapledon is critical of this approach, arguing that:

while income is expected to be a major influence on prices, there is no theoretical reason for any fixed relationship between prices and income or between rents and income

Over time, people may change their priorities and place a greater or lesser importance on housing and, as a result, be prepared to spend a larger or smaller proportion of their income on housing. Stapledon argues that a better approach is to examine rental yield, which is the ratio of rents to prices. Since the property prices can be expected to keep pace with inflation (and, in fact, outpace inflation), rental yields should be comparable to real yields (i.e. yields over and above inflation) on other asset classes. The easiest real yields to observe are those of inflation-linked Government bonds. The Reserve Bank of Australia publishes historical data for inflation-linked real yields back to the late 1980s. The chart below compares these Government bond real yields to Stapledon’s history of rental yields. While the correlation is not perfect, both rental yields and real yields show a downward trend from the late 1980s/early 1990s which has only recently begun to reverse. Since rents have not fallen over this period, this provides an explanation for the strong growth in property prices over that period.

Rental Yields

Australian Rents and Inflation-Linked Bonds

So what could this approach tell us about property prices? Rental yields have already risen further than bond real yields, but certainly could go higher. What this means for prices does also depend on where rents themselves may be headed. The chart below shows the contribution of rents to consumer price inflation as published by the ABS. While the rate of growth in rents has slowed, history would suggest that rents are unlikely to go backwards. A cautious, but not overly pessimistic forecast could see rental increases falling to an annualised rate of 1% while rental yields could climb back to 4%. The combined effect would be a fall of 12%. Since prices have already fallen by 7% over the year to the end of March 2009, this would amount to a fall of almost 20%.

Rent CPI

Rent Inflation (Quarterly)

This is certainly a significant drop, but still half the fall that Keen expects to see. For prices to fall by 40%, even assuming rents remain unchanged rather than growing by 1%, it would be necessary for real yields to rise to 5.8%, which exceeds the record level since 1960 of 5.4%. On this basis, I find it hard to be as pessimistic as Keen. Indeed, the latest data from RP Data-Rismark International suggests that prices are once again on the rise. The next ABS release is a little over a month away, so it will be interesting to see whether they see the same recovery.

The relationship between rental yields and real yields is an interesting one, but ultimately does not provide definitive predictions, but rather an indication of a range of outcomes that would be precedented historically. Of course, as Nassim Taleb has emphasised, unprecedented “black swans” can occur so history does not allow us to rule out more extreme events. Furthermore, nothing here addresses the question why prices in the US have fallen so dramatically and yet Australian prices could suffer far milder falls. That is the primary focus of Stapledon’s paper and is a topic I may return to in a future post, but this one is long enough already!

UPDATE: In this post I noted that the historical data shows a marked shift in behaviour from the mid-1950s without providing any explanation as to the cause of this shift. Needless to say this is a subject Stapledon has given some serious consideration, and I will quote from his doctorate, “Long term housing prices in Australia and some economic perspectives”:

From a longer term view, a key observation is the clear shift in direction in house prices and rents from circa the mid 1950s. House prices, in particular, jumped significantly, best illustrated by the rise in the price to income ratio from about one: one to about 4:1 in the 2000s. Looking at demand and supply variables…indicates that this shift in direction cannot be adequately explained in terms of the demand variables of income and household growth. Supply side factors appear to be more crucial and there is a substantial literature emerging in the US emphasising the importance of supply side variables and specifically the propensity to regulate to constrain supply. The evidence presented in this thesis of the lift in the cost of fringe land in the major urban areas provides prima facie evidence that supply factors have been a significant factor explaining the upward trajectory in house prices in Australia since the mid 1950s.

* I would like to thank Dr Stapledon for generously making his data available to me.

UPDATE: finally, I have published the post on why I don’t think Australia’s property market will experience the same fate as the US market.

http://unsworks.unsw.edu.au/vital/access/manager/Repository/unsworks:1435

Swine Flu on Swivel

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I have now uploaded the swine flu data to a Swivel data set. I will update this data set periodically and so the rankings in the chart below should stay reasonably up to date.

Data sources: Guardian Data Blog, CIA World Fact Book.

UPDATE: A number of people have told me that in a number of places, including Victoria and much of the US, testing for swine flu has ceased. This means that the “lab confirmed” swine flu count will become increasingly meaningless over time, so I have decided to stop updating this data.

Swine Flu League Table

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The Guardian have been publishing swine flu data on their Data Blog. They are sourcing their data from by the World Health Organisation, the US Centers for Disease Control, country health agencies and press reports, which makes their data the most up to date I have found. One thing missing from their data is a sense of scale for each country. Of course populous countries like the US have had a high number of infections, but this also means that hidden in the smaller numbers are some fairly significant infection rates in countries with smaller national populations.

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Where Music Lives

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Over the last few years, I have posted a number of times on the subject of music. These posts have ranged from the subject of Krautrock to a critique of the RIAA. From now on, I have decided to post pieces which are directly about music (concert reviews, genres, etc) over on The Music Blogs, where I am now a guest contributor. Anything about the economics of music or music and web 2.0 may continue to appear here on the Mule.

I have begun this shift with a review of the Lee “Scratch” Perry concert at the Sydney Opera House. Perry, one of the pioneers of dub music, is now 73 so it was a historic occasion, not to be missed. It was a great concert and featured the legendary Adrian Sherwood on the mixing desk, but that’s as much as I’ll say here. To find out more, you’ll have to read the review!

Restaurant Hall of Shame

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Last week the New South Wales Food Authority began publishing details of penalty notices issued to food outlets around the state. Their media release included examples of the sorts of tasteful details included in the reports:

– KFC in Victoria Street, Taree fined $660 for having an accumulation of dirt and grease in the shop.
– A noodle takeaway in Teramby Road, Nelson Bay received two fines for $330 each for having a dirty shop.
– An outlet in Great Western Highway, Marrangaroo (Lithgow) fined $330 for not maintaining a required standard of cleanliness.
– A noodle shop in Salamander Bay fined $660 for having evidence of cockroach activity in the shop.

The data stretches back to November 2007 and consists to date of 1038 penalty notices. Data sets like these are a delight to data-miners like myself and so I plan to define a data-scraping tool along the lines of the one I developed to capture Grocery Choice data (speaking of which, it is probably time for an update on grocery prices on the Mule). In the meantime, I have my hands on details of 1000 of the 1038 and have conducted some intial exploration of the data.

First there is the suburb hall of shame. The table below shows the 15 worst suburbs ranked by number of penalty notices. The inner West Sydney suburb of Ashfield has the ignominious award of first place, with 33 penalty notices. These include a number of repeat offences, including five notices for the Eaton Chinese Restaurant for offences including storing food in the rear yard and failing to provide hand-washing facilities. See them all here (note that this search includes a few Summer Hill restuarants).

Having recently moved to Petersham, I was gratified to see that neither Petersham nor Leichhardt have yet blotted their copybooks burnt their toast*. The Mayor of Newtown should be pleased to see that Newtown has only one penalty notice for the Tandoori Grill.

Rank	Suburb	Penalty Notices
1	Ashfield	33
2	St Mary’s	31
3	Penrith	29
=4	Castle Hill	27
=4	Sydney	27
6	Auburn	18
=7	Burwood	17
=7	Randwick	17
=8	Chatswood	16
=8	Fairfield	16
=8	Katoomba	16
9	Kogarah	15
10	Brookvale	14
11	Taree	13
12	Baulkham Hills	12

It is also interesting to see the outlets that have incurred the most infringements. Domino’s Pizza has been served with 14 notices across Castle Hill, Five Dock, Katoomba, Merrylands, St Mary’s (five notices there!) and Ballina, while the Asian fast food outlet Hokka Hokka has received 11 notices across Brookvale, Castle Hill, Chatswood, North Sydney, Sydney and Warriewood. Other offenders, all with 8 notices, are Zisti & Co in Alexandria, Top Choice BBQ Restaurant in Burwood and Blue Sky Chinese Restaurant in Springwood.

This is a subject that the Mule will certainly have to revisit. In the meantime, I will leave you with the penalty notice for Zhen Zhen Van Loi Hot Bread in Ballina, which is the inspiration for the picture above:

A person must not sell food that is unsuitable – A loaf of bread sold contained a cockroach.

Photo credit: kronicred on flickr (Creative Commons)

* The choice of language is an attempt to appease commenters who hate clichés.