AUSTRALIAN households have lost an extraordinary 36 per cent of their financial wealth since the economic crisis began.

Estimates from the Australian Bureau of Statistics put combined household wealth at just short of $787 billion at the end of March, down from a peak of $1246 billion in September 2007.

The total includes household wealth held in cash, bank deposits, bonds and shares, but net of borrowing. Significantly it excludes wealth held in the form of superannuation and real estate, and both of these have also dived since the crisis began.

» We’ve lost 36% of wealth - The Sydney Morning Herald, 27th June 2009.

The ABC has been airing a six part series titled “The Ascent of Money”. This series is presented by Professor Niall Ferguson and follows the evolution of Money.

Last night’s episode was called “Safe as Houses” and is worth a watch.

AUSTRALIA’S sharemarket will halve in value, house prices will slump as much as 40 per cent and unemployment will climb to 10 per cent.

That’s the bold prediction from economic forecaster Harry Dent, who says a bigger crash is ahead for the global economy within the next two years.

» Worse to come for Australian economy, says Harry Dent - The Courier Mail, June 20th 2009

Earlier this year, there was a lot of speculation and warning that the First Home Owner’s Boost would turn the First Home Buyers segment of the market into a subprime bubble. Data from the Australian Bureau of Statistics is now coming out which will confirm these fears.

On Wednesday, the ABS released Housing Finance Commitments for April 2009. It shows First Home Buyers now make up 28 per cent of dwellings financed, the largest slice since the ABS started collecting data on this in 1991. As you can see from the graph below, after the Boost was announced in October 2008, First Home buyers have come out in force. Once they represented about 17% of dwellings financed, today it’s more like 28%.

With all this extra competition to get the grant before it expires and at any cost, the size of First Home Buyers loans have shot though the roof exceeding figures not seen since the 2003 housing boom. Between July 2005 and the start of 2008, First Home Buyer loan commitments have been increasing by around 5% a year or in line with inflation.

By July 2008 any rises in FHB loans had grounded to a halt with the average size of a FHB loan that month being $246,400, $1,400 less than a year prior where the average loan was $247,800.

With the housing market in dire straights and on the verge of a long and well overdue correction, the Australian Government announced the First Home Buyers Boost in October 2008. Almost immediately the market went into overdrive and within the FHB segment of the market, has exceeded the unsustainable bubble of 2003.

Using the Prime Minister’s words, the scary part is “That all good things must come to and end.” Not only do First Home Owners have to worry about the scheme coming to an abrupt end, they are also faced with rising interest rates, rising unemployment and the real possibility they paid far too much all to get an extra $7,000 from the government.

» 5609.0 - Housing Finance, Australia, Apr 2009 - The Australian Bureau of Statistics, 14th June 2009.

THE average loan size for first-home buyers has risen by $52,000 - or 23 per cent - in the past two years, raising fears that government incentives for young buyers are artificially inflating the market.

A report commissioned by Brandmanagement, a market research firm specialising in the finance sector, says the average size of loans being taken up by young home buyers is jumping by an “unsustainable” amount.

Drawing on Australian Bureau of Statistics figures, the report has found the average size of the loans rose by $11,400 in the three months to February, after rising by $18,100 in the three months to November.

» First-home buyers borrow big - The Australian, 25th May 2009.
» Size of first-home buyers’ loans inflating - News Limited, 25th May 2009.

INCREASING concerns about job security are impacting on the property market, with people opting to spend less and delay buying, a survey shows.

The realestate.com.au Consumer Insights Buy report, which measures the perceptions of property buyers, showed 55 per cent of Australians have a high degree of concern about their job security.

Of the 2665 people surveyed, 38 per cent said they would spend less on buying property, while 32 per cent said they would delay their purchase.

» Job security impacting on home market - News Limited, 24th May 2009.

Those buying their first home have another six months to locate their dream dwelling and still benefit from last year’s boost to the first home owners grant scheme.

The first home owners grant was lifted from $7000 to $14,000 for existing dwellings and from $14,000 to $21,000 for new homes as part of the $10.4 billion stimulus package unveiled by the government in October last year.

The more generous scheme was set to expire on June 30 but has been extended due to the ongoing impact of the global financial crisis.

» Six more months for first home owners scheme - Businessday, 12th May 2009.

Despite the best efforts of the government to prop up the bubbling housing market, Australian Bureau of Statistics data released today show Australian house prices fell 6.7% for the year.

This result is the biggest annual fall since the index started 23 years ago.

It does appear the First Home Owners Boost has helped to slow the rate of falls and with the grant likely to be terminated on June 30, falls are likely to accelerate in the 2nd half of this year.

» Australian house prices fall 2.2pc in March quarter - The Australian, 4th May 2009.

With lack of employment and pay cuts from a 4 day working week, young adults are moving out off their rentals and back into the family nest with Mum & Dad or into share accommodation.

This has prompted warnings that the national rental vacancy rates are set to double within the next coming weeks.

» Renters seek financial safety in numbers - The Australian, 4th May 2009.

» Renters scaling back - News Limited, 4th May 2009.

FIRST home buyers are leaping aboard a sinking ship, with house prices set to fall about 20 per cent in the next two years, an Australian National University economist says.

Professor Quentin Grafton said house prices could not continue to grow at a faster rate than incomes and consumer prices.

» Property bubble ’set to burst’ - The Age, 1st May 2009.

One of the problems which has helped fuel this real estate bubble has been the wild and ridiculous claims made by sprukers. The real estate industry is unique in that you can make up anything, disseminate it to the public and never expect any repercussions. If a financial advisor made such claims, they would probably be stripped off their AFS licence, yet for many the purchase of the home is the biggest investment they make.

However the law is gradually catching up with the Real Estate industry. Unfortunately it’s too little to late.

In October 2003 to January 2004, Today Tonight which airs on the seven network ran some exclusive stories on women who would become millionaires though investing in property, even if they had no money to start with.

With no reasonable grounds to make these assertions, the ACCC took aim. Channel Seven disputed the shows were deceptive and tried to seek cover under the media safe-harbour protection, an exemption in the trade practices act. But today, the High Court has found today tonight did in fact breach trade practices laws.

But such wild claims is not unusual for television.

On Sunday night, Channel 9 broadcasted a show called 2nd Chance. While it set about to help bail out families from mountains of crippling housing debt, celebrity Real Estate agent John McGrath was shown making wild claims.

He clearly stated in an orchestrated, prerecorded scene that “a lot of people are nervous about buying in this real estate market, which is understandable because it is down about 20% over the past 12 months, but if you look back over the last 100 years property prices have doubled about every 7 to 8 years. So if you are cashed up and ready to purchase, now is an outstanding time to be get into the market.”

The question one has to ask is where in earth does he get information that over the last 100 years, property prices have doubled every 7 to 8 years? What is the source for these wild claims? In ACCC speak, there is no reasonable grounds to make such assertions.

Earlier this year we reported of the Judge who teared up a property contract allowing the investor to walk away. The decision was made on the grounds that both the Real Estate agent and the promotional material made some predictions with no reasonable grounds that they would in fact come true.

The agency’s advertisements promised that Green Square, a planned business centre next to Victoria Park, would become the “next city centre in Sydney”; they forecast a seminar which would advise how to buy “the hottest investment location in Sydney” and they promised a “one-year 5 per cent rental guarantee”.

“According to Mr Zhang, he and Ms Liu were reluctantly persuaded to buy the Victoria Park terrace by being assured that the property market was continually rising; that the market doubled in value every seven years; and that in two years the terrace would definitely have increased in value,” Justice White said.

» Seven pinged for dodgy investment programs - WA today, April 30th, 2009.

A GROWING number of NSW residents are on the cusp of losing their homes to banks and other lenders despite the steep fall in interest rates.

The number of repossession orders in the state dropped at the end of last year, as lower interest rates offered relief to borrowers struggling to repay loans, according to figures made public by the NSW Attorney-General’s Department yesterday. But that trend reversed in January, and consumer credit advocates blame an increase in joblessness.

» Thousands living on borrowed time - The Sydney Morning Herald, 29th April 2009.

You could be mistaken for thinking we didn’t each have a part to play in the Global Financial Crisis. It wasn’t that long ago Kevin Rudd was saying “As Prime Minister I will not sit idly by and watch Australian households suffer the worst effects of a global crisis we did not create.”

But the cause is closer to home than we think.

The Great House Bubble

Despite real estate agents and industry lobbyists shamelessly spreading the concept that house prices double every 7 to 10 years, sadly this is nothing but lies. But as they say there is "truth in marketing" and you certainly can’t say they haven’t marketed Real Estate well – just too well, and now we are paying the costs.

House prices in fact, do not increase in the long term faster than inflation. Historically, you don’t buy houses for capital appreciation, but rather rental yield.

The chart above shows over 100 years of "Real" house prices, that is, prices corrected for inflation. Both the United States and Australia is featured. As you can see, over the long term house prices don’t really do anything.

What happens from the late 1990’s onwards in enough to scare anyone.

The driver of this bubble is still open for debate. After tech wreck the U.S. Federal Reserve dropped interest rates quite sharply. Rates didn’t drop nearly as much in Australia and our boom appeared to start some ten years earlier, so while some analysts suggest low interest rates were the cause, the jury is still out. What is more concerning is the implications.

Implication of Rising Housing Costs

Now what are the implications of rising housing costs? I use the term rising housing costs as this covers both mortgage repayments and rents. As the first part of this crisis developed, it was rising housing asset prices and associated mortgage repayments having an effect on household budgets.

During the later part of the crisis, landlords decided to increase rents at a pace which far exceeded wage growth, hence the same repercussions shifted into rental households and remain a real threat today.

Household Debt

Money doesn’t grow on trees, so as house prices continued to accelerate, homeowners needed to borrow more. It doesn’t take a highly educated economist from the treasury to work out that household debt must go up.

If you look closely at the real house prices for Australia, you will see the first part of the housing boom started in the late 1980’s and never fully corrected. This is the same time household debt started to adjust its trajectory for the moon.

In the 1980’s for every dollar earned, the average Australian household had about 40 cents of debt. By the time household debt reached orbit in 2008, the average Australian had debts totaling a fraction less than $1.60 for every dollar they earned.

Household Savings

Just as household debt skyrocketed, household net savings went through the floor. In the 1980’s Australia was a nation of savers, putting about 10% of household income under the pillow for a rainy day.

By 2002, the average Australian household was actually spending more than they earned and household net savings went negative. This continued for a number of years.

Mortgage Repayments

Unfortunately there is no free lunch in life. As house prices went up and along with it debt levels, so did mortgage repayments. Below is a graph of interest payable on dwellings as a percentage of household net income.

The figures represent the aggregate of all Australians, hence why the figures appear low. But it’s not the actual values that are of interest, but the step rise from 2001 to 2008. Payments shot up from under 4% to over 10%, a rise of 150%.

Household expenditure

The following chart shows the Average Household Expenditure for 03/04 financial year taken from the ABS Household Expenditure Survey (6530.0). In 2003/04 the largest household expense was food and non-alcoholic beverages, followed closely by housing costs. The housing cost category includes rents, rates and interest payments on mortgages.

Below is another chart for the same year – 2003/04. What we have done is simplified the chart by grouping some of the categories into discretionary spending, that is spending that we have some choice on, like recreation, miscellaneous goods and services, household furnishings and equipment, alcoholic beverages and tobacco products, clothing and footwear and personal care.

This leaves categories such transport, medical care and health expenses and domestic light and power as necessary services. You could argue that if need be, you could leave the car at home and take public transport, cancel your private health insurance and live in the dark, but you get the picture.

Remember by 2003 we were actually spending more than we earned. Now as much as we would like it to, money doesn’t grow on trees and the average working family has probably eroded any savings by now. If house prices rise faster than household income, like has been the case for the past decade, something must budge in the household budget.

Let’s increase housing expenses. We have already decided there are some fixed expenses in our budget which will not change (not really true, both petrol (transport) and private health insurance premiums have gone up more than inflation).

So what budges in the budget? Discretionary Spending.

It simply means as housing expenses continue to outpace household income, households must cut back on discretionary spending.

Now let’s fast forward a couple more years and with rapidly rising house prices, let’s make housing costs 50% of the household budget. Now, don’t laugh. Housing stress is considered when the household spends more than 30% of income on housing expenses. Many new buyers took out 100% loans, so it’s not unreasonable for more recent purchasers to be paying this, if not more.

In a recent Melbourne Institute study, it was found in the “mining boom state”, 18% of Western Australians paid between 26% and 50% of their income in debt repayments. These figures were for March 2009, after rates have been cut by more than half, but it would be fair to say than many households have chosen to keep paying down debt at the old rate of payment.

Rising housing costs strangle discretionary spending and the broader economy

So it should now easy to visualise the repercussions of house prices outpacing household income growth year in, year out for a decade, and why historically house prices only increase in line with inflation or wage growth in the long term. Australia is not alone. Most OECD countries were caught up in this bubble.

But why hasn’t the effects of this been felt earlier?

As house prices increased in the early part of the cycle, we saw household savings deteriorate. Temporary relief was sought by channeling money that would otherwise be spent i.e. the 10% of the household income, into housing.

After 2002, the net savings ratio we negative. So rather than cut back on discretionary spending to make the household budget balance, we started using debt as a means to continue our spending excesses.

Then there is a phenomenon called the wealth effect. As house prices rose, those owners felt wealthy and had a tendency to spend more. In reality, the capital gain is not realised until you sell the asset at a price agreed between you and the buyer. Before then, the price of the asset may deflate. Yet many households have already spent any gains they have made from their housing assets as they are continually told house prices only go up and hence there must be little risk.

Hence a good part of all the unrealised or artificial housing capital gains have flowed into the economy and helped drive (or overdrive) consumption. The excess consumption of households spending beyond their means helped to bolster the domestic and global economies.

Closer to home, the extra retail spending required extra shop assistants. The cuppa chino and newspaper before work supported the café, just like the eating out at restaurants supported the chiefs and waiters. The kitchen and bathroom renovations required extra tradespeople and well you get the picture.

Further abroad, the spending on the latest consumer gadget or flat screen telly did wonders for the Chinese economy, and as that boomed, they brought our resources to build factories and homes.

We now have a considerable problem on our hands. Not only do we have to cut back on spending and live with in our means, we also have to start paying down some of this mountain of debt we have in our names. For every dollar a household spends in paying down debt, is one more dollar not spent in the economy supporting jobs. It’s a double whammy.

The journey ahead - 2009 onwards

The journey ahead still remains cloudy thanks partly to interference from governments.

The housing market remains the key to the problem. The longer house prices remain artificially high in comparison to household incomes, the more households will need to spend on this expense, and hence the less money that can be spent on other goods and services underpinning domestic jobs.

The quicker we can get house asset prices versus household income back to historic trend, the quicker this crisis will pass, freeing up important money to be spent as discretionary spending.

Many OECD countries have the same problem than us. As you can see from the real house price graphs featured earlier, the U.S. housing bubble has popped and U.S. house asset prices are 27% down from the peak of the bubble. The sooner prices get back to a healthy trend, the quicker they can move into recovery and get back on their feet.

Time to pick and choose: Housing or Jobs

In Australia, our Government is playing a game of tug of war.

One aspect of the economic security package has seen the introduction of the First Home Owners Boost (FHOB), an incentive to encourage first home buyers into the market by giving them extra grants on top of the existing first home buyers grants. If you build a new house, first home buyers get an extra $14,000. If purchasing an existing home, it is $7,000.

If you want to measure the success of this package by the number of First Home Owners signing up, then it’s one thing that Real Estate Agents don’t need to lie about – there is a subprime frenzy out there as buyers, some of which are bidding up prices more than the grant is worth, just so they don’t miss out.

But economically, how is propping up the housing market helping our recovery? Are we just delaying the inevitable, while at the same time encouraging a new generation of home buyers into so much debt, they won’t be ready to stimulate the economy for another 25 years until they pay down the mountain and have some free money left over? This off course assumes they make it through the 25 years, and don’t default once the cash rate starts to head north, requiring yet another bail out from the Government.

To me, this seems to be encouraging our old ways. Have we not learned anything since this crisis has started?

Then we have the $900 handouts. Of the money that is not going to overseas visitors, deceased estates or the dog and cat benefactors of deceased estates, it appear to be going straight into paying down debt. If this helps just one or two households avoid foreclosure, then I certainly wouldn’t mark the package unsuccessful. In fact, just to see the net savings ratio spike up, I think is a huge success.

But at the end of the day, we appear to have two policies – on one side of the rope we have the stripping large sums of money from retail and service sectors by encouraging young first home buyers into a life of excessive debt in a bid to keep the housing bubble afloat, while on the other side of the rope is trying to put money back into the economy with the aim to save jobs.

With news out today suggesting retail jobs which employ 15% of the workforce is under threat from the next stage of this crisis, It is time the government needs to decide what is important: High house asset prices or jobs?

The economy can’t sustain both.

The Sydney Morning Herald reports :

THE Australian housing market is facing the prospect of a “perfect storm” of financial pressures - including high mortgage debt, overvalued homes and rising unemployment - in which prices could eventually fall by as much as 30 per cent, investors have been warned.

» First-home buyers in the eye of a storm - The Sydney Morning Herald, 18th March 2009.

COMMONWEALTH Bank of Australia has cautioned that the Federal Government’s sweetener on the first home buyers grant should not become an open-ended offer because it could encourage some into the housing market who may not be able to afford home ownership.

» Subprime warning on first home grants - The Age, 18th march 2009

Real Estate agents are now expressing their fears that the housing market will collapse when the subprime frenzy caused by the FHOB ceases.

The Brisbane Times reports Real Estate agent Peter Secco’s office had 37 sales in January and only two were above $500,000.

“If that’s not enough evidence for you then I don’t know what is,” he said. “Every buyer we have now is a first-time buyer and I would say 90 per cent of them are doing it because of the government incentive.”

» Agents tip housing crash after grant glory - The Brisbane Times, 16th March 2009

Despite GDP figures released last week showing Australia is in recession and with unemployment rising, NSW Housing Minister David Borger, says it’s never a better time to load up with debt. “I strongly encourage anyone thinking about buying a new home to do so now - with lowering interest rates, a flat market and help from the state and federal Labor governments, Sydney is definitely a buyers’ market.”

Today’s comments come after the release of a NSW Government report on quarterly sales and rents showing that rents are rising while house prices are falling.

Mr Borger said “Our figures show that the sales price of homes in Sydney during 2008 dropped 8.1 per cent for homes and 5.6 per cent for units.”. With the medium house price in Sydney peaking around $575,000, a 8.1% fall or a “flat market” in his words, corresponds with approximately a $45,000 fall in value. As Australia enters a recession, there is no guarantee these falls will slow or reverse in the short term (3 to 5 years) meaning new home owners entering the market on Mr Borger’s advice could be losing $45,000 a year or $865 per week while having to make mortgage repayments. That’s a lot of money that could be used to pay rent.

Only on Wednesday this week, Mr Borger was telling News Limited that the number of homeless families in NSW had increased 51 per cent and that staff were finding shelter for an extra 643 people a month. “We are seeing people who are economic victims who have lost jobs and can no longer pay bills. They have racked up their credit cards,” he said. “There is a new category of economic refugee.”

Lets just hope Mr Borger’s comments today strongly encouraging new buyers into the housing market doesn’t end with a new set of economic refugee’s as job losses and negative equity starts to settle in.

» Cheaper to buy than rent - The Sydney Morning Herald, 8th March 2009.
» Families lose their jobs and homes - News Limited, 4th March 2009.

Last year Deputy Governor of the Reserve Bank of Australia, Mr Ric Battellino addressed the 7th ITSA Bankruptcy Congress with an update on household finances. In his speech, he raised differences between the Australia and U.S. housing markets :

“A third important difference between Australia and the US is in the groups that the lenders targeted, and in the loan terms on offer. In Australia, the lending boom was concentrated on existing home owners who traded up to bigger and better houses and bought investment properties. Many of these were people in their 40s and 50s who previously had low levels of debt. “ said Mr Battellino.

But how things have changed.

It all started last year on the 14th of October when the Australian Government announced increased grants to encourage people to take on more excessive debt. Under the First Home Owner’s Boost program, the Government gave an extra $7,000 to first home buyers purchasing existing dwellings and an extra $14,000 to first home owners wanting to build a new dwelling.

A couple of weeks later the NSW State Government got in on the action : NSW Government to join Federal in encouraging young first home owners to take on large debts. They are offering $3,000 of cream on top of the boost.

We are now starting to see examples of where all these incentives are going. Valentina Popovska appeared in the Sun Herald on the 1st of March, “thrilled” with her new home. It means that they now work 7 days a week and are paying a mortgage almost double their rent, but they were able to purchase their first home without needing a deposit.

Then emerged the story of teenager’s Matthew Tregent and Sarah Zajac who has brought a block of land and using $26,000 in government grants and $5000 of their own savings to build their first home.

The daily telegraph reports that Western Sydney is in the grip of a property mini-boom “with more than 50 per cent of all sales being first home purchases - with most sold for less than $500,000.”

However Australian Financial Group’s (AFG) general manager of sales and operations Mark Hewitt said “with more first home buyers entering the market, the loan-to-value ratio (LVRs) has risen steadily to a record high of 72.5 per cent in January” Many First Home Buyers enter the market with little to no deposit, relying solely on grants.

There are even reports in some area’s that the surge of first home owners are bidding up prices in excess of value of the grant, in order to secure the grant before it expires at the end of June 2009.

With the boom fueling more applications for home loans, lenders want the grant extended beyond the June 30th deadline. News Limited reports “Loan Market Group executive director John Kolenda said there has been a 300 per cent increase in inquiries from first home buyers since October. “Extending (the grant) will have a positive flow-on effect for the entire housing market and that will be beneficial to the whole economy,” Mr Kolenda said.”

But the driving force behind the latest boom cannot be all attributed to the First Home Owners Boost. The RBA has aggressively cut interest rates to a 45 year low of 3.25%, however the likelihood of rates remaining this low for the duration of a 25 to 30 year loan is next to none.

The other prospect facing new home owners is the possibly of either losing their job or the reduction in wages. To reduce the number of jobs to be slashed, many employers are opting for wage cuts or a move to a four day week with a 20% reduction in wages.

Only time will tell what the effect’s of Rudd’s subprime frenzy will be.

» Young families defying recession to lead revival - The Daily Telegraph, 7th March 2009.
» Grants help teens into a house of their own - The Sydney Morning Herald, 6th March 2009.
» Home loan lenders want FHOG extended - News Limited, 5th March 2009

Today’s release of the December ‘08 National Accounts came as a surprise. Not the fact that Australia’s GDP has recorded its first quarter decline since 1991 - it was only a mater of time for Australia to join the ranks of countries in recession. But while GDP has started to sink, technical we won’t be in a recession until two quarter’s of negative growth is recorded - that will come in three months.

The surprise was in the Household Net Savings Ratio.

It appears Australians, probably assisted by Kevin Rudd’s stimulus war chest is starting to turn into a nation of savers again. For those that have followed this site since we began in 2006, one area of focus has been household savings. In 2003, Australia households started spending more than they earned - clearly something not sustainable. In 2006 our poor record started to rub off on our friends in the U.S. Up to 2006, the U.S. had only ever recorded two years of negative savings, both years during the Great Depression when households dug into their savings to help purchase essential items such as food.

December 2008’s Net Savings Ratio has hit 6.6 per cent in trend terms and 8.5, seasonally adjusted. The seasonally adjusted figure is the highest it’s been since September 1990.

The realisation that unemployment will trend upwards has no doubt sent fear into Australian households and lead to the recovery of savings (and the reduction of consumption). Households are trying to de-leverage as quick as they can, and you certainly can’t forgive them granted the size of household debt we carry today.

Unfortunately Jobs, none more so than retail, was supported by the fact Australian’s were spending more than they earned. Now that this unsustainable habit has abruptly stopped, less disposable income is flowing into the economy to help support these jobs.

» 5206.0 - Australian National Accounts: National Income, Expenditure and Product, Dec 2008 - The ABS, 4th March 2009.