Australia Faces Its Demons

[Guest]

http://www.smh.com.au/opinion/society-and-culture/house-prices-on-shaky-foundations-20110308-1bltu.html

Nice to see the subject getting some main stream media attention at last.

[blue skies]

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

[blue skies]

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.

[JonoP]

I must admit, I have been watching recent events in the Aussie mortgage market with a sense of amazement. Recent developments include:

1. The introduction of ‘covered bonds’

Aussie banks are heavily dependent on securing funding from abroad. Without this funding, they will have no money to lend. Unfortunately, the rest of the world thinks that there is a property bubble in Australia. So foreign banks are reluctant to lend yet more money to the aussie banks to inflate the bubble further. To counter this ‘misconception’ a number of the big banks over here have undertaken global tours with the intention of persuading foreign banks that aussie banks are low risk. This has not worked. Foreign banks are still reluctant to lend, even though the interest rates in Australia are extremely attractive (7%+). The aussies banks will be in trouble if they cannot keep lending, they need to keep the bubble pumped up. If mortgage finance dries up the whole house of cards will come tumbling down.

So, to get around the foreign funding issue, they put pressure on the government to allow covered bonds. Covered bonds, for the uninitiated, basically allow the bank to ‘guarantee’ their mortgage backed bonds with other assets. So, in simple terms, the banks can now use the cash in retail depositors bank accounts to guarantee against default of the banks mortgage bonds that are secured against property (what could possibly go wrong with this model….?). In turn, the government has guaranteed savers that their retail deposits will be refunded if the banks go bust. So what we indirectly have here is the state underwriting the banks mortgage bonds. The Labour government will do anything to keep the Ponzi scheme rolling so that people feel ‘rich’ and stay voting Labour….

2. Banks increase ‘competition’

Now that they have access to this shiny new funding, the banks want to lend it out. Being Australian, the only thing they want to lend against is residential property. So, they have decided to go after each other’s mortgage customers. All well and good you might say.

For a long time, there have been accusations that the big four banks over here have acted as a cartel. The banks, of course, furiously deny this. Yet they quite obviously do. Now, one of the banks (NAB) has declared that they have broken ranks with the other three and will be offering dramatically more attractive deals to gullible debt slaves, I mean mortgage holders.

They have launched an eye watering bad advertising campaign telling the other three banks that ‘they are dumped’. I am struggling to see how NAB can credibly say that they were NOT previously colluding with their competitors if they have now decided to ‘dump’ them. How does that work? Nobody seems to ask that question over here though.

3. Where we are at

I think that we have now started to move towards the end game. The banks have access to a lot of funds, but very few people are left to (responsibly) lend to. So we are at a ‘Northern Rock in 2005/6’ stage where the banks will chase anyone with a pulse and lend at increasingly high LTVs. You can already get mainstream 95% LTV and 100% LTV are offered by specialist brokers.

Even the 95% loans are dodgy. Technically, the buyer needs to ‘save up’ a 5% deposit but in reality the government provides the FTB with a $7K first home buyers deposit and apparently some brokers do not ask if the remainder of the 5% deposit is also borrowed…………

My guess is that LTV will creep up and up as the ‘pool’ of potential customers gets smaller and smaller. The ‘officially stated’ line will probably remain at 95% but we will see the usual cheats/dodges to get around it.

I give it another couple of years before it all goes pop, maybe sooner if there is another shock to the world credit markets.

[7clubs]

I must admit, I have been watching recent events in the Aussie mortgage market with a sense of amazement. Recent developments include:

1. The introduction of ‘covered bonds’

Aussie banks are heavily dependent on securing funding from abroad. Without this funding, they will have no money to lend. Unfortunately, the rest of the world thinks that there is a property bubble in Australia. So foreign banks are reluctant to lend yet more money to the aussie banks to inflate the bubble further. To counter this ‘misconception’ a number of the big banks over here have undertaken global tours with the intention of persuading foreign banks that aussie banks are low risk. This has not worked. Foreign banks are still reluctant to lend, even though the interest rates in Australia are extremely attractive (7%+). The aussies banks will be in trouble if they cannot keep lending, they need to keep the bubble pumped up. If mortgage finance dries up the whole house of cards will come tumbling down.

Which is why I have enquired as to how to short the Australian banks in another section of this forum - they are screwed.

So, to get around the foreign funding issue, they put pressure on the government to allow covered bonds. Covered bonds, for the uninitiated, basically allow the bank to ‘guarantee’ their mortgage backed bonds with other assets. So, in simple terms, the banks can now use the cash in retail depositors bank accounts to guarantee against default of the banks mortgage bonds that are secured against property (what could possibly go wrong with this model….?). In turn, the government has guaranteed savers that their retail deposits will be refunded if the banks go bust. So what we indirectly have here is the state underwriting the banks mortgage bonds. The Labour government will do anything to keep the Ponzi scheme rolling so that people feel ‘rich’ and stay voting Labour….

To be fair, I don't think this action would be exclusive to the Labor party.

2. Banks increase ‘competition’

Now that they have access to this shiny new funding, the banks want to lend it out. Being Australian, the only thing they want to lend against is residential property. So, they have decided to go after each other’s mortgage customers. All well and good you might say.

For a long time, there have been accusations that the big four banks over here have acted as a cartel. The banks, of course, furiously deny this. Yet they quite obviously do. Now, one of the banks (NAB) has declared that they have broken ranks with the other three and will be offering dramatically more attractive deals to gullible debt slaves, I mean mortgage holders.

They have launched an eye watering bad advertising campaign telling the other three banks that ‘they are dumped’. I am struggling to see how NAB can credibly say that they were NOT previously colluding with their competitors if they have now decided to ‘dump’ them. How does that work? Nobody seems to ask that question over here though.

3. Where we are at

I think that we have now started to move towards the end game. The banks have access to a lot of funds, but very few people are left to (responsibly) lend to. So we are at a ‘Northern Rock in 2005/6’ stage where the banks will chase anyone with a pulse and lend at increasingly high LTVs. You can already get mainstream 95% LTV and 100% LTV are offered by specialist brokers.

Even the 95% loans are dodgy. Technically, the buyer needs to ‘save up’ a 5% deposit but in reality the government provides the FTB with a $7K first home buyers deposit and apparently some brokers do not ask if the remainder of the 5% deposit is also borrowed…………

My guess is that LTV will creep up and up as the ‘pool’ of potential customers gets smaller and smaller. The ‘officially stated’ line will probably remain at 95% but we will see the usual cheats/dodges to get around it.

I give it another couple of years before it all goes pop, maybe sooner if there is another shock to the world credit markets.

I am in broad agreement with you - the only fly in the ointment (based on what I have seen back in the UK) is the potential for government intervention when things start to topple; for better or worse, the Australian Federal government has (relatively) deep pockets and can learn the lessons from elsewhere - God knows they need to - clowns to the left of me, jokers to the right etc.

[blue skies]

Pond 321, thanks for that you have your finger on the pulse

[JonoP]

I am in broad agreement with you - the only fly in the ointment (based on what I have seen back in the UK) is the potential for government intervention when things start to topple; for better or worse, the Australian Federal government has (relatively) deep pockets and can learn the lessons from elsewhere - God knows they need to - clowns to the left of me, jokers to the right etc.

Agreed. The resources sector is keeping the government figures looking very healthy at the moment.

They are doing the classic Labour thing though of committing to spend pretty much all of the money that is coming in, thus building up huge future liabilities. A bit like the UK government did during the financial services boom in the first decade of this century.

If there is any interruption to the boom, as I suspect there will be (either another banking crisis or, more likely, an 'economic event' in China), the government will have a huge bunch of future liabilities to fund. And it will be at this pont that the chickens come home to roost for the Australian banking system. My expectation is that the government will have to take on a whole bunch of bad debt from the banks, either by nationalising them or bailing them out with huge loans.

At this point, the government deficit will increase massively. Perhaps leading to a review of flagrant tax bribes like negative gearing.......

[blue skies]

"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.

[blue skies]

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

[blue skies]

Covered bonds OK but banks want more

* Scott Murdoch

* From: The Australian

* March 25, 2011 12:00AM

* Increase Text Size

* Decrease Text Size

* Print

* Email

* Share

o Add to Digg

o Add to del.icio.us

o Add to Facebook

o Add to Kwoff

o Add to Myspace

o Add to Newsvine

o What are these?

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.

[Paddles]

Why it Won’t Take a Shock to Knock House Prices for Six

by Kris Sayce on 24 March 2011

I saw the article this picks apart and it struck me that the UK analogy would be an article in the Economy section of the Times but written by that bloody awful woman (I can't remember her name; loud ginger thing, used to live round the corner from me in Islington, claimed she was skint a few years ago, etc.).

"It's not a bubble because it's not a bubble" is right up there with "we gotta invade Iraq because we gotta" and "climate change is happening, is man-made, can be reversed and governments are capable of implementing the reversal" as irrefutable truths of our time.

By the way, shame about the cricket. Nightmare that Pongo got a century, makes it even harder to fire him now.

Edit: Rosie Millard! How soon we forget. That's showbusiness, I suppose.

Edited March 25, 2011 by Paddles

[aussieboy]

Ok - just sold a house in Woollahra, Sydney. I locked in my new place eight weeks ago with a looong settlement so no time pressures.

Put it on the market seven weeks ago with an auction planned week 5.

Lots of viewings which then tailed off. No offers. Second week, sudden supply of similarly priced property. Lost several buyers to other properties.

Come the auction, some interest but main buyer a no show so we go to for sale, priced at $x. Lot sof viewings that day, offer on the Monday. 92% of $x. Guy offered another place for $x, withdraws offer. Finds out next morning that he was being used as a negotiating foil. Other house sells for $x + $150k. Offers on my place. Tell him price is now 95% of $x - he agrees, inspection and exchange the same day.

Lessons from this experience in a very specific part of Australia.

Market is sliced into price bands, the performance of each can turn on a sixpence. Big houses for families are selling well, smaller ones are now selling more slowly. Three months ago the opposite applied.

For me, I bought this house in a rising market with rising interest rates (2003) etc etc. The cost of debt has been less than the rental would have been on the property and my equity has grown seven fold and, of course, tax free being my primary residence. By far the best investment I coulg invisage and only one year before I began lurking here. Not trying to crow, just trying to share some facts and market intel.

Thought about keeping and negatively gearing via a portfolio facility, but I'm really not interested in the hassle of being a property investor.

Edite for typos

Edited March 30, 2011 by aussieboy

[blue skies]

Perth house prices slump in difficult market

Chris Zappone

March 31, 2011 - 1:40PM

Be the first to comment

Ads by Google

Perth Property Valuers

www.ValuationsWA.com.au

Residential & Commercial Valuers BEST Price Guaranteed - Please Call

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.

Advertisement: Story continues below

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.

[LuckyOne]

Thank goodness the "Explosion at Fukushima" thread is now longer than this one.

The problems in Japan might turn out to be slightly or significantly more relevant to UK house prices and the UK economy than the trials and tribulations in Oz.

If I were a mod, I would banish both threads from the main board to the hinterland : this one first and the Japanese one in a few months / years / decades / centuries / millenia once the problem in Japan is well defined.

[aussieboy]

Thank goodness the "Explosion at Fukushima" thread is now longer than this one.

The problems in Japan might turn out to be slightly or significantly more relevant to UK house prices and the UK economy than the trials and tribulations in Oz.

If I were a mod, I would banish both threads from the main board to the hinterland : this one first and the Japanese one in a few months / years / decades / centuries / millenia once the problem in Japan is well defined.

Oh, i didn't realize that is board was only for uk house prices. Oh, it isn't? Just that there are some idiot solipsists who think it is? .

Guess that's why you aren't a mod.

[Paddles]

I miss Bardon.

Not seen here since March 11th. The market hasn't dive-bombed since, which is the point where we won't see him again (q.v. Sibley, Telemeter, et al).

Only two weeks so it could be just a holiday.

I'll start to worry if there's a natural gas contract awarded somewhere I don't want to live in the next 4 weeks and he doesn't come back with a post telling how we should get in a buy units there.

[aussieboy]

I miss Bardon.

Not seen here since March 11th. The market hasn't dive-bombed since, which is the point where we won't see him again (q.v. Sibley, Telemeter, et al).

Only two weeks so it could be just a holiday.

I'll start to worry if there's a natural gas contract awarded somewhere I don't want to live in the next 4 weeks and he doesn't come back with a post telling how we should get in a buy units there.

I'm sure based on the heuristic above someone could code a bardon bot.

[blue skies]

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."

[blue skies]

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.

[Panda]

Wheres Bardon.........................

Ooooooooooops

http://www.moneymorning.com.au/20110401/why-inflated-markets-must-crash.html

Edited April 4, 2011 by Panda

[blue skies]

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.

Advertisement: Story continues below

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.

[JonoP]

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.

.

So, it would appear that more mortgages are issued Australia each month than in the UK.

And Australia has 1/3rd of the population of the UK.

Interesting. I wonder if any of the FORTY FIVE THOUSAND loans issued in a BAD month in Australia are going to ‘investors’ speculating on the price of housing…….

[aussieboy]

So, it would appear that more mortgages are issued Australia each month than in the UK.

And Australia has 1/3rd of the population of the UK.

Interesting. I wonder if any of the FORTY FIVE THOUSAND loans issued in a BAD month in Australia are going to ‘investors’ speculating on the price of housing…….

It's the influx of overseas capital that I wonder about. The place we sold went for cash to a pom.

[blue skies]

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.

[blue skies]

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.

Advertisement: Story continues below

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.