blue skies
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RBA and government incentives hurt housing market
THE efforts by the government and the Reserve Bank to prop up the housing market during the global financial crisis are largely to blame for its sick state now.
The boosts to the first-home buyers grant and the slashing of interest rates brought forward demand and left a hole once the stimulus disappeared.
The rapid rise in rates since October 2009 has compounded, if not caused, the new conservatism in the household sector. Add in the pro-cyclical influences of the tax system, and there are the ingredients for a housing slump.
The International Monetary Fund, which has increased its research into housing since the global financial crisis, reported findings last week that first-home buyers grants, variable rate mortgages and capital gains tax concessions all served to destabilise housing markets.
The Australian housing market is in a worse state than is widely understood. Demand is falling, supply is rising and the monthly turnover is drifting lower.
Prices have gone nowhere for the past year, but market dynamics suggest the scattered falls will become more widespread.
The best measure of demand is housing loan approvals.
A big fall in January, revised up last week to 6.3 per cent, was mainly sheeted home to floods in Queensland and Victoria. But the subsequent 5.6 per cent fall in February hit all states, with a 10 per cent drop in NSW one of the biggest. Looked at over a longer scale, new home loan approvals are down by 30 per cent from the peak reached in September 2009.
The best measure of supply is the property listings. RP Data's assessment of online and newspaper listings shows there were a record 260,000 properties advertised for sale over the four weeks to April 3. That is 24.1 per cent more than a year ago, when the market was booming. While the properties on the market are rising, the number actually being sold is falling.
RP Data senior research analyst Cameron Kusher says that monthly sales stood at 37,500 in May last year, which was when prices peaked. By December, they were down to 27,500. So there is now 9 1/2 months' supply of houses on the market, up from 5 1/2 months' a year ago.
When the global financial crisis struck in September 2008, the big worry was that rising unemployment would result in a wave of forced housing sales and defaults.
Housing prices had plunged 30-40 per cent in other advanced capitals under the weight of forced sales and the defaults caused havoc in financial institutions.
With Australians carrying more housing debt than almost any other nation, and Australian housing prices having risen further, Treasury, the Reserve Bank and the Australian Prudential Regulation Authority feared a housing slump would have catastrophic consequences.
Treasury chief at the time Ken Henry said Treasury had always hated the first-home buyers grant, believing it simply resulted in prices being bid higher. But on the edge of the precipice, that seemed like a good idea. The $7000 grant was doubled for buyers of established homes and tripled for buyers of new homes.
The Reserve Bank swiftly slashed its cash rate from 7.25 per cent when the crisis broke to 3 per cent by April 2009. Standard mortgage rates dropped from just under 10 per cent to 5.8 per cent.
Although housing prices fell in late 2008, the first sign of a change emerged in March 2009 as the average size of first-home owner loans jumped by $20,000 to $287,000. Buyers were leveraging the government grants to spend more. The flow of first-home buyers doubled with more than 200,000 taking advantage of the government's incentives.
From April 2009 until March last year, the combined effect of demand from first-home buyers and low interest rates was pushing house prices up at a rate of 1 per cent a month, leading the Reserve Bank to fret about a new housing bubble. That was then. The number of first-home buyers has dwindled from a peak of about 18,000 a month to an average of about 6000 this year. The stimulus incentives did not increase the pool of first-home buyers -- they simply encouraged people to bring forward the purchase.
Most market economists argue Australia cannot suffer a housing market slump, because there has been under-building for years despite strong population growth, generating a shortage. But the supressed level of first-home buyers shows that the barrier to new household formation is high.
Kusher says the unsold stocks of housing belong to people who want to trade up but need to sell before they buy. With first-home buyers out of the market, they are stuck.
The reversal of the Reserve Bank's stimulus has drained both first-home buyers and prospective traders from the market. Mortgage rates have risen by two percentage points since May 2009.
Investors are a source of volatility in the Australian market. The generous negative gearing and capital gains tax provisions mean that Australia's property investors are driven by capital gain, not by rental yield. The role of capital gain-seeking investors helped drive Australian property prices higher and rental yields lower. Rental returns are less than 5 per cent in most markets.
With the increasing weakness in the capital gain outlook, investors are deserting the market.
This is all consistent with the research reported in the IMF's latest report: "Subsidies to first-time buyers are shown to both amplify house price swings in the up turn and lead to deeper subsequent busts. Similarly, tax deductability of capital gains tends to both amplify the boom and exacerbate the bust."
The IMF study was based on the performance of housing markets in 19 advanced countries over 30 years.
A further finding is that variable rate mortgages destabilise housing markets, as people are encouraged to enter the market during periods of low interest rates without fully appreciating the interest rate risk they are taking on.
Global investors have long prophesied that Australia's housing market would inevitably suffer a steep fall, pointing to the fact that its prices have risen higher in the past five years than any other advanced country.
That view has been discounted by all but the most apocalyptic Bardons. The level of population growth, the strength of household income and low unemployment suggest nothing should go too seriously wrong.
But the IMF says the leverage of the housing market generates feedback loops -- rapid housing credit growth pushes prices higher, which encourages further credit growth and, as Australia may be finding, vice-versa.
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Australian Home Sales Sink, Luxury Units Sell for Half Cost; New Home Loans at 10-Year Low; Australia Retailers in Deep Trouble; Party Officially Over
Things are not looking too hot down under. Not only is the Australia housing collapse picking up steam, but Australian retailers are struggling mightily in spite of rising sales numbers.
Bloomberg reports Australia Retail Sales, Loans Rose in February, Sending Dollar to Record
Australian retail sales rose in February and lending to businesses climbed for the first time in nine months, according to government reports that sent the nation’s currency to a record against the U.S. dollar.
Sales advanced 0.5 percent from a month earlier, when they gained 0.4 percent, the Bureau of Statistics said in Sydney today. That was the biggest increase since July and was higher than the median forecast in a Bloomberg News survey of 24 economists for a 0.4 percent increase.
A separate report from the Reserve Bank of Australia showed total credit extended by Australian lenders last month jumped by the most since May, led by business loans. The signs of stronger consumer spending and a lending revival boosted the local dollar as confidence grew that natural disasters didn’t derail the economy’s expansion.
That is the extent of the good news.
Housing is a veritable disaster. Even retail sales do not look so good from the perspective of retail profits.
Frugal is the New Black, Tourism Sinks, Retailers Struggle
The Australian reports Mining hides flatlining Australian economy
The growth in employment, which yesterday pushed the March jobless rate below 5 per cent, is concentrated in a handful of industries, several of which have little to do with the overall health of the economy.
The Australian Chamber of Commerce and Industry's latest survey of business confidence found that 34.5 per cent of businesses say trading conditions are poor, while the number expecting conditions to deteriorate over the next three months has almost doubled since the beginning of the year to 18.7 per cent.
"The non-mining sectors, which still make up 90 per cent of the economy, are exposed to pressure from interest rates, the dollar, cautious household spending and rising oil prices," ACCI economics director Greg Evans said.
Figures released this week revealed spooked consumers and a sluggish housing market had put even the booming mining state of Western Australia into a technical recession, with two consecutive quarters of economic contraction.
The latest figures from RP Data revealed house prices fell in every capital city except Sydney in February, with the strong growth experienced in the market in 2009 flattened in the past year by the run of interest rate rises.
Retail king Gerry Harvey, co-founder of the Harvey Norman electrical and furnishings chain, yesterday described a "multi-speed economy" in which only the mining, food and hardware sectors were flourishing.
"There's an awful lot of retailers just surviving, who have sacked all their staff and kept on mum, dad and the kids working 14 hours a day just to keep the doors open," Mr Harvey said. "You'll see a lot of retailers going in the next few months - they just can't survive - and the small ones are going under every day."
Australian National Retailers Association chief executive Margie Osmond said retail was "the sick man of the economy. "We've been severely bruised by interest rate activities, and we have a community completely conditioned now to discount-only. Frugal is the new black."
But Australian Tourism Export Council managing director Felicia Mariana notes that foreign visitors are less likely to stray beyond the big cities, starving regional towns of investment. "Further afield, you'll see hotel occupancy rates of 30, 40, 50 per cent," she said yesterday. "People are using the internet to build itineraries and they are less and less inclined to meander and drive four or five hours to find an interesting place."
The trend is most apparent in far north Queensland, where visitor numbers fell 9 per cent last year. Tourism spending fell 12 per cent - and the fall-off came even before Cyclone Yasi and floods ravaged the region.
Luxury Units Sell For 50% of Cost
The Fraser Coast Chronicle reports Luxury units go at basement prices
AFTER more than 18 months on the market, the luxury Riverview On March apartments finally went under the hammer yesterday — and about 140 people came to watch as they sold for a song.
Valued at $650,000 to $700,000-plus each, four of the six units sold. They fetched $510,000, $320,000, $339,000 and $300,000.
Auctioneer Jason Andrew was made to earn his keep in cajoling every last dollar out of the buyers, but bidding was desultory for the two penthouses, which were eventually passed in because they did not meet the reserve price.
Developer Ron Blyth admitted he felt hard done by, with three of the four sold units going for less than half the building cost.
Even on the highest-selling apartment, Mr Blyth lost about $200,000 – or a total of about $1.2 million for the combined sales.
“It's less than encouraging,” he said. “The situation probably is that real estate isn't in vogue at the moment.” “I thought we had enough interest to get them sold, but there w bidders there and they didn't all bid.”
There were not really 30 bidders there were 4 bidders and 26 "Lookie Lous". Expect to see "No Bid" with increasing frequency at auctions.
New Housing Loans at 10-Year Low
The Australian reports Buyer retreat spells slump in home prices
BUYERS are deserting the housing market at a pace that threatens a slump in housing prices and a risk to the economic outlook.
The number of new housing loans approved by the banks dropped 5.6 per cent to a 10-year low in February, after a similarly sharp drop in the previous month.
The buyer retreat comes as the stock of unsold houses mounts. Figures compiled by property analysts SQM Research show there are now 356,600 properties on the market, which is almost 50 per cent more than a year ago.
"It is clear now that the sudden drop in finance approvals in the new year is not to do with the flooding, but is rather due to the Reserve Bank's interest rate rise in November, which was the straw that broke the camel's back," SQM chief executive Louis Christopher said.
The slump threatens to undermine budget calculations for the government, which is counting on a rapid return to growth in the next financial year.
The number of loans for new homes slumped 12 per cent in February and has dropped almost 36 per cent in the past three months. Home building is a key economic sector influencing both the health of manufacturing and consumption.
Mr Christopher said the market was likely to continue weakening until the Reserve Bank cut rates or there was some form of government stimulus.
Stimulus the Problem, Not the Solution
I cannot help but laugh at some of the comments by SQM chief executive Louis Christopher.
For starters, one last interest hike did not break the camel's back, nor will buyers return when the Reserve bank of Australia cuts rates.
Christopher seems to be angling for more stimulus. Has anyone, anywhere learned anything from the popping of the US housing bubble?
Hells bells it took massive stimulus and silly bank loans to reach peak housing insanity in the US, in Australia, in China, in the UK, in Spain, in Ireland, and for that matter everywhere there was a housing bubble.
Perhaps this annotation I made on the Australian graphic will help.
Buyer Exhaustion - Pool of Greater Fools Runs Out
Australia is suffering from buyer exhaustion after the Australian government foolishly stimulated housing to stave off the last recession.
Buyer exhaustion would have set in whether the Reserve Bank made that last rate hike or not. .
Now what?
Housing inventory is both huge and rising, few can afford homes, and those who can afford homes already have one (if not more).
Simply put, the pool of greater fools has run out.
Stimulus will not help. After all, how many rounds of stimulus did the US try to restore housing prices? Let me count the ways.
US Housing Stimulus Tried and Failed
1. Fannie and Freddie nationalized
2. Home buyer tax credits
3. Home buyer tax credit extensions
4. HAMP - Home Affordable Mortgage Program
5. Numerous foreclosure moratoriums
6. QE round I
7. QE round II
8. Fed bought $2 trillion in mortgages to keep rates low
9. Fed holding short-term rates at zero percent
10. Record low mortgage rates
Did any of those work? How many others did I miss?
Regardless of how many I missed, none of them worked. So why would they work in Australia?
Please don't tell me it's different down under, and don't tell me there is a shortage of housing either. Skyrocketing inventory and falling demand says otherwise. Besides, it's a simple economic fact that home prices cannot sustainably rise above people's ability to pay for them. Nor can home prices sustainably rise several standard deviations above rental prices.
Party is Now Officially Over
Please pay attention to those struggling retailers. Australian retail sales will collapse once the housing bubble bust pick up more steam. That collapse in retail sales will crucify banks that made poor commercial real estate loans and it will bankrupt store owners who paid too much for their stores.
Look for the Reserve Bank of Australia to cut rates. It will not matter when they do. It was one hall of a party Australia, but the party is now officially over.
Mike "Mish" Shedlock
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EDIT: Where IS Bardon anyway? .......................................It is most out of his charactor not to be jumping on every post . I recon it must be some thing very grave. If I was to gess I would say, Kicked out ? Dead? Debtors Prision? or maybe he finally understands the housing bubble has run its course and is running for the exits. I did get a bulldust personal chat from "moderators" whos listed friend was Bardon . I gess he may have had his wings cliped.
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Blue Skies - why not just post a link and a few choice quotes? it is much easier to read on Steve Keen's blog and the blog has the all important graphs.
Ok I would if I new how too.
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This Time Had Better Be Different: House Prices and the Banks Part 2
by Steve Keen on April 11th, 2011 at 8:57 am
Posted In: Debtwatch
Click here for this post in PDF
Figure 1
In last week’s post I showed that there is a debt-financed, government-sponsored bubble in Australian house prices (click here and here for earlier installments on the same topic). This week I’ll consider what the bursting of this bubble could mean for the banks that have financed it.
Betting the House
For two decades after the 1987 Stock Market Crash, banks have lived by the adage “as safe as houses”. Mortgage lending surpassed business blending in 1993, and ever since then it’s been on the up and up. Business lending actually fell during the 1990s recession, and took off again only in 2006, when the China boom and the leveraged-buyout frenzy began.
Figure 2
Regular readers will know that I place the responsibility for this increase in debt on the financial sector itself, not the borrowers. The banking sector makes money by creating debt and thus has an inherent desire to pump out as much as possible. The easiest way to do this is to entice the public into Ponzi Schemes, because then borrowing can be de-coupled from income.
There’s a minor verification of my perspective in this data, since the one segment of debt that hasn’t risen compared to GDP is personal debt—where the income of the borrower is a serious constraint on how much debt the borrower will take on. As much as banks have flogged credit cards, personal debt hasn’t increased as a percentage of GDP.
On the other hand, mortgage debt has risen sevenfold (compared to GDP) in the last two decades.
Figure 3
The post-GFC period in Australia has seen a further increase in the banking sector’s reliance on home loans—due to both the business sector’s heavy deleveraging in the wake of the crisis, and the government’s re-igniting of the house price bubble via the First Home Vendors Boost in late 2008. Mortgages now account for over 57 percent of the banks’ loan books, an all-time high.
Figure 4
They also account for over 37% of total bank assets—again an all-time high, and up substantially from the GFC-induced low of 28.5% before the First Home Vendors Boost reversed the fall in mortgage debt.
Figure 5
So how exposed are the banks to a fall in house prices, and the increase in non-performing loans that could arise from this? There is no way of knowing for sure beforehand, but cross-country comparisons and history can give a guide.
Bigger than Texas
A persistent refrain from the “no bubble” camp has been that Australia won’t suffer anything like a US downturn from a house price crash, because Australian lending has been much more responsible than American lending was. I took a swipe at that in last week’s post, with a chart showing that Australia’s mortgage debt to GDP ratio exceeds the USA’s, and grew three times more rapidly than did American mortgage debt since 1990 (see Figure 13 of that post).
Similar data, this time seen from the point of view of bank assets, is shown in the next two charts. Real estate loans are a higher proportion of Australian bank loans than for US banks, and their rise in significance in Australia was far faster and sharper than for the USA.
Figure 6
More significantly, real estate loans are a higher proportion of bank assets in Australia than in the USA, and this applied throughout the Subprime Era in the USA. The crucial role of the First Home Vendors Boost in reversing the fall in the banks’ dependence on real estate loans is also strikingly apparent.
Figure 7
Never mind the weight, feel the distribution
The “no bubble” case dismisses this Australia-US comparison on two grounds:
* most of Australia’s housing loans are to wealthier households, who are therefore more likely to be able to service the debts so long as they remain employed; and
* housing loans here are full-recourse, so that home owners put paying the mortgage ahead of all other considerations..
Bloxham made the former claim in his recent piece:
However, there are other reasons why levels of household debt should not be a large concern. The key one is that 75 per cent of all household debt in Australia is held by the top two-fifths of income earners. (Paul Bloxham , The Australian housing bubble furphy, Business Spectator March 18 2011)
Alan Kohler recounted an interesting conversation with “one of Australia’s top retail bankers” a couple of years ago on the latter point:
There is some ‘mortgage stress’ in the northern suburbs of Melbourne, the western suburbs of Sydney and some parts of Brisbane, but while all the banks are bracing themselves for it and increasing general provisions, there is no sign yet of the defaults that are bringing the US banking system to its knees.
We often see graphs showing that Australia’s ratios of household debt to GDP and debt to household income had gone up more than in the United States. So, while the US is deep into a mortgage-based financial crisis, it is surely a cause for celebration that Australia has not seen even the slightest uptick in arrears.
“Please explain,” I said to my dinner companion. Obviously, low unemployment and robust national income, including strong retail sales until recently, have been the most important part of it. But on the other hand, the US economy was doing okay until the mortgage bust happened; it was the sub-prime crisis that busted the US economy, not the other way around.
Apart from that it is down to two things, he says: within the banks, “sales” did not gain ascendancy over “credit” in Australia to the extent that it did in the US; and US mortgages are non-recourse whereas banks in Australia can have full recourse to the borrowers’ other assets, which means borrowers are less inclined to just walk away. (Alan Kohler, “Healthy by default“, Business Spectator August 21, 2008; emphases added)
Kris Sayce gave a good comeback to Bloxham’s “most of the debt is held by those who can afford it” line when he noted that “two-fifths of income earners is quite a large pool of people”:
In fact, it’s nearly half the income earners. Is that number any different to any other economy? You’d naturally think the higher income earners would have most of the debt because they’re the ones more likely to want it, need it or be offered it.
So with about 11.4 million Australians employed, that makes for about 4.6 million Australians holding over $1.125 trillion of household debt – remember total household debt is about $1.5 trillion. That comes to about $244,565 per person.
Perhaps we’re not very bright. But we’re struggling to see how that makes the popping of the housing bubble a “virtual impossibility.” (Kris Sayce, “Are Falling House Prices “Virtually Impossible”?“, Money Morning 18 March 2011)
The best comebacks to Alan Kohler’s dinner companion may well be time itself. Impaired assets (See Note [1]) did hit an all-time low of 4.1% of Bank Tier 1 Assets and 0.2% of total assets in January 2008, but by the time Kohler and his banker sat down to dinner, impairment was on the rise again. Impaired assets have since reached a plateau of 25% of Tier 1 capital and 1.25% of total assets—and this has occurred while house prices were still rising. Despite the pressure that full-recourse lending puts on borrowers, this is comparable to the level of impaired assets in US banks before house prices collapsed when the SubPrime Boom turned into the SubPrime Crisis (see Table 2 on page 10 of this paper).
Figure 8
Since real estate loans are worth roughly 7 times bank Tier 1 capital—up from only 2 times in 1990—it wouldn’t take much of an increase in non-performing housing loans to push Australian banks to the level of impairment experienced by American banks in 2007 and 2008.
Figure 9
The level and importance of non-recourse lending in the US is also exaggerated. While some major States have it, many do not—and one of the worst performing states in and since the Subprime Crisis was Florida, which has full recourse lending.
Finally, the “never mind the weight, feel the distribution” defence of the absolute mortgage debt level has a negative implication for the Australian economy: if debt is more broadly distributed in Australia than in the USA, then the negative effects of debt service on consumption levels are likely to be greater here than in America. This is especially so since mortgage rates today are 50% higher here than in the USA. Interest payments on mortgage debt in Australia now represent 6.7% of GDP, twice as much as in the USA. It’s little wonder that Australia’s retailers are crying poor.
Of course, the RBA could always reduce the debt repayment pressure by reducing the cash rate. But with the margin between the cash rate and mortgages now being about 3%, it would need to reduce the cash rate to 1.5% to reduce the debt repayment burden in Australia to the same level as America’s.
Figure 10
So if America’s consumers are debt-constrained in their spending, Australian consumers are even more so—with negative implications for employment in the retail sector.
Compared to the USA therefore, there is no reason to expect that Australian banks will fare better from a sustained fall in house prices. What about the comparison with past financial crises in Australia?
This time really is different
There are at least three ways in which whatever might happen in the near future will differ from the past:
* On the attenuating side, deposit insurance, which was only implicit or limited in the past, is much more established now; and
* If the banks face insolvency, the Government and Reserve Bank will bail them out as the US Government and Federal Reserve did—though let’s hope without also bailing out the management, shareholders and bondholders, as in the USA (OK, so call me an optimist! And if you haven’t seen Inside Job yet, see it);
On the negative side, however, we have the Big Trifecta:
* The bubbles in debt, housing and bank stocks are far bigger this time than any previous event—including the Melbourne Land Boom and Bust that triggered the 1890s Depression.
I’ll make some statistical comparisons over the very long term, but the main focus here is on several periods when house prices fell substantially in real terms after a preceding boom, and what happened to bank shares when house prices fell:
* The 1880s-1890s, when the Melbourne Land Boom busted and caused the 1890s Depression;
* The 1920s till early 1930s, when the Roaring Twenties gave way to the Great Depression;
* The early to mid-1970s, when a speculative bubble in Sydney real estate caused a rapid acceleration in private debt, and a temporary fall in private debt compared to GDP due to rampant inflation;
* The late 1980s to early 1990s, when the Stock Market Crash was followed by a speculative bubble in real estate—stoked by the second incarnation of the First Home Vendors Boost; and
* From 1997 till now.
I chose the first four periods for two reasons: they were times when house prices fell in real (and on the first two occasions, also nominal) terms, and bank share prices suffered a substantial fall; and they also stand out as periods when an acceleration in debt caused a boom that gave way to a deleverage-driven slump, when private debt reached either a long term or short term peak (compared to GDP) and fell afterwards. They are obvious in the graph of Australia’s long term private debt to GDP ratio.
Figure 11
They also turn up as significant spikes in the Credit Impulse (Biggs, Mayer et al. 2010)—the acceleration of debt (divided by GDP) which determines the contribution that debt makes to changes in aggregate demand (See Note [2]).
The Credit Impulse data also lets us distinguish the pre-WWII more laissez-faire period from the “regulated” one that followed it: credit was much more volatile in the pre-WWII period, but the trend value of the Credit Impulse was only slightly above zero at 0.1%.
Figure 12
The Post-WWII period had much less volatility in the debt-financed component of changes in aggregate demand, but the overall trend was far higher at 0.6%. This could be part of the explanation as to why Post-WWII economic performance has been less volatile than pre-WWII, but it also indicates that rising debt has played more of a role in driving demand in the post-War period than before.
Ominously too, even though the post-WWII period in general has been less volatile, the negative impact of the Credit Impulse in this downturn was far greater than in either the 1890s or the 1930s.
Figure 13
One final factor that also separates the pre-WWII data from post-WWII is the rate of inflation. The 1890s and 1930s debt bubbles burst at a time of low inflation, and rapidly gave way to deflation. This actually drove the debt ratio higher in the first instance, as the fall in prices exceeded the fall in debt. But ultimately those debts were reduced in a time of low inflation.
The 1970s episode, on the other hand, was characterized by rampant inflation—and the debt ratio fell because rising prices reduced the effective debt burden. Whereas the falls in real house prices in the 1890s and the 1930s therefore meant that nominal prices were falling even faster, the 1970s fall in real house prices mainly reflected consumer price inflation outstripping house price growth. The 1990 bubble also burst when inflation was still substantial, though far lower than it was in the mid-1970s.
Today’s inflation story has more in common with the pre-WWII world than the 1970s. Our current bubble is bursting in a low-inflation environment.
Figure 14
Now let’s see what history tells us about the impact of falling house prices on bank shares.
The 1880s-1890s
This was the bank bust to end all bank busts—just like WWI was the War to end all wars. Bank shares increased by over 75% in real terms as speculative lending financed a land bubble in Melbourne that increased real house prices by 33% (Stapledon’s index combines Sydney and Melbourne, so this figure understates the degree of rise and fall in Melbourne prices). The role of debt in driving this bubble and the subsequent Depression is unmistakable: private debt rose from under 30% of GDP in 1872 to over 100% in 1892, and then unwound over the next 3 decades to a low of 40% in 1925.
The turnaround in debt and the collapse in house prices precipitated a 50% fall in bank shares in less than six months as house prices started to fall back to below the pre-boom level.
Figure 15
The excellent RBA Research paper “Two Depressions, One Banking Collapse” by Chay Fisher & Christopher Kent (RDP1999-06) argues fairly convincingly that the 1890s Depression was a more severe Depression for Australia than the Great one—mainly because there were more bank failures in the 1890s than in the 1930s. The severity of the 1890s fall in bank shares may relate to the higher level of debt in 1890 than in the 1930s—a peak of 104 percent of GDP in 1892 versus only 76 percent in 1932 (the peak this time round was 157 percent in March 2008).
The correlation of the two series in absolute terms is obvious (the correlation coefficient is 0.8), and the changes in the two series are also strongly correlated (0.42).
Figure 16
The 1920s-1940s
The 1920s began with the end of the great deleveraging that had commenced in 1892. Real house prices rose by about 25 percent in the first two years—though mainly because of deflation in consumer prices—and then fluctuated down for the next four years before a minor boom. But the main debt-financed bubble in the 1920s was in the Stock Market.
Figure 17
There was however still a crash in bank shares after house prices turned south in early 1929. It was not as severe as in 1893, and of course coincided with a collapse in the general stock market (I can’t give comparable figures because of the different methods used to compile the two indices—see the Appendix). But still there was a fall of 24% in bank shares over 7 months at its steepest, and a 39% fall from peak to trough—preceded by a 25% fall in house prices.
Figure 18
Bank shares also tracked house prices over the 20 years from the Roaring Twenties boom to the beginning of WWII: the correlation was 0.44 for the indices, and 0.47 for the change in the indices.
Figure 19
The 1970s
The 1970s bubble was the last gasp of the long period of robust yet tranquil growth that had characterized the early post-WWII period. The peculiar macroeconomics of the time—the start of “Stagflation”—clouds the house price bubble picture somewhat (I discuss this in the Appendix), but there still was a big house price bubble then, and a big hit to bank shares when it ended.
This was Australia’s first really big debt-financed speculative bubble, which most commentators and economists seem to have forgotten entirely. Its flavor is well captured in the introduction to Sydney Boom, Sydney Bust:
Sydney had never experienced a property boom on the scale of that between 1968 and 1974. It involved a frenzy of buying, selling and building which reshaped the central business district, greatly increased the supply of industrial and retailing space, and accelerated the expansion of the city’s fringe. Its visible legacy of empty offices and stunted subdivisions was matched by a host of financial casualties which incorporated an unknown, but very large, contingent of small investors, together with the spectacular demise of a number of development and construction companies and financial institutions. The boom was the most significant financial happening of the 1970s and the shock waves from the inevitable crash were felt right up to 1980. It was an extraordinary event for Sydney, and for Australia.(Daly 1982, p. 1)
House prices rose 40 percent in real terms from 1967 till 1974, and then fell 16 percent from 1974 till 1980. Bank shares went through a roller-coaster ride, following Poseidon up and down from 1967 till 1970, and then rising sharply as the debt-bubble took off in 1972, with a 31 percent rise between late 1972 and early 1973. But from there it was all downhill, with bank shares falling 35 percent across 1973 while house prices were still rising.
But when house prices started to fall, bank shares really tanked, falling 54 percent in just seven month during 1974.
Figure 20
However, the extreme volatility of both asset and commodity prices, and the impact of two share bubbles and busts—the Poseidon Bubble of the late 1960s and the early 1970s boom and bust—eliminated the correlation of bank share prices to house prices that applied in the 1890s and 1930s: the correlation of the indices was -0.46 and of changes in the indices was -0.01.
Figure 21
The 1980s
“The recession we had to have” remains unforgettable. That plunge began with Australia’s second big post-WWII speculative bubble, as Bond, Skase, Connell and a seemingly limitless cast of white-shoe brigaders established the local Ivan Boesky “Greed is Good” church—with banks eagerly throwing money and debt into its tithing box.
It would have all ended with the Stock Market Crash of 1987, were it not for the government rescues (both here and in the USA) that enabled the speculators and the banks to regroup and throw their paper weight into real estate.
Figure 22
Having plunged 30 percent in one month (October, of course), bank shares rocketed up again, climbing a staggering 54 percent in 11 months to reach a new peak in October 1988, as speculators and the second incarnation of the First Home Vendors Grant drove house prices up 37 percent over just one and a half years. Bank shares bounced around for a while, but once the decline in house prices set in, bank shares again tanked—falling 40 percent over 11 months in 1990.
Figure 23
The positive correlations between the indices and their rates of change which had been swamped by the high inflation of the early 1970s returned: the correlation of the indices was 0.45 and the correlation of their rates of change was 0.42.
Figure 24
Which brings us to today.
From 1997 till today
I have argued elsewhere that the current bubble began in 1997, but the debt-finance that finally set it off began far earlier—in 1990. The fact that unemployment was exploding from under 6 percent in early 1990 to almost 11 percent in early 1994 was not, it seems, a reason to be restrained in lending to the household sector. It was far more important to expand the marketing of debt, and since the business sector could no longer be persuaded to take more on, the virgin field of the household sector had to be explored. Mortgage debt, which had flatlined at about 16 percent of GDP since records were first kept, took off, increasing by 50 percent during the 1990s recession (from 1990 till the start of 1994), and ultimately rising by 360 percent over the two decades—from 19 percent of GDP to 88 percent—with the final fling of the First Home Vendors Boost giving it that final push into the stratosphere.
Figure 25
By 1997 the sheer pressure of rising mortgage finance brought to an end a period of flatlining house prices, and the bubbles in both house prices and bank shares took off in earnest.
The rise in bank shares far outweighed the increase in the overall share index (the two indices are now comparable, whereas for the longer series they were compiled in different ways). Bank shares rose 230 percent from 1997 till their peak in 2007, versus a rise of only 110 percent in the overall market index.
The increase in house prices also dwarfed any previous bubble: an increase of over 120 percent over fifteen years.
Bank shares and house prices both tanked when the GFC hit: house prices fell 9 percent and bank shares fell 61 percent. But thankfully the cavalry rode to the rescue—in the shape of the First Home Vendors Boost—and both house prices and bank shares took off again. House prices rose 17 percent while bank shares rose 60 percent (versus a 45 percent rise in the market) before falling 12 percent after the expiry of the FHVB.
Figure 26
The correlation between bank shares and house prices is again positive: 0.51 for the indices and a low 0.1 for the change in indices over the whole period, but 0.46 since 2005.
Figure 27
So now we are on the edge of the bursting another house price bubble. What could the future bring?
When the bubble pops…
There are several consistent patterns that can be seen in the past data.
Firstly, house prices and bank shares are correlated. There was one aberration—the 1970s—but that was marked by peculiar dynamics arising from the historically high inflation at the time. Generally, bank shares go up when house prices rise, and fall when the fall. Partly, this is the general correlation of asset prices with each other, but partly also it’s the causal relationship between bank lending, house prices, and bank profits: banks make money by creating debt, rising mortgage debt causes house prices to rise, and rising house prices set off the Ponzi Scheme that encourages more mortgage borrowing. The bubble bursts when the entry price to the Ponzi Scheme becomes prohibitive, or when early entrants try to take their profits and run.
Secondly, the fall in the bank share price is normally very steep, and it occurs shortly after house prices have passed their peaks. Holding bank shares when house prices are falling is a good way to lose money—and conversely, if you get the timing right, betting against them can be profitable. That’s why Jeremy Grantham—and many other hedge fund managers from around the world—are paying close attention to Australian house prices.
Thirdly, house prices and bank shares are driven by rising debt, and when debt starts to fall, not only do house prices and bank shares fall, the economy also normally falls into a very deep recession or Depression. This is the crucial role of deleveraging in causing economic downturns, including the serious ones where debt falls not just during a short cycle prior to another upward trend, but in an extended secular decline.
There is also one cautionary note about the current bubble: though history would imply that there is a very large downside to bank shares now, it’s also obvious that bank shares fell a great deal in 2007-09, so that much of the downside may already have been factored in.
However, on every metric: on the ratio of debt to GDP, on how much that ratio rose from the start of the bubble to its end, on how big the house price bubble was, and on how much bank shares rose, this bubble dwarfs them all.
Debt to GDP
The 1997 debt to GDP ratio started higher than all but the 1890s bubble ended, and the bubble went on long after all the others had popped.
Figure 28
Though the actual debt to GDP ratio today dwarfs all its predecessors, in terms of the growth of debt from the beginning of the bubble, it has one rival: the 1920s.
Figure 29
However this is partly because of deflation during the early Great Depression: deflation ruled from 1930 till 1934, and the debt to GDP ratio rose not because of rising debt, but falling prices. Though the increase in debt in the final throes of the Roaring Twenties was faster than we experienced, over the whole boom debt grew as quickly now as then, and it has kept growing for four years longer than in the 1920s. Even though the ratio is falling now, it’s because debt is now rising more slowly than nominal GDP: we still haven’t experienced deleveraging yet (unlike the USA).
House Prices
The rise in prices during this bubble again has no equal in the historical record.
Figure 30
Bank Shares
Bank shares are also in a class of their own in this bubble, even after the sharp fall from 2007 till 2009. In terms of how high bank share prices climbed, this bubble towers over all that have gone before, and even what is left of this bubble is still only matched by the biggest of the preceding bubbles, the 1890s and the 1970s.
Figure 31
It’s a long way from the top if you’ve sold your soul
Bank lending drove house prices sky high, and the profits banks made from this Ponzi Scheme dragged their share prices up with the bubble (and handsomely lined the pockets of their managers).
It’s great fun while it lasts, but all Ponzi Schemes end for the simple reason that they must: they aren’t “making money”, but simply shuffling it—and growing debt. When new entrants can’t be enticed to join the game, the shuffling stops and the Scheme collapses under the weight of accumulated debt. There are very good odds that, when this Ponzi Scheme collapses and house prices fall, bank shares will go down with them.
Appendices
Stagflation
Between 1954 and 1974, unemployment averaged 1.9 percent, and it only once exceeded 3 percent (in 1961, when a government-initiated credit squeeze caused a recession that almost resulted in the defeat of Australia’s then Liberal government, which ruled from 1949 till 1972). Inflation from 1954 till 1973 averaged 3 percent, and then rose dramatically between 1973 and 1974 as unemployment fell.
This fitted the belief of conventional “Keynesian” economists of the time that there was a trade-off between inflation and unemployment: one cost of a lower unemployment rate, they argued, was a higher rate of inflation.
But then the so-called “stagflationary” breakdown occurred: unemployment and inflation both rose in 1974. Neoclassical economists blamed this on “Keynesian” economic policy, which they argued caused people’s expectations of inflation to rise—thus resulting in demands for higher wages—and OPEC’s oil price hike.
Figure 32
The latter argument is easily refuted by checking the data: inflation took off well before OPEC’s price hike.
Figure 33
The former has some credence as an explanation for the take-off in the inflation rate—workers were factoring in both the bargaining power of low unemployment and a lagged response to rising inflation into their wage demands.
Figure 34
The Neoclassical explanation for why this rise in inflation also coincided with rising unemployment was “Keynesian” policy had kept unemployment below its “Natural” rate, and it was merely returning to this level. This was plausible enough to swing the policy pendulum towards Neoclassical thinking back then, but it looks a lot less plausible with the benefit of hindsight.
Figure 35
Though inflation fell fairly rapidly, and unemployment ultimately fell after several cycles of rising unemployment, over the entire “Neoclassical” period both inflation and unemployment were higher than they were under the “Keynesian” period. So rather than inflation going down and unemployment going up, as neoclassical economists expected, both rose—with unemployment rising substantially. On empirical grounds alone, the neoclassical period was a failure, even before the GFC hit.
Table 1
Policy dominance Keynesian Neoclassical
Years 1955-1976 1976-Now
Average Inflation 4.5 5.4
Average Unemployment 2.1 7
There was a far better explanation of the 1970s experience lurking in data ignored by neoclassical economics: the level and rate of growth of private debt. As you can see from Figure 32, private debt, which had been constant (relative to GDP) since the end of WWII, began to take off in 1964, and went through a rapid acceleration from 1972 till 1974, before falling rapidly.
The debt-financed demand for construction during that bubble added to the already tight labor market, and helped drive wages higher in both a classic wage-price spiral and a historic increase in labor’s share of national income—which has been unwound forever since.
Figure 36
Inflation, higher unemployment that weakened labor’s bargaining power, anti-union public policy and an approach to wage-setting policy that emphasized cost of living adjustments but ignored sharing productivity gains, all contributed to that unwinding.
The share market indices
The bank share index used in this post was compiled by combining 3 data sources. Working backwards in time, these were:
* The S&P’s ASX 200 Financials Index (AXFJ) from May 2001 till now;
* A composite formed from the prices for the 4 major bank share prices that matches the value of the Financials Index from 2000 till May 2001; and
*
Data from the Global Financial Database from 1875 till 2000, which in turn consists of three series:
o “Security Prices and Yields, 1875-1955,” Sydney Stock Exchange Official Gazette, July 14, 1958, pp 257-258 (1875-1936), together with D. McL. Lamberton, Share Price Indices in Australia, Sydney: Law Book Co., 1958; and
o The Australian Stock Exchange Indices, Sydney: AASE, 1980; and
o Australian Stock Exchange Limited, ASX Indices & Yields, Sydney: ASX, 1995 (updated till 2000)
From a perusal of the GFD documentation and a comparison of the Banking and Finance index to the broader market index, it appears that the bank index is a straight price index pre-1980, whereas the GFD’s data for the overall market is an accumulation index till 1980 and a price index after that. These inconsistencies make it impossible to compare the two over the very long term, but the movements in each at different time periods can be compared (and the comparison is also fine from 1980 on).
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First home buyers being left for dust in boom
SIMON JOHANSON
April 4, 2011
POPULATION pressures and record prices are derailing the dreams of frustrated first home buyers.
Last Monday, research from Bob Birrell and Colin Keane indicated that first home buyers were being priced out of the last bastion of affordable housing, new estates on the city's fringes.
That was followed by Friday's revelations that Melbourne's population has soared by more than 600,000 in the last nine years.
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Most of those new arrivals decided to live, not surprisingly, in the outer fringe suburbs where first home buyer affordability has become a critical issue.
They're troubling statistics for young people wanting to get a start in the housing market, particularly with fat government grants a distant memory and prices at record highs.
Added to this, the size of the average first-home loan is near an all-time high of $279,300 and, according to the Real Estate Institute of Victoria, Melbourne's median house price rose 15.2 per cent to $547,000 in the year to February.
And just to illustrate how difficult things have become, the number of loans issued to first home buyers in January this year was just 1676, the lowest level in seven years, and well down from the heady days of May 2009, when 4500 loans flooded the market.
Sliding affordability has social consequences, and not just for the less well-off first home buyers.
People are more likely to delay buying a home until later in life, their 30s or 40s, when they can get a secure, higher-paying job.
That, in turn, will have an impact on the time it takes to pay off the mortgage, leaving some with a debt legacy to be carried over into retirement.
Faced with rising mortgage lending rates, high house prices and decreasing affordability in the outer suburbs, the chance for less well-off buyers to get into the market are fast diminishing.
And there appears to be no quick or easy solution.
Keane and Birrell rightly point out that unprecedented demand is behind the inability of Melbourne's new developments to deliver affordable housing.
Over the past nine years, Melbourne, and particularly its outer suburbs, grew faster than any other place in Australia. The city's population boom saw an extra 605,411 people - half the population of Adelaide - settle mainly on the fringes, where the battle over affordability has hit hardest.
As the city's population surged above 4 million, demand shot through the roof and land procurement and planning processes were unable to keep pace. As a consequence, Kain and Birrell say the property development industry has also lost the capacity to play catch-up.
No other city in Australia has witnessed such growth or had to deal with the corresponding pressure such rapid expansion puts on infrastructure and services, with congested roads, crowded public transport, schools and hospitals.
One solution is to further reduce the population intake. Melbourne's net population is estimated to have actually fallen by 17,000 in the year to June 2010 from the previous year's high of 96,000. Nonetheless, that still equates to a jump of 1500 people a week over the year.
More people generate greater demand for jobs, housing, goods and services and contribute significantly to the economy. This helped create Victoria's recent economic success.
But has it gone too far? Expect to hear more from Dick Smith on the evils of Australia's addiction to economic and population growth in coming months.
Little wonder, also, that frustrated Gen Y first home buyers are joining a ''buyers' strike''.
Tax-reform group Prosper Australia has ignited a small but growing online social media campaign against the high cost of housing, urging prospective home owners to sign a pledge not to buy. Over the past two weeks, thousands voted online in support, pushing the campaign to the top of political activist website GetUp's campaign ideas list.
But their efforts to generate a wholesale hit on prices may hurt more than it helps.
The Economist, among other commentators, has been vocal about Australia's unsustainable house prices but it has also documented the other side of the equation, the aftermath of the housing crash in the US.
Gambling mecca Las Vegas has many dubious distinctions, The Economist says, but it recently added one: the US foreclosure capital. In the city's poorer suburbs, one in five homes is in some stage of foreclosure.
People who have managed to hold on to their homes are far from lucky either, the magazine says. Property prices are around 60 per cent below the peak they reached in 2006, leaving 70 per cent of home owners owing more on their mortgage than their property is worth.
These grim statistics have a knock-on effect: local government revenue and services are constricted, construction has shrivelled and people forced out of their homes are moving away from families and friends, leaving them isolated and depressed.
Back in Australia what is being done to avoid all this?
On a federal level, not much. That inaction is epitomised by Labor's much-publicised National Housing Supply Council. Soon after delivering its landmark report on housing supply and affordability last year, it was whittled away to only one member, it's chairman Owen Donald.
Things are better at state level. The Baillieu government confirmed it will not back away from stamp duty cuts for first home buyers but will roll them out mid-year as promised. In the first year, this translates to a 20 per cent saving of $3274 for the average first home buyer spending $400,000 on a house. In subsequent years, it will rise to 50 per cent.
And the more dubious - but favoured - government policy of first home buyer grants, will continue into the next financial year. This can put up to $26,500 (depending on your circumstances) in the pocket of a first home buyer, or, depending on who you listen to, the price for the vendor.
Less favourably, scrapping the urban densification policy along rail and road corridors has not helped increase the supply of housing.
With affordability at breaking point and deep structural problems confronting the housing market, maybe it's time to take first home buyers' concerns more seriously.
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Property boycott push gains ground
* Herald Sun
* From: Herald Sun
* March 31, 2011 11:30PM
A CAMPAIGN urging first-home buyers to take part in a "buyer's strike" in an effort to drive down property prices is gaining momentum.
Prosper Australia, a tax reform lobby group, warns that the property bubble is about to burst, and first-home buyers should stand aside, because they will be the worst affected when real estate prices fall.
Spokesman David Collyer said first-home buyers face financial ruin if house prices crash to a point that the market value is less than their debt.
"The problem is that prices have got so far that two solid jobs and a good deposit is no longer enough to buy a house in Melbourne," he said.
Mr Collyer said the property market relied on first-home buyers so that sellers could cash out and buy superior properties.
The campaign is gaining traction online, with almost 5000 votes supporting the first-home buyers boycott recorded in only a few days on community advocacy site GetUp.
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Home loans sink to decade low
Chris Zappone
April 6, 2011 - 2:10PM
Home loans dropped for a second consecutive month in February with New South Wales posting its biggest monthly decline in 14 years. The share of first-home buyers shrank further.
The number of home loans fell 5.6 per cent to 45,393 in February, following a revised 6.3 per cent fall in January, according to the Australian Bureau of Statistics. Economists polled by Bloomberg tipped a 2 per cent fall.
The total was lowest number of home loans approved in a month since February 2001.
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Home loans in New South Wales plummeted 10.1 per cent in seasonally adjusted terms, the most since February 1997, the ABS reported. Victoria did better than the national average but still saw a drop.
"What’s a little worrying is that there are such big drops in the early part of this year," said RBC Capital markets senior economist Su-Lin Ong. The drop ''has more than wiped the out gains in the second half of last year when we saw a string of modest increases and what looked to be a little bit of resilience in households and housing in general", she said.
Demand for home loans has sagged this year, after flooding in Queensland and parts of Victoria interrupted the sales cycle in those markets. Also, auction clearance rates have slumped to about 60 per cent in recent weeks in some capitals - well down from the 80 per cent levels seen a year ago - as high prices, rising interest rates and economic uncertainty deter buyers.
"Home loan demand clearly struggled amid intense flooding across the eastern states in the early part of 2011, keeping home buyers, investors and builders on the sidelines," said Moody's Economy.com analyst Matthew Circosta. "Prior to January, home loan demand had been recovering on the back of falling unemployment and rising incomes, even amid higher borrowing costs."
In raw terms, the share of first-home buyers as a percentage of the total dropped to 14.9 per cent in February, the lowest ratio since June 2004. The share fell from 15.2 per cent in January, and is barely half the peak of 28.5 per cent in May 2009 when the federal government offered incentives to draw in first-time buyers.
The average loan size for first-home buyers rose $2700 to $277,000 in the month, while the average loan size for all home buyers dropped $2200 to $281,500 in the same period, the ABS said.
Broad declines
Among the other states, Victoria registered a 4.6 per cent drop in new home loans, while in Queensland, they edged down 0.5 per cent.
In Western Australia the number of home loans slid 2.1 per cent, while in South Australia, home loans sank 5 per cent.
Tasmania experienced a 13.7 per cent drop while in the Northern Territory they sank 11.4 per cent. In the ACT, loans fell 4.5 per cent, the ABS said.
"It’s not Queensland," said Ms Ong, referring to the expected disruption in the wake of the summer's floods.
"Queensland was part of the explanation for the weak January numbers - it’s not driving the weak February numbers with the weakness concentrated in New South Wales."
Now any recovery in housing will be coming off a lower base, Ms Ong said, adding that the February data suggests the Reserve Bank can continue to leave interest rates where they are for now.
The number of loans for the purchase of existing homes dropped 6 per cent in the month to 39,076, while the number of loans for newly built homes dived 12 per cent to 1745.
RBA outlook
The weak data follows the Reserve Bank's decision yesterday to keep rates steady at 4.75 per cent, a level they have been at since November.
Westpac economics said the poor home loan data supported keeping rates on hold for longer.
"This result reinforces the likelihood of the RBA remaining on hold for now," said Westpac economics.
In other indications of the strength of the real estate market, mortgage broker Australian Finance Group - which claims it processes about 10 per cent of the national home loan market - said today it had $2.5 billion in home loans in March on its books, up 22 per cent on February, but 9 per cent lower than a year earlier.
Separately, the March quarter National Australia Bank residential property survey showed that the industry tipped house prices to grow only 0.6 per cent over the next 12 months.
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This Time Had Better Be Different: House Prices and the Banks Part 1
by Steve Keen on April 1st, 2011 at 10:02 am
Posted In: Debtwatch
Click here for this post in PDF
Before the US house price bubble burst, its banks and regulators claimed (a) that there wasn’t a bubble and (
that, if house prices did fall, it wouldn’t affect the solvency of the banks.The same claims are now being made about Australian house prices and Australian banks. On the former point, Glenn Stevens recently remarked that:
“There is quite often quoted very high ratios of price to income for Australia, but I think if you get the broadest measures country-wide prices and country-wide measure of income, the ratio is about four and half and it has not moved much either way for ten years.
“That is higher than it used to be but it is actually not exceptional by global standards.
(SMH March 16th 2011)
On the latter, APRA conducted a “stress test” study of Australian banks in 2010, with the stresses including a 30% fall in house prices over 3 years:
Table 1: APRA Stress Test Table, APRA Insight 2010/2, p. 9
2009/10 2010/11 2011/12
GDP growth (%) (-3.0) 2.1 3.5
Unemployment (%) 9.8 10.8 10.7
House Price Growth (%) (-11.8) (-12.1) (-1.7)
Commercial office property growth (%) (-21.5) (-9.4) 1.5
APRA’s conclusion was:
The main results of the stress-test for the 20 ADIs, taken as a group, are as follows:
*
none of the ADIs would have failed under the downturn macroeconomic scenario;
*
none of the ADIs would have breached the four per cent minimum Tier 1 capital requirement of the Basel II Framework; and
*
the weighted average reduction in Tier 1 capital ratios from the beginning to the end of the three-year stress period was 3.1 percentage points. (APRA Insight 2010/2, p. 10)
So there’s nothing to worry about then? No bubble to pop, and no problems for the banks if house prices fall anyway? In this post I’ll consider the argument that there is no bubble because changed economic fundamentals justify Australia’s relatively high house prices. In the next I’ll consider what the popping of the bubble could mean for Australian banks.
Prices
Glenn Stevens’ claim that the house price to income ratio was “about four and a half” was almost certainly relying on research by Rismark. Rismark MD Chris Joye recently asserted that the house price ratio in Australia was 4.6, and though he conceded this was somewhat high, he argued that it was justified by changes to economic fundamentals. He ridiculed the claim, made by The Economist on the basis of a comparison of house prices to rents, that Australia’s house prices are 56% overvalued:
The Economist does not question whether the old housing ratios might be nonsensical to today’s home owners as a result of:
*
Fundamental changes in the structure of the economy wrought by the fact that interest rates over the past 15 years have, on average, been 43 per cent lower than interest rates in the 15 years that preceded that period;
*
The fact that average inflation since the middle of the 1990s has been 55 per cent lower than inflation in the 15 years prior; or
*
The fact that the rise of two-income households and the female participation rate in concert with a near halving in the nominal cost of debt might have triggered a once-off upward increase in household purchasing power, and hence housing valuations… (Chris Joye, A property bubble long shot, Business Spectator March 25 2011)
Former RBA staffer and now HSBC economist Paul Bloxham was equally adamant: Australian house prices are a tad high, but they are justified by changed economic fundamentals over the last 15 years:
… a large structural adjustment that occurred in the Australian housing market between 1997 and 2003… involved lower interest rates, better-anchored inflation expectations, and increased availability of housing credit. Without some reversal of these structural changes – which is a virtual impossibility – we do not expect Australian housing prices to fall…
Since late 2003 the dwelling price to income ratio has been broadly stable at between 3.5 and 4.5 and has averaged 4 (see chart)…
We view the risk of a sharp fall in housing prices as very low. (Paul Bloxham, The Australian housing bubble furphy, Business Spectator March 18 2011)
Figure 1: Rismark’s Dwelling Price to Income Ratio Chart
In other words, this time is different.
They would say that, wouldn’t they?
The “this time is different” argument asserts that lower interest rates, lower inflation and higher income per household (and more income earners per household) means that though the house prices to income ratio might higher than before, it’s nothing to worry about.
Tell that to a would-be first home buyer who’s contemplating taking out a mortgage. In 1992, the average mortgage for a First Home Buyer was $ 71,500. It is now $274,000.
Figure 2: Average First Home Mortgage and Mortgage Interest Rate
The “no bubble” argument asserts that this has been counterbalanced by the fall in interest rates—which were 12% then and are 7.8% now. So the average first home buyer’s mortgage is 3.8 times higher than it was two decades ago, while interest rates are 2/3rds what they were then. Does one—along with changes in income and demographics—counterbalance the other?
Not on your life: the increase in debt and debt servicing has far outstripped all the factors that Joye and Bloxham rely upon to argue that Australia’s house prices are not in a bubble.
I want to make this case slowly, so that you can see each step in the argument, so let’s first look at the weekly interest and loan repayments on a typical 25-year First Home housing loan. Back in 1992, the weekly interest bill was $165; now it is $420—2.5 times as high. Repayments were $174; now they are $490—2.8 times as high.
Figure 3: Interest up 2.5 times, repayments up 2.8 times
So have incomes risen sufficiently to mean that this almost threefold increase in debt servicing costs over 20 years is no big deal?
Not if you’re a wage earner! Average before tax wages have risen from $505 a week in 1992 to $996 a week at the end of 2011—so they have almost doubled. Using an average tax rate of 28%, that gives the average wage earner $777 after tax a week today, versus $394 back in 1992.
Figure 4: Average wages have risen by 97% since 1992
While wages have risen, the 2.8 times increase in loan repayments means that mortgage payments on an average first home loan have gone from taking 40 percent of after-tax income of the average worker in the 1990s to 64 percent now—after reaching a peak of 74 percent in late 2008 before the RBA slashed interest rates (the ratio fell to 53 percent, and it would have fallen further had the First Home Vendors Boost not caused house prices to skyrocket again).
In the early 1990s, a young wage earner could aspire to financing a house purchase using his or her income alone. Now, that’s out of the question.
He’s a (young) Working Class Man Renter…
This is what the “no bubble” proponents don’t get: high house prices have become a class and age issue. If you’re a young “working class man” on the average wage, you can no longer afford to enter the housing market in Australia—since the average first home loan would consume over 60 percent of your after-tax wage.
Even if you’re a “young working class couple”, the cost of servicing a mortgage from wage income alone is prohibitive. In the 1990s, a couple (where both earned the average wage) had about 80% of their income free for other costs after paying the average First Home mortgage. The rapid escalation in house prices after Howard doubled the First Home Owners Grant in 2001 drove this down to under 65 percent—and most wage-earning couples simply don’t have that much headroom in their budgets. They can’t pay the rates, the food bill, the petrol, and the education fees, with less than three quarters of their after-tax income.
Figure 5: Max Headroom–disposable income after paying the mortgage plummets as prices rise
Faced with this level of potential debt-servicing costs, young would-be house-buyers are giving up on the dream of home ownership—and its attendant nightmare of debt peonage. They’re also signing up in droves to call for a political campaign against house prices by GetUp: see the Anti-FHOG, Anti-Negative Gearing, and Buyers Strike campaign suggestions (and read David Llewellyn-Smith’s excellent piece on it in the Fairfax press too).
A “Buyers’ Strike”, whether organized or not, is what will end the Ponzi Scheme of debt-inflated house prices, because like all Ponzi Schemes it only continues to work so long as new entrants outweigh those trying to cash out.
Those who are trying to cash out—existing house owners who are selling as speculators, or selling to realize a paper capital gain and upgrade to a more expensive house, or selling an investment property to fund their retirement—are now selling into a dwindling market.
The first effect of this imbalance between demand and supply is an increase in the time to sell, and in the number of unsold properties on the market. The second effect is a moderate fall in prices, once sellers who have to sell realize that they have to take a haircut. The third effect in Australia may well be an increase in sales by property speculators, if they see their capital gains diminishing the longer they hold on to their “investments”.
The Scheme could be kept alive by a reduction in interest rates to entice new buyers into the market—Australia’s floating rate mortgages make it much easier for the Central Bank to manipulate mortgage rates here than in the USA—but even there, there’s a limit. To get mortgage payments back to 20% or less of the after-tax income of a couple earning the average wage— without mortgage levels falling, and hence house prices falling—the mortgage interest rate would need to fall to 3%. This would require the RBA to drop its cash rate to zero from its current level of 4.75 percent.
Even if it does do that, it will take a very long time to do so—remember that Australia’s Central Bank was still raising interest rates well into the GFC (it increased the cash rate to 7.25% in March 2008, and only starting cutting it in September when the crisis was already a year old). Mortgages and house prices will have plenty of time to fall before that happens.
Figure 6: Australia’s Central Bank rate is almost 5% higher than the USA’s
This raises two questions: how much could house prices fall, and what could be the impact of a fall on the financiers of this Ponzi Scheme: the banks?
I’ll consider the second question in a post next week; for now let’s do something the “no bubble” crowd regularly refuse to do, and consider long-term data on house prices and incomes.
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House investors to lose interest
Source: Herald Sun
THE bull run in house prices is set to run out of steam as investors realise that credit costs are dwarfing anaemic yields, according to a senior banker.
National Australia Bank finance chief Mark Joiner yesterday said the property market was fully valued and likely to languish.
"I don't think property can go up from here," he said.
"It's at the top of the range on affordability. It's well out of line internationally."
Mr Joiner's comments followed a speech in which he called for the Federal Government to further bolster the savings rate by delivering tax concessions to savers.
"Eventually people (Bardon?) are going to realise that taking a 2 per cent pre-tax yield from renting a house that isn't going up in value doesn't make any sense, if you're paying 7 or 8 per cent for the associated loan," he said."
Mr Joiner said that despite the likely slowdown, banks were unlikely to sustain higher losses at the hands of defaulting mortgage customers.
The domestic share market was also likely to fall out of favour, he said, following an extensive bull run that had yielded "great stock market success (and) great property success".
"I talk to international investors and they really feel Australia has had its run," Mr Joiner said. "We had banks growing credit at 15 per cent per annum - that's not going to happen any more. We had a mining boom - a lot of that's priced in. I think they're looking elsewhere."
Speaking at a lunch in Melbourne, Mr Joiner said the Government should use its tax forum scheduled for October to "debate the importance of a stronger deposit market in Australia".
Tax concessions for savers would bolster the market, he said. "I would like to see (a situation where) interest earned on up to $20,000 of money on deposit was tax free, or taxed at a concessional rate."
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Perth house prices slump in difficult market
Chris Zappone
March 31, 2011 - 1:40PM
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The bad news for Perth's real estate market continues with the median house price dropping 1.9 per cent in the three months leading to February, according to the latest RP Data figures.
Perth was the second-worst performing state in the country, with only flood-hit Brisbane at 3.3 per cent producing a steeper drop.
The survey of the housing market shows the median house price in Perth was now $480,000, down four per cent compared to the same time last year.
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Median unit prices slumped even further, with a 4.5 per cent fall.
On a national scale, home prices remained steady in February as higher interest rates at the end of 2010 removed some of the market's fizz.
National city home values were unchanged last month, following a revised 1.5 per cent drop, seasonally adjusted, in January, according to the figures. January's fall was the biggest decline since 2005 when the index began.
"When you consider that Australian inflation was 2.7 per cent in the year to December 2010, in real terms Australian residential property values have been declining, which is a good outcome for prospective buyers," said RP Data senior research analyst Cameron Kusher.
The update from the property research groups noted: "A (near) double interest rate hike in November 2010 combined with numerous natural disasters has conspired to make the last three months difficult ones for Australia's housing market."
The Reserve Bank lifted official interest rates in November, a move made more costly for borrowers by the additional interest rate increases tacked on by commercial banks. The RBA will meet to decide on rates on Tuesday with the market rating the possibility of a rate cut as a 7 per cent chance, following the global instability in the Middle East and the debt worries in Europe.
In Melbourne prices slumped 1.8 per cent in the three months to February, seasonally adjusted, while they edged up 0.3 per cent in Sydney over the same period, according to RP Data-Rismark.
The national city median dwelling price in February was $459,000, RP Data said.
'Weak' clearance rates
Auction clearance rates have hovered around 60 per cent mark in Sydney and Melbourne in recent weeks, well down from the 80 per cent clearance levels seen last year. New home sales growth as measured by the housing industry has been modest, as well.
Australia's home prices are the source of contentious debate in much of the country, with housing affordability a key issue. An online campaign, for instance, is urging would-be buyers to boycott home purchases to help bring prices down.
In Victoria, official prices on houses and units fell 2 per cent in the September quarter, according to the state's Valuer-General, with some of the sharpest falls in upmarket suburbs.
"Auction clearance rates have been a little weak, the number of homes advertised for sale is at the highest level it has been since we started collecting this data, and other lead indicators, such as the time it takes to sell a home, and the margin by which vendors have to discount their properties, are climbing again after reaching a plateau in recent months," said RP Data's Mr Kusher.
He noted that market conditions certainly favour prospective buyers, giving them more ability to negotiate prices and get the best deals.
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Ireland leads world in house prices fall
By Niamh Hennessy
Wednesday, March 30, 2011
HOUSE prices fell in Ireland by more than anywhere else in the world last year.
a d v e r t i s e m e n t
Experts are now calling for a proper index of prices in Ireland, saying that without it we will never know when the market has hit bottom.
The Knight Frank house price index found that house prices fell here by 10.8% last year while they rose by 20.1% in Hong Kong, which was top of the list.
Globally house prices rose by 2.8% last year, led by Asia-Pacific (7.5%), the Middle East (5.3%) and South America (3.8%).
The weakest region was North America which saw no change in values in the previous 12-month period.
Besides Hong Kong the fastest risers were Latvia (16.9%), which is bouncing back from a 70% fall in prices during the credit crunch, and Israel (16.2%), which is still benefiting from considerable inward investment.
Head of research at Knight Frank, Liam Bailey, said: "Our main headline confirms relatively benign conditions — with average annual price growth across the world at a modest 2.8%.
"Of course this headline hides big regional and country level differences, but more concerning is the fact that this annual figure hides the fact that a growing number of countries are seeing negative quarterly price movements.
"Across an increasing number of European countries and also in the US, markets were weaker in the second half of 2010, following a brief revival in the previous 12 months."
The index said that it looks increasingly likely that Asian markets will escape a crash in prices.
"Across Europe and the US the lack of bank lending is likely to extend the recent period of price reversals," said Mr Bailey.
Director of the Irish Mortgage Corporation, Frank Conway, said that it looks Ireland will become the "laggards of Europe" in terms of price recovery.
"Even states such as Spain show some signs of stability, which is a concern for Ireland since both states suffered severe property price crashes and increases in the unemployment rates.
"In fact, on some levels, the Spanish employment situation is considerable worse than Ireland’s," he said.
Mr Conway said Ireland’s disadvantage is the "fuzzy nature" of recording of property price data.
"What we really need is a central, Government controlled database, where all transactions are recorded and published shortly after the completion of each month."
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10.8% plunge in Irish house prices
(UKPA) – 9 hours ago
House prices in Ireland are falling at a double-digit rate but property values in other countries are showing signs of stabilising, research has indicated.
The average cost of a home in Ireland dropped by 10.8% during 2010 as the market suffered from the fall-out of the country's economic problems, according to estate agent Knight Frank.
The drop was the biggest recorded for the total of nearly 50 countries looked at by the group. The pace of the falls are also showing little sign of easing, with property losing 3.5% of its value during the final quarter alone.
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First up there is a lot of emotion driving peoples thoughts. I recon the reality is people will have to think about causes and less about quick fixes. The world is crowed out, more so in Asia. Japan is in many ways trying to deal with reducing its population, but the present realities are such that it must choose the best of all the dredfull posibilities.
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27 March 2011 Last updated at 13:18 GMT
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Japan nuclear crisis: Radiation spike report 'mistaken'
breaking news
The operators of a stricken Japanese nuclear plant have apologised for a "mistake" in reporting a radiation spike 10 million times above normal.
Tokyo Electric Power Company, which has previously been criticised by officials for its handling of the crisis at the plant, said it got the readings wrong.
Despite the mistake, the radiation spike at reactor 2 was still very high and enough to evacuate workers.
The Fukushima Daiichi plant was damaged in the 11 March quake and tsunami.
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Covered bonds OK but banks want more
* Scott Murdoch
* From: The Australian
* March 25, 2011 12:00AM
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AUSTRALIA'S bank bosses have urged the government to take bolder steps to allow them to diversify their funding bases and ease cost pressures, following a decision to allow banks to issue covered bonds.
Commonwealth Bank's chief executive Ralph Norris said the government's decision to limit covered bonds to 8 per cent of net assets, after initial suggestions of a 5 per cent limit, was a positive move.
Covered bonds are a form of debt backed by specific assets.
Mr Norris said funding pressures were beginning to ease as Australians saved more, boosting the retail deposit component of bank funding. But he said the industry would lobby for more regulatory relief to provide alternative debt instruments to investors. The CBA, Australia's largest bank by market capitalisation and home lending, funds 60 per cent of its mortgage book from its retail deposits.
"I think we need to ask, does this solve the funding requirements of the Australian banks? Not in itself. We have to look at other opportunities for potential solutions," Mr Norris told the Credit Suisse Asian Investment Conference in Hong Kong.
Start of sidebar. Skip to end of sidebar.
Related Coverage
* Norris backs 8pc cap on covered bonds The Australian, 1 day ago
* Swan pushes ahead on covered bonds The Australian, 1 day ago
* Weak credit growth to cap bank rates The Australian, 8 days ago
* Covered bonds to cut banks' debt costs The Australian, 4 Feb 2011
* Westpac chief hits back at reforms The Australian, 21 Jan 2011
End of sidebar. Return to start of sidebar.
Mr Norris, who is also the chairman of the influential Australian Bankers Association, said the banks, regulators and Treasury were examining ways to increase the funding instruments available to the banks.
However, he gave little guidance as to whether the government would meet the banks' demands.
"At this point there's a lot of ideas being thrown about but until there is something more solid there's no point in speculating what might happen," Mr Norris told The Australian.
The government's decision on covered bonds brings Australia into line with other jurisdictions, especially New Zealand, which have allowed their banks to issue the debt instruments.
Westpac chief executive Gail Kelly said allowing covered bonds was one step towards easing the funding pressures on major Australian banks.
Mrs Kelly had advocated the government set the cap at 10 per cent of net assets.
"I welcome the decision, especially given that we are good to go so quickly," she said.
"I would have liked to have seen the cap a little higher, but 8 per cent is better than 5 per cent. It's a very good start."
Mrs Kelly said the bonds, which would be AAA-rated, would appeal to investors who bought Australian bank debt when it was covered by the government guarantee.
"There are some investors who can only hold AAA-rated debt," she said. Mrs Kelly said it was too early to say how much relief covered bonds would provide.
Despite support for covered bonds, the government is likely to test the banks' patience after it introduced legislation to crack down on price signalling.
Treasurer Wayne Swan said price signalling was bad for consumers and the laws would allow the ACCC to take action against the banks if they communicate future price movements to rivals.
"This type of anti-competitive price signalling can be just as harmful to Australian consumers as an explicit price-fixing cartel," Mr Swan said.
The major banks have condemned the legislation and argued they would be stopped from explaining interest rate moves and funding pressures to their customers.
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Why it Won’t Take a Shock to Knock House Prices for Six
by Kris Sayce on 24 March 2011
We thought housing articles couldn’t get any worse after reading the effort from HSBC’s Paul Bloxham last week.
But oh boy. We were wrong.
The Sydney Morning Herald’s Jessica Irvine has knocked out what is, in our opinion, the year’s worst housing bubble article – that’s a big claim when it’s still only March!
But it’s hardly surprising, seeing as much of the material appears to have been drawn from Mr. Bloxham’s half-baked effort last week. After all, if you take a badly baked cake and mix it up, what are you left with? That’s right, an even worse cake.
There’s no point taking apart the entire article, because as I say, it’s largely a rehash of Mr. Bloxham’s effort.
But I will go over a couple of points. I know, maybe it gets a little boring covering old ground. But as long as the mainstream press and banking insiders keep printing the same old drivel, I’ll keep printing rebuttals.
So if you’ve had enough of housing bubbles, give this section a miss and scroll down to see what Aaron Tyrrell has to say about cars and lithium.
Marvellous water views
If you’re still with me, let’s take a look at some of the schoolgirl errors made by Ms. Irvine:
Ms. Irvine backs Mr. Bloxham’s claim that Aussie houses are better quality than those overseas. Not surprisingly, no proof is given. Where is the data to prove this?
Then Ms Irvine claims Aussies houses have “marvellous water views”! And that’s why high prices are justified. What on earth does that have to do with anything? If “marvellous water views” are a house price crash preventer, then surely a lack of “marvellous water views” is a house price bubble preventer.
Yet the lack of “marvellous water views” didn’t stop house prices in Arizona forming a bubble.
Yes, people may desire a water view, but it doesn’t mean houses with water views can never be overpriced. The same dynamic of excessive credit and the belief that prices can never fall has played out in houses with and without views.
In fact, based on some of the discounting that’s happened among prime Sydney apartments on the Harbour, we’d say those properties with a “marvellous water view” are likely to be hit the hardest.
But those are just trivial things. Things she may now regret writing. Of more interest is the following comment:
“You see, house prices only fall when people are forced to sell their homes. Otherwise, households choose to simply remain in their home and wait things out. Property investors are loath to realise their capital loss.
“A true collapse in house prices would indeed require some large external shock – a doubling of unemployment or interest rates – to trigger the wave of forced home sales that it would take to provoke house price falls.”
Not true. People buy and sell houses all the time. People upsize and downsize. If someone wants to sell, they’ll sell… not just when they’re forced to.
All that’s required for house prices to fall is for people to think that house prices will fall. Just in the same way that share prices can fall when they reach a peak. Sellers look to get out first before everyone else gets the same idea.
But because it can take so long to sell a house, the stock of housing on the market can build up quickly. And before sellers know it, they’re no longer the only house on the street for sale… they’ve got competition. And as you know, in all areas of an economy, competition tends to drive down prices.
And let me tell you something, there’s a whole bunch of competition on the market right now.
Competition among sellers
This week SQM Research sent out its latest analysis of housing stock on the market. As you’ll see in the table below, there’s been a huge increase in the number of houses up for sale:
Source: SQM Research
In fact nationally there has been a 46% increase in the supply of housing for sale, compared to the same time last year… 46%!
Talk about a housing glut…forget the housing shortage lies. Australia has a huge excess of housing. Incidentally, we did hear our old pal Peter Switzer banging on about the housing shortage last night on Sky Business Channel… it seems you can’t keep a good excuse down.
But what will the glut do to prices? That’s right, push them down thanks to increased competition. I can picture buyers now, “Why should I pay $500k for your house when there’s one down the road for $480k…”
Forget “large external shocks”, or a “doubling of unemployment or interest rates”, all it needs is increased competition… and we’ve got it.
But Ms. Irvine also ignores the fact that different sellers are in different circumstances. Someone who bought a house for $100k, may be happy to accept $300k, whereas someone who bought for $350k may not be so happy.
But that won’t stop the first house from selling. And it won’t stop house prices from falling just because someone chooses to hold out for a higher price – which may never arrive if buyers can get something similar for cheaper.
You see, the idea that something major has to happen in order for prices to fall is nonsense. There doesn’t need to be a big bang catalyst to spark a house price rout.
All that’s needed is for the fundamentals of supply, demand, price and quantity to play out. And that’s happening right now.
Interest rates are up 20%
But what about the idea that interest rates need to double? Not true. When interest rates are kept artificially low, it sucks in a whole bunch of borrowers. Those that wouldn’t otherwise have borrowed are drawn into the market.
As with anything, artificially low interest rates create malinvestments.
And as Ms. Irvine correctly points out, it encourages lower lending standards too.
Because so many borrowers have been sucked in on low interest rates, it distorts the market. But at some point the demand for borrowing will begin to dry up, and investors who would otherwise have put savings in the bank will look elsewhere for higher returns.
That creates a problem for a Ponzi banking system. Banks need to keep filling the hopper. They need more deposits and more borrowing to keep the Ponzi finance flowing.
When that slows down – as it has – the banks need to raise interest rates. Simply so they can encourage savers to deposit money, or to encourage investors to buy their bonds.
Remember all the crazy offers the banks were making to attract deposits last year? Yeah, of course you do. That’s Ponzi finance in action. It was an indicator of the market starting to tip over.
But here’s the thing. If the bank has lowered its lending standards and kept interest rates low for too long, interest rates only have to rise marginally in order for it to have a big impact on borrowers.
It’s just like leveraged investing. It works great when things are going your way… and… not so great when things are going against you.
For instance, the ANZ Bank reckons the median house price is $559,000. Let’s say someone has taken out an 80% mortgage, borrowing $447,200. An interest rate of 5% would mean repayments of $2,401 per month.
But should the interest rate increase to 7%, repayments increase to $2,976 per month.
That’s an extra $575 per month of after-tax money.
And if interest rates go to 8%, then you’re looking at monthly repayments of $3,282… an extra $881 per month.
“Oh, that won’t happen,” the spruikers say. Really? Too late, we’re almost there. Mortgage interest rates got down to about 5% in 2008. Today they’re above 7%. And that’s why prices are on the way down. That’s about a 20% increase from the low point.
“Oh, but people are ahead on their mortgages, the RBA says so.” Don’t trust those figures too much. Sure, plenty of people would have gotten ahead on their mortgages. Especially as interest rates dropped in 2008 and 2009. But trust me, it won’t take long for that benefit to be wiped out.
Not when repayments are an extra $700 or $800 per month.
And don’t forget, those that are ahead are those that had mortgages prior to 2008… before interest rates were cut. Those that were suckered in by the first-home buyer’s bribe won’t have any buffer, because they were conned into borrowing as much as they could afford, just at the point when interest rates were at the low.
Any interest rate increase will hurt them harder. Each 0.25% rise in interest rates is an increase of 5% increase for someone who took out a mortgage when rates were at 5%.
Whereas it’s only a 3.5% increase for someone who took out a mortgage with rates at 7%. Believe me, it may not seem like much, but it makes a whole lot of difference when you’ve overextended yourself with a giant mortgage.
Unemployment may be higher than you think
But what about the unemployment rate. Again, don’t get too excited. Sure, the unemployment rate is 5%. But remember who counts as employed… anyone doing more than one hour of work per work… yeah, those people are gonna help prop up house prices!
For a start, consider that today about 28% of all employed people work part-time.
In 1978, it was only about 14%.
What does that tell you? It tells you there has been a relative increase in people working part-time. That much is obvious.
What else does it tell you? Well, we’re not a labour force analyst so we can’t say for certain. But we can take a stab at a guess or two…
Granted, more flexible working arrangements have played a part. But we’ll guess it also means that people are now counted as part of the permanent labour force when previously they weren’t… therefore distorting Australia’s unemployment rate.
You can see that distortion in the number of unemployed people and the number of people not in the labour force. Both these numbers have only increased by about 50% over the past thirty-three years.
In normal circumstances you’d expect those numbers to increase as the population increases.
But while there has been an increase it has been nowhere near as much as the increase in the number of people in the workforce. Those employed full-time has more than doubled. But importantly, the number of people working part-time has increased more than three-fold.
In other words, fiddling of the employment statistics is giving a distorted impression of the strength of the Australian economy.
Both of these facts tell you it won’t take a major shock to interest rates or unemployment to knock house prices down. All it will take is a marginal move in either – thanks to the increased leverage from low interest rates.
Nothing I’ve written will stop the spruikers from carping on about the invincibility of the Australian housing market. House prices are falling around their ears, yet still they make the same old tired excuses.
But really, the spruikers must learn to do better. And if they insist on egging on the mainstream press to write anti-bubble stories, they should give them better and more convincing material than rubbish about “marvellous water views”.
Cheers.
Kris Sayce
For Money Morning Australia
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"In turn, the government has guaranteed savers that their retail deposits will be refunded if the banks go bust." I think the guarante runs out at the end of this year...... In all probabily the government will extend it........... the new sercured bonds give preference to the holders of these bonds over the share holders......... if I was a bank share holder I would be concerned allso Moodies have just given a negitive out look for Australian banks.
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Pond 321, thanks for that you have your finger on the pulse
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February Home Sales Plummet As Housing Market May Have Further To Fall
Home Sales
First Posted: 03/21/11 12:22 PM Updated: 03/21/11 03:32 PM
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Read More: Economic Recovery, Existing Home Sales, Home Prices, Home Sales, Housing Market, National Association Of Realtors, Business News
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Sales of previously owned U.S. homes fell sharply in February, after several months of increases, according to a report released Monday, in an another blow to a sagging housing market that may have further to fall.
Existing home sales dropped 9.6 percent from January to February to an annual rate of 4.88 million units, according to the National Association of Realtors, an industry group. Compared with the same period last year, sales fell 2.8 percent. Home prices fell to their lowest in nearly nine years.
Although economists expected a decline from January's annual rate of 5.36 million units sold -- economists polled by Reuters expected February sales to fall 4.0 percent -- the steepness of the drop came as a surprise. The last several months of housing market data from NAR showed glimmers of recovery, but many analysts now feel that the downward trend is clearly reasserting itself.
"Expectations had looked for a decline, but a much more modest decline than what we saw," said Miller Tabak economist Dan Greenhaus. "I think what we're seeing is a complete and total reversal of any strength we saw as a result of the first time homebuyers credit."
In a March 15th statement, the Federal Reserve acknowledged that while the "economic recovery is on a firmer footing," the housing market "continues to be depressed."
Home prices have fallen 31 percent since peaking in 2006, according to the Case-Shiller 20-city index released in February. (For the past several months, Case-Shiller has indicated that home values are dwindling in nearly every American market.) Last year, nearly 2.9 million homes received foreclosure notices -- a 2 percent increase from 2009 -- according to data collected by RealtyTrac, an online foreclosure market. More than a quarter of all U.S. home sales last year were of foreclosed properties.
"This decline basically wiped out about half of the gains in home sales that were made in the previous 3 months," said Celia Chen, an economist at Moody's Analytics. But, Chen went on, if you look at the broader trends, there are some encouraging signs. "The pace of sales over three months is over 5 million," Chen said. "So that's better than the pace that occurred in the second half of last year."
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For Greenhaus, the report suggests that not only is a double-dip in the housing market at hand, but that there never really was a bounce to begin with.
"What the report does do is reinforce the housing weakness story," Greenhaus said. "With each new housing report, we're getting further corroboration that there really is no strength whatsoever in the housing market."
The one bright spot Greenhaus sees in the report is the absolute number of homes available for sale, which peaked in July of 2008 and has been steadily moving lower.
"At the end of the day the weakness in the housing market is at its core a supply and demand problem. We are working through that inventory, and that's a good thing," Greenhaus said.
At Moody's Analytics, economists remain optimistic about a recovery, despite the harsh February drop.
"Yes there are many risks out there," Chen said. "But our baseline outlook is that sales will pick up this year. And what's driving that outlook is our expectation that job growth is going to continue picking up as well. And jobs are of course very important for driving demand for homes."
According to the Bureau of Labor Statistics, In February the unemployment rate hovered near 9 percent with 13.7 million Americans officially out of work.
"I think there is sort of a general thougtht that the housing market is turning: it's gonna turn, it's gonna turn, it's gonna turn," Greenhaus said. "And with each passing month that turns out not to be the case. The insistence that the housing market is just about to turn has led to more incorrect than correct forecasts."
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Why negative gearing has failed
Unconventional Economist
Published 6:27 AM, 22 Mar 2011 Last update 10:30 AM, 22 Mar 2011
MacroBusiness
A key reason why I started writing was because the quality of commentary and debate around housing and other important issues had deteriorated so badly that the media had become little more than a mouthpiece for vested interests. Lazy journalists were writing puff piece after puff piece parroting the latest press release or one-eyed piece of research from real estate spruikers, banks and other so-called ‘experts’.
My main goal was to add a contrarian perspective on housing-related issues in order to restore some balance to debates about housing and, in doing so, exert pressure on the media to lift their editorial standards and the government to implement evidence-based policies aimed at achieving affordable housing and financial stability.
A key focus has been negative gearing. Long-time readers will know that I have been lobbying to restrict negative gearing on the grounds that it is inequitable and inefficient, it erodes housing affordability and it does not improve the availability or affordability of rental accommodation. Readers can find my analysis on the impacts of negative gearing here and here.
As a quick primer, negative gearing is a form of leveraged investment in which an investor borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan. A negative gearing strategy can only make a profit if the asset rises in value (capital gains) by enough to cover the shortfall between the income and interest that the investor suffers.
Under Australia’s taxation system, negative gearing rules allow investors in both property and shares to write-off the cost of borrowing used to acquire an asset as well as other holding costs against all income, not just the income generated by the asset. At the same time, following changes to capital gains tax in 1999, capital gains earned on assets held for more than 12 months are taxed at half the rate of other income.
According to the Reserve Bank of Australia, "the taxation treatment [of residential investment property] in Australia is more favourable to investors than is the case in other countries". In Australia, there are no restrictions on the ability of taxpayers to negatively gear investment properties. That is, there are no limitations on the income of the taxpayer, on the size of losses, or the period over which losses can be deducted. By contrast, in the United States and Canada, there are limitations placed on negative gearing, whereas it is not permitted at all in the United Kingdom.
In July 1985, as part of a broader tax reform package, former Treasurer Paul Keating 'quarantined’ losses from negative gearing by stopping them from being deducted against other income. However, after intense lobbying by the property industry, which claimed that the changes to negative gearing had caused investment in rental accommodation to dry up and rents to rise, Treasurer Keating restored the old rules in September 1987, thereby once again permitting the deduction of interest and other rental property costs from other income sources.
One of the property industry's most ridiculous claims is that negative gearing stimulates housing supply. The below charts confirm that investors are overwhelmingly choosing to invest in existing dwellings and, therefore, that they are not adding to rental availability or affordability.
First, consider the percentage of investor mortgages going to existing dwellings versus new construction.
[Click to enlarge the image]
click the image to enlarge
As you can see, the share of investment in new construction has fallen for the past 25 years, from around 60 per cent in the mid-1980s to 6 per cent currently. So despite the favourable tax treatment provided to property investors in Australia, for every 17 investment homes purchased in December 2010, only one was a new dwelling that actually added to housing supply and rental availability.
Second, as shown below, investor loans for new construction have remained relatively flat for the past 25 years whereas loans for second-hand properties surged from around 2000 onwards, coincident with the reduction in capital gains tax.
[Click to enlarge the image]
click the image to enlarge
As a comparison, the ratio of investor lending for existing dwellings to new dwellings was around 2:3 in 1985; 7:1 in 2000; and is now 16:1.
The key point to take away is that negative gearing has not improved the availability of rental accommodation. Why? Because investors that buy existing homes do not increase rental availability since they do not add to overall housing supply and merely turn homes for sale into homes to let. They also do not address the shortage of rental accommodation, because the reduction in the supply of homes for sale throws potential owner-occupants onto the rental market.
These views were recently echoed by Fairfax's Michael McNamara in an analysis that, in my opinion, pushes all the right buttons. Importantly, he refutes a key industry claim that rents would rise dramatically in the absence of negative gearing.
McNamara refers to a study of mine from June 2010. In it I showed the below chart (updated) illustrating real (inflation-adjusted) rents for the Australian mainland capital cities. The first vertical dotted black line shows the beginning of the ‘ban’ on negative gearing (July 1985), whereas the second vertical dotted black line shows its reintroduction in September 1987.
[Click to enlarge the image]
click the image to enlarge
Now if it is true that the abolition of negative gearing by the Hawke/Keating government in July 1985 caused investment in rental accommodation to dry up and rents to rise, you would expect rents to rise significantly in each capital city, since negative gearing affects all rental markets equally.
But this is clearly not the case. Rather, between July 1985 and September 1987, rents rose in both Sydney and Perth, were flat in Melbourne and Adelaide, and fell in Brisbane. Based on this analysis, the claim that negative gearing reduces rents is false.
The study is also backed up by research by Saul Eslake, then chief economist at ANZ Bank. Using Real Estate Institute data (as opposed to my ABS data), Eslake also found that rents went up in Sydney and Perth but that there was no discernible increase in the other state capitals.
Based on the above evidence, there is clearly little merit in Australia's tax concessions for property investment. Negative gearing and the CGT concession do not provided any incentive to invest in new housing because they are available for both existing homes as well as new ones. And since these concessions do not increase housing supply, they also do not put downward pressure on rents.
Rather, the increase of investment in existing dwellings has merely significantly added to housing demand, reduced housing affordability, and displaced potential owner-occupiers, forcing them onto the rental market. While the cost to the taxpayer is immense, the costs to younger Australians, in particular, from reduced housing affordability and increased debt levels is even greater.
The situation that has arisen in Australia, where a substantial part of the population never own their own home or have to go deep into debt to achieve home ownership, makes a complete mockery of claims about 'rising living standards' and Australia having a 'strong economy'. Successive governments have allowed an appalling situation to develop in Australian society, and new approaches are desperately needed.
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He has a blog www.moneyandmarkets.com mostly its about telling people how he "told you so" and how "if you pay me I will help you make $" . but I recon he may be correct about the dollar unless interest rates go up big time the USD in doomed.
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Why Property Investing is for Mugs
Tuesday, 8th March 2011
Melbourne, Australia
By Kris Sayce
* Why Property Investing is for Mugs
Have you ever wondered why property investors just can’t bear to admit that house prices could fall?
I mean, ask any other investor and they’ll admit it’s possible for their favourite asset class to drop.
It doesn’t matter whether they’re share, gold, bond or art investors, every last man jack of them will say, “Prices can fall as well as rise.”
But not property investors.
Property prices always go up is their mantra. Even in the face of evidence to the contrary, they still deny it.
Well, there’s a simple reason for their denial, which I’ll get to in a moment. First, as we did a bit of channel hopping on Foxtel last night, we stumbled on Your Money, Your Call on Sky Business Channel.
Maybe, if we’re kind, we can see a few cracks in the property-always-goes-up-mantra. Even so, it’s like drawing blood from a stone to get property experts to concede house prices may actually fall.
Even so, the wording is so cryptic that one of the experts admits there has been a price correction but not that prices have fallen. Only in the world of property does a price correction involve prices going up!
The following is a transcript of the host, two property experts and Adam from Willoughby – a caller to the show:
Adam: “How much further do you think the property market could come off? We have recently sold our property in Willoughby and we’ve taken over a 10% hit on our property… we had it valued last February and we recently sold it, in fact it’s over, a greater than 10% hit, and in some of the surrounding suburbs people are seeing in excess of 20-30% devaluations on their properties. That probably hasn’t escaped to the press yet but it is significant, and in talking to a lot of… the real estate agents, they’ve only really got one buyer on most of these properties. So I’m just wondering whether you have any view in terms of how far it could fall?”
Before we go on, we like Adam’s reference to reports of price falls not having “escaped to the press yet.” Of course he should have said it “hasn’t escaped from the press yet.”
The press is just as keen as the property spruikers to keep price falls under wraps. Even when they do run a prices-falling story, it’s soon followed by a prices-to-the-moon story – just to even things up. But anyway, back to the show…
Host: “I don’t see any evidence of significant falls in the lower north shore of Sydney, what are your thoughts?”
Expert 1: “No, I do a lot of work in the lower north shore, a lot of work. And in fact I had business in Willoughby and I was auctioning a couple of properties in Willoughby on… Saturday, and we didn’t sell one of them I grant you, but I have not personally seen a drop in the lower north shore. We have experienced I believe a drop in the northern beaches area, but that’s probably been the case for the last three to four years. What has happened, there has definitely been a slight correction, whilst I don’t think there has been a drop I think that the rapidity of the growth has certainly come off the boil a little, but the thing about Willoughby and those lower north shore areas – in my humble opinion – is that they are the most convenient spots in Sydney to get around. They offer great lifestyles and really when you look at Willoughby for the size of the blocks that you get, the size of the homes you get, you compare them to the inner west or the inner east and they’re still very good value in Willoughby so I can see that the lower north shore will continue to go along OK, that’s my absolute thought on that one.”
Host: “Lisa Montgomery would you agree? This goes back to the great variability you see in Sydney, particularly near the harbour.”
Expert 2: “Yeah, look I do agree. And I think it’s interesting. This is your family property you’ve just sold… if you’re going to be selling and buying, yes you might have lost a little bit in that correction but if you’re buying in the same market you may be able to pick up a little bit with that next purchase as well. So, you know buying and selling in the same market is OK, it’s when you sell and you hold for some time that that correction could cause you some difficulty.”
Expert 1: “And Adam, you did use the word valuation and that’s not an exact science… I really have to say to my great friends out there who are valuers, you know it’s a very difficult job particularly in a market that is decreasing a little, we’re looking at valuations which are six to twelve weeks behind and is often trying to catch the tail up so, really I think valuations and particularly if they’re only estimates from agents, you’ve got to be very careful, you really do.”
For a start, buying and selling in the same market isn’t OK if you’ve made a loss.
A loss is a loss. It doesn’t matter if the new property you’ve bought is cheaper, you’ve still made a loss on the property you’ve sold. If you buy something for $1 and sell it for 50 cents, you’ve made a 50 cent loss… even if you buy something else for 50 cents.
And secondly, it’s a bit rich for a real estate guy to have a pop at valuers for getting house values wrong.
But anyway, as you know, financial advice and property spruikers don’t always go hand-in-hand. As the following example shows.
Clear evidence of why property spruikers need prices to go up was in the “top tip” from property guru Chris Gray on his Sky Business Channel show last Friday:
“Before you buy an investment property you’ve got to work out your numbers beforehand. So let’s just say you bought a typical $500,000 investment. That should rent out at about $450 a week. And that equates to about $22,500.
“Now let’s just assume you borrowed 100% of the funds at say 7% interest, that equates to $35,000 in mortgage repayments. Now strata fees and other expenses are going to be about 1% of the property value, so that’s going to be about $5,000 a year.
“So if you add all those numbers up, a property of about $500,000 will cost you $15,000-$20,000 in cash flow.
“So why would you ever buy an investment that costs you money? Well, if that property rises on average by five or ten per cent a year it’s going to rise by $25,000-$50,000 which means that your net return is anywhere from $10,000 to $40,000. So the real key to making money from real estate is to cash flow it in the short-term and then you’ll make money in the long-term.”
There you have it. Exactly as we’ve told you all along. Property investors buy housing for one reason – capital growth. The income to them is irrelevant apart from the fact that it helps reduce their annual expenses.
The fact is property investing involves losing money on a week-by-week basis in the hope – or gamble – that capital growth exceeds the costs.
Another way of looking at it is that when you buy a property all you’re doing is making a down payment… the first instalment if you like. Then each year you have to make extra instalments – otherwise known as interest charges.
What that means is the purchase cost of the property is rising all the time. The cost of the house keeps rising even if the value of the house stays the same or – heaven forbid – falls.
And don’t forget, most of these 100% mortgages are interest only. So the principal never falls. If you’re losing money on the interest repayments, and you’re not actually paying anything off the loan, your only hope is that house prices go up by the 5-10% the spruikers claim is “normal”.
But it isn’t normal. And that’s the problem. No investment has a “normal” return. Returns vary all the time. Sometimes returns are good, and sometimes they’re bad.
Returns vary based on something called risk. I know that word isn’t familiar to property investors. As far as they’re concerned there’s no risk to property investment. Only there is… lots of it.
You only need to ask share investors how risky a market can be after years of being told there’s no risk. Share investors saw in 1987, 2000 and 2008 how things bad can be.
And hopefully most share investors aren’t now making the same mistakes that many made leading up to those dates.
But I’m afraid property investors haven’t learnt their lesson. And it’s not necessarily their fault.
For most of them all they’ve seen is house prices going up. Even though they’re only looking at a short timeframe of twenty-odd years or less, they’ve been trained to believe house prices rise – regardless of anything that happens to the economy.
But it’s not just what they’ve seen. It’s what they’ve been told as well. Trouble is, they’ve learned from the vested interests in the property sector.
Vested interests who just can’t admit house prices could and will fall. Because as soon as they admit it they’ll let the biggest investing cat out of the bag in history: that property right now is a terrible investment.
The fact is, paying more for something than it returns isn’t an investment, it’s an expense. You’ll find that in any Investing 101 manual.
But still, even though the Australian housing market is falling down around them, the property spruikers and experts tell you to look the other way… there’s nothing to see.
They’re wrong. There is something to see. It’s the beginning of the collapse of the Australian housing bubble.
A bubble that’s maxed out on easy credit fed to gullible borrowers by the banks for the past thirty years.
If you want further proof of the unviability of property investing, just take a look at page three of today’s Australian Financial Review (AFR). Under the headline “Bargain time for luxury pads”, is a sorry tale of property investing gone wrong.
It would be a mistake to think these losses only happen to bigwig fatcats who have overspent on trinkets and real estate. Because the scale of these losses – in percentage terms – is exactly the same losses the average property investor is making right now…
And it’ll only get worse.
Quite frankly, the way I see it, it won’t be long until the AFR has a headline saying “Bargain time for suburban housing”.
Only then might it be time to get your chequebook ready to buy property. But right now property investing is a game for mugs… a very expensive game for mugs.
Regards,
Kris Sayce
for Money Morning Australia
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Construction slumps for nine straight months
By finance reporter Rebecca Hyam
Posted 9 hours 43 minutes ago
Building construction site with wooden beams in house roof at Gungahlin in Canberra's north
The Housing Industry Association says policy changes are needed to encourage home building (ABC TV News - file image)
Australia's building sector contracted again in February, but there was a slight easing in the pace of decline.
The Australian Industry Group's Performance of Construction Index rose 4.4 points in February to a reading of 44.6.
However, that is still well below the key 50-point level indicating growth.
The index shows weak demand and tight credit conditions continue to affect work in the sector.
The construction industry has been in the red since June last year but, last month, there were some indications of improvement in certain areas.
A lift in new orders for engineering construction helped push that sub-sector 13.3 points higher, but that was coming off a particularly low base.
The rate of contraction also slowed in commercial construction and apartment building.
The Australian Industry Group's director of public policy Peter Burn says that was an encouraging development.
"Apart from house building, which continues to disappoint, there are some signs that activity in the other sub-sectors may improve in the months ahead," he said.
"The expansion in activity recorded by engineering construction, and the slowdown in the pace of decline of activity in apartment and commercial construction, provide some encouragement.
"The forward-looking new orders indicator points to a similar pattern of improvement."
The index also showed the ongoing mood of caution among consumers was continuing, with house building falling 3.1 points.
"The fall in housing new orders is particularly disappointing and suggests the slump may still have some way to run," Dr Burn said.
"The decision last week by the Reserve Bank to keep interest rates on hold for the time being may assist in lifting confidence in this area."
The Housing Industry Association says other economic indicators, including building approval figures for January, which were published last week, point to considerable weakness in residential construction.
HIA senior economist Andrew Harvey says those figures showed the largest fall in total dwelling approvals in more than eight years.
"It's increasingly clear that the 2010 interest rate hikes have battered the housing industry," he said.
"What we need after so many consecutive months of contraction in residential building activity is serious reform to the supply side of the housing market.
"This reform necessarily includes the removal of stamp duties on new homes and much faster land releases processes, without which the pressure on families from higher house prices and rents is simply going to worsen," Mr Harvey said.
Australia Faces Its Demons
in House prices and the economy
Posted
Australia Housing Cracks Emerge Across Queensland Coast
Queensland Coast Slips as Australia Housing Cracks Emerge
An aerial view of Surfers' Paradise, a northern suburb of the Gold Coast in Australia. Photographer: Patrick Hamilton/Bloomberg
Queensland Coast Slips as Australia Housing Cracks Emerge
Riverfront residential properties are framed by highrise towers in Surfers' Paradise, a northern suburb of the Gold Coast. Photographer: Patrick Hamilton/Bloomberg
Queensland Coast Slips as Australia Housing Cracks Emerge
A worker stands in front of Soul, a residential tower under construction in Surfers' Paradise, a northern suburb of the Gold Coast. Photographer: Patrick Hamilton/Bloomberg
Queensland Coast Slips as Australia Housing Cracks Emerge
A construction worker walks above an advertisement for Soul, a new residential tower in Surfers' Paradise, a northern suburb of the Gold Coast. Photographer: Patrick Hamilton/Bloomberg
Queensland Coast Slips as Australia Housing Cracks Emerge
Cranes operate on the building site of a new highrise building in Surfers' Paradise, a northern suburb of the Gold Coast. Photographer: Patrick Hamilton/Bloomberg
Queensland Coast Slips as Australia Housing Cracks Emerge
Surfers walk along the main beach in Surfers' Paradise, a northern suburb of the Gold Coast. Photographer: Patrick Hamilton/Bloomberg
Apartment prices in the luxury beachside Australian town of Noosa Heads have tumbled by a fifth since 2008 as cracks emerge in a housing market that’s so far escaped the rout seen in the U.S., U.K. and Ireland.
The median apartment price in the tourism and retiree town 150 kilometers (93 miles) north of Brisbane has slumped 21 percent in three years to A$570,000 ($594,000), according to the Real Estate Institute of Queensland. Sales have more than halved across Queensland state’s Sunshine coast, home to “Crocodile Hunter” Steve Irwin’s Australia Zoo, and the Gold Coast, known for its surfing beaches and casinos.
“We have a very overvalued housing market and even a small adverse shock can be magnified by a large adverse impact on property values,” said Gerard Minack, Sydney-based global developed markets strategist at Morgan Stanley (MS), who asserts Australian home prices are as much as 40 percent overvalued. “We’re seeing that now in parts of Queensland.”
Australia’s housing is the most overvalued in the world, the Economist newspaper said last month. The country had the most unaffordable homes among English-speaking nations, with the Gold Coast and Sunshine Coast markets near the top, according to a Jan. 24 report by Belleville, Illinois-based consulting company Demographia, which compared 325 housing markets in seven developed economies.
The house price index of Australia’s eight capital cities has gained 15 percent since the first quarter of 2008, according to the Australian Bureau of Statistics. Prices gained 16 percent in Sydney and 26 percent in Melbourne.
Unlikely to Spread
Economists and analysts at organizations including RP Data, Australia & New Zealand Banking Group Ltd. (ANZ) and Westpac Banking Corp. (WBC) have said the weakness in home prices along Queensland’s southeastern coast is unlikely to spread as low unemployment and a shortage of homes underpins prices.
In contrast, on the Sunshine Coast, where Noosa Heads is located, and the Gold Coast a lot of stock hit the market at the same time that the number of people moving there slowed, said Cameron Kusher, senior analyst at Brisbane-based real estate researcher RP Data. The two regions are among Australia’s most popular attractions, drawing more than 1 million overseas visitors last year.
Across the Sunshine Coast, sales halved from a 10-year monthly average to 476 in December, the latest month for which figures are available, according to RP Data. On the Gold Coast, transactions dropped to 757 in December, after averaging 1,954 a month over the past decade. Floods inundated three quarters of Queensland in late December and early January.
‘Cutting Prices’
“A lot of sellers are cutting prices and are preparing to meet the marketplace,” said John Newlands, Gold Coast spokesman for the real estate institute and principal at an LJ Hooker franchise in Surfer’s Paradise, a northern Gold Coast suburb that’s home to the world’s tallest residential tower. “In 2011, more investors will start to come back into the marketplace as prices fall.”
Median prices across Australia’s eight capital cities were flat in February at A$459,000, RP Data said, as the Reserve Bank of Australia’s seven rate increases between October 2009 and November 2010 damped demand.
For the year to March 2012, prices are expected to climb by a “modest” 0.6 percent, according to a survey by National Australia Bank Ltd. released April 5.
Overvalued?
Some 63 percent of Australians consider the housing market overvalued, a survey of mortgage holders commissioned by QBE Insurance Group Ltd. (QBE)’s lenders mortgage insurance division released yesterday shows. More than a tenth of borrowers said they would find it hard to repay their home loans if the central bank raises interest rates by a quarter percentage point, and almost a quarter would struggle with two increases, the survey found.
Traders bet Reserve Bank of Australia Governor Glenn Stevens will raise the benchmark interest rate by 26 basis points, or 0.26 percentage point, over the next 12 months, according to a Credit Suisse Group AG index.
While prices in Sydney and Melbourne, the nation’s biggest cities, hold up, in the northern city of Darwin, home prices declined 9 percent in the three months ended February, and in Brisbane they fell 3.3 percent, according to RP Data.
Housing finance approvals dropped in February and loans to first-home buyers dropped to 14.9 percent, the lowest proportion of home borrowing since 2004, the statistics bureau said on April 6, as higher property prices and rising rates made purchases more difficult.
‘Opposite’ Market
Median apartment prices on both the Sunshine Coast and the Gold Coast fell 1.3 percent to A$370,000 in the three months to December from the previous quarter, RP Data’s latest figures for the two regions show.
The Gold Coast market is the “opposite” of other parts of the country, and the falling prices there won’t be replicated Australia-wide, said Harry Triguboff, founder and managing director of closely held Meriton Pty, Australia’s biggest apartment developer, who is building the 1,165-unit Brighton on Broadwater apartment development on the Gold Coast.
“There’s not enough work there,” said Sydney-based Triguboff, who has no more plans to build in the area once the project is completed. “So here, it’s overcrowded, and there, there’s not enough demand.”
About 6.7 percent of the Gold Coast’s population was unemployed as of February, up from 5.7 percent six months ago, according to the Australian Bureau of Statistics latest data. The Sunshine Coast’s unemployment rate rose to 7.4 percent from 6.6 percent in September. Across Australia, unemployment fell to 4.9 percent in March.
Dollar Parity
The Australian dollar reached parity with its U.S. counterpart in October for the first time since 1982 and has been hovering at record levels since then. It traded around $1.0470 recently and gained 37 percent in the past two years.
“With a strong Australian dollar, Australian tourists are heading overseas and inbound tourism has been fairly flat,” said David Cannington, a Melbourne-based property economist at ANZ Bank. “That’s what has affected demand for housing, especially serviced apartments, in the Gold Coast and Sunshine Coast markets.”