26 October 2011
Melbourne:- The Kavanagh-Putland Index, which examines the ratio of property sales to GDP, has fallen to a 12-year low. A fall in market turnover precedes a fall in land values by one to two quarters, which then foreshadows recession.
“The ratio of property sales to GDP has suffered its biggest year-on-year fall since the recession we ‘had to have’,” Dr Gavin Putland of the Land Values Research Group said yesterday. According to the precedents, “there will be recession in 2011-12.”
“The recession will be quite severe due to our very high debt burden and the fact the housing market was more overvalued in 2010 than at any other time in the last 41 years.
In 2010-11, the index fell by the third biggest percentage on record. The biggest fall was in 1974, which preceded the 1975 recession. The second biggest was in 1989-90, and was followed by recession in 1990-91. The fourth biggest was in 1981-82, which was a recession year, and was followed by a worse recession in 1982-3.
On the basis of sales figures for the second half of 2008, the fall in the index for 2008-9 was initially expected to be very large – perhaps worse than in 1989-90. However, the First Home Owners’ Boost persuaded many potential buyers to purchase, so the actual fall in the index was smaller than in 1981-2. A standstill in borrowing that would have led to recession — as happened in so many other countries — was averted for the time being.
It is twenty years since Bryan Kavanagh started calculating the total annual value of property sales in Australia, using records dating back to 1972.
It is ten years since he first published this measure that shows when a downturn in property prices would cause a recession. The index now comprises forty years of data.
Dr Putland said that governments can, but won’t, act to avoid recession. “They need to cut taxes on current income or expenditure, so that people can more easily service their current debts, and replace the revenue by increasing taxation of capital gains, so that people have less incentive to borrow and speculate in future.”
“Governments just don’t do that sort of thing,” Dr Putland concluded.
About: The Land Values Research Group, founded in 1943, studies the influence of land prices on broader economic activity. LVRG’s history is here: http://lvrg.org.au/about.htm.
Kavanagh-Putland index: http://lvrg.org.au/files/kpi2011-718.png