Fund Manager Roger Montgomery featured on the ABC’s The Business last night to talk about the misleading Auction clearance rates being banded around the market at present.
He says the Sydney 83.7% clearance rate reported on November 9th, according to Financial Analyst Mark Bayley is nothing like it – more like 49%.
He took viewers’ through the numbers:
Andrew Wilson from Australian Property Monitors (APM) reported there would be 789 auctions or houses available for sale on that particular weekend in Sydney; listed for sale. What is interesting is he subsequently reported 471 auctions that 448 took place and 23 were withdrawn and then they reported – the first problem is 318 just went missing and what is interesting is the way the numbers are reported – the 83.7% clearance rate is based on the smaller number of 471 that were reported for have had been auctioned or put up for sale and not the ones that were reported prior to the weekend.
So the missing ones simply don’t get reported by the agents as having been put up for auction at all, or having been pass in or not sold or put up for rent because they weren’t sold at auction. So the 83.7 per cent clearance rates you are hearing the agents report is nothing of the sort.
It is widely believed Real Estate Professionals are massaging statistics to help portray the market as being significantly stronger than it actually is – in a bid to encourage buyers into what otherwise would be a weak market.
The recent exuberant reporting even had the banking regulator’s chairman, Dr John Laker, joking to an economic’s lecture, “Consumer confidence is picking up and certainly if you open the newspapers on a Saturday, if you’re not at an auction you must have no life because that’s where everybody is,” as he warned banks to maintain lending standards reminding them of previous housing corrections – “We don’t want the memories of the earlier correction in housing prices in Australia a decade ago, or the memories of what’s happened in housing markets in Spain, Ireland, the US, we don’t want those memories to be short, we don’t want those memories to be selective.”
Earlier this month the Australian Bureau of Statistics (ABS) reported the number of first home buyers in the Australian property market has fallen again – this time to levels not seen in almost ten years. In September, first home buyers made up only 12.5 per cent of the market. The cause – affordability.
The Reserve Bank of Australia shows growth in Housing Finance is at close to record lows and significantly lower than the levels recorded in 2003 due to rising household leverage potentially hitting a ceiling.
So it came as quite a surprise when the HIA-Commonwealth Bank housing affordability index today suggested Australian Housing is now at the most affordable level in a decade. Many smelt a rat.
HIA senior economist Shane Garrett said “Despite widely publicised dwelling price increases in some markets in recent months, affordability has continued to improve as a result of reduced interest rates”
It appears the index provides a potentially misleading indication on affordability, skewed by record low interest rates. Can interest rates stay at record lows forever?
For some time now I have maintained House Price to Income and House Price to Rent ratios indexed to 1995 – a flat period of fair value prior to the current housing boom. The Economist Magazine, OECD and IMF have used similar ratios to compare housing bubbles around the world and to provide an approximate gauge of under/over valuation.
Interest rates aside, it would appear there is some substance to the claim housing affordability is close to being the most affordable in a decade, after house prices stagnated allowing accelerating rents and wage growth to catch up. However, on a house price to rent metric, rising house prices is starting to impact affordability again and the index has turned.
If anything, the statement that house prices are the most affordable in a decade just goes to demonstrate how long this bubble has remained inflated with continuous support from the government and the help of the resources boom. Assuming house prices were fairly priced in 1995, on a house price to rent basis, Australian housing is still 42.8% overvalued in Australia. This places Australia in the top tier of worldwide housing bubbles.
After Australia’s longest period of continued economic growth, ever – there is no room for complacency.
» Affordability at decade high – The Domain, 27th November 2013.
» Bogus affordability index shows improvement – Macrobusiness, 27th November 2013.
» APRA chairman John Laker says regulator ‘working assertively’ with banks on lending standards – The ABC, 27th November 2013.
Posted in Australian economy, Australian Housing | 16 Comments »
Getting reforms in the public interest of all Australians can be difficult when vested interests have too much to lose.
The Sydney Morning Herald has today reported on figures published by the NSW Office of State Revenue showing a record $356.8 million was made from Stamp Duty receipts last month as the Sydney property market goes gang-busters. This is the highest monthly figure since records began in 2005-06.
The booming property market has done wonders for the NSW State Government’s September quarterly budget. The June budget had forecast a $374 million deficit, but a surplus of $239 million was actually achieved.
But booms can quickly turn into busts as then NSW Treasurer, Eric Roozendaal found out in 2008.
In November 2008, we reported the NSW government was forced to join the Federal government and give first home buyers free money to help plug a collapse in revenue:
With plunging house sales and dwindling prices in NSW, the NSW Government today announced it will throw in another $3,000 to first home owners building new dwellings under $750,000, effective next Tuesday. While this is better than the Federal Government’s increased grants across the board, it’s hard to see what $3,000 will do in a market with falling prices. Quite possibly that $3,000 will evaporate in less than a month.
But is the governments really concerned so much about construction workers? Why not prop up the ailing automotive or retails sectors as well? Why is there such a vested interest in housing?
The answer may be in the NSW’s mini budget. NSW had a projected surplus in the June  budget of $268 million. However in the mini budget to be revealed on Tuesday, it will show a deficit of between $900 million and $1 billion. This will be the first deficit since 1997 and the biggest since 1992.
So how can this position change so fast? NSW Treasurer Eric Roozendaal said “The impact (of the global economic slowdown) on us is huge, in terms of a reduction in revenue from duties generated by land transfers”. It’s been reported stamp duty receipts were down by $270 million alone in the first three months of this financial year.
Looks like NSW Government income was as “safe as houses”.
Maybe removing stamp duty and introducing a broad based land tax could help the NSW state government with a more predictable and dependable revenue source? But why would you do that in a booming market?
» Sydney property boom delivers record stamp duty receipts to NSW’s coffers – The Sydney Morning Herald, 23rd November 2013.
» NSW Government to join Federal in encouraging young first home owners to take on large debts. – Who crashed the economy? 8th November 2008.
Posted in Australian economy, Australian Housing | 22 Comments »
As the saying goes, the Real Estate fraternity is using statistics as a drunken man uses lamp-posts — for support rather than illumination.
Australia’s unprecedented housing bubble has few fundamentals left, and this has seen the Real Estate industry turn to dodgy statistics to help sell and support the cause that one must leverage into the bubble now – before it is too late.
This has lead to warnings by the Australian Financial Review last week that misleading numbers are putting potential buyers at risk.
Mark Bayley explains record number of Auction results are going missing, leading to a big divergence between the real clearance rate which has been trending down and the reported auction clearance rate used to sell the concept that the property market is extremely strong.
More of Mark’s analysis can be found here.
The practice is by no means new. It was considered rife in Sydney & Melbourne in the years after the Global Financial Crisis (2011) corresponding with periods where markets deteriorated and property prices were falling, hence the requirement to fudge the numbers.
One has to wonder, is the same circumstances occurring now?
» Misleading property auction figures ‘put buyers at risk’ – The Australian Financial Review, 15th November 2013.
» Lies, damned lies and auction clearance rates – The Australian Financial Review, 18th November 2013.
» Sydney Agents cooking Auction Clearance Rates – Who Crashed the Economy?, 6th March 2011.
» Auction rates fudged by failed campaigns – News Limited, March 6th 2011.
Posted in Australian Housing | 10 Comments »
On Monday, ABS Housing Finance data revealed another deterioration of the number of first home owners’ participating in the owner-occupier segment of the market.
The decline has renewed calls for a national housing affordability debate.
Last week the Abbott government abolished the National Housing Supply Council (NHSC) citing their “activities are no longer needed.”
Economist Saul Eslake, a member of the NHSC told Fairfax, “I suspect the only way that Australia’s housing affordability problem will be solved, if it ever is, is the way the Americans solved theirs. And that is not something that I would wish for.”
Eslake is on the money. Any Government lead affordability action normally props up the market (i.e. First Home Owners’ Boost). Broken aspects of our tax system such as Negative Gearing would never be abolished or quarantined to new properties only, and the country is slow to act on Macro-prudent controls. The problem has been continuously ignored to the point it is now simply too big for any other potential solution.
» First-home crisis triggers call for action – The Sydney Morning Herald, 16th November 2013.
Posted in Australian Housing | 16 Comments »
Record low interest rates have put a rocket under the Sydney property market, propelling yearly growth to an unsustainable double-digit 11.4 per cent according to official figures released from the Australian Bureau of Statistics (ABS). The size of the Sydney market has helped prop up the rest of Australia, with the weighted average of the eight capital cities returning a frothy 7.6 per cent gain for the 12 months to September.
Canberra and Adelaide is still in the doldrums going backwards 1.2 and 0.6 per cent for the quarter. Perth (0.2%), Darwin (0.4%), Brisbane (1.2%), Hobart (1.4%) and Melbourne (1.9%) reported modest gains, while the red hot exuberant Sydney market fired up a 3.6 percent result and fears of a new bigger property bubble.
Record low interest rates have seen interest payments on dwellings plunge in recent times, creating a false economy as the uneducated leverage back into the property bubble. Few consider the prospect, interest rates could ever rise again.
This has seen an up-tick in the growth of housing finance, after scraping lows not seen since records existed 37 years ago.
All eyes will now be on the Reserve Bank of Australia to see how it intends to react. Will it be forced to follow in the footsteps of the RBNZ and implement macroprudent controls?
» 6416.0 – House Price Indexes: Eight Capital Cities, Sep 2013 – The Australian Bureau of Statistics, 4th November 2013.
Posted in ABS House Price Indices, Australian Housing | 45 Comments »
If you have landed on this page searching for information on the Australia Housing Bubble, then you are not alone.
According to a new CommSec Housing Bubble Index, there were 194 mentions of “housing bubble” in Australian Newspapers in September this year. This is just shy of 201 mentions last recorded in January 2003 when Australia’s housing market first entered bubble territory.
Renewed talk of the housing bubble in mainstream media has seen a remarked increase of individuals doing some homework on the topic. Google Trends reveals a significant increase in September of savvy participants searching the term “Housing Bubble” on Google: (The last data point consists of incomplete data for the month.)
To date, confidence has kept the market a float. Could this be a leading indicator that the tide is changing?
» Approaching peak bubble: new index to track housing bubble hype – BRW, 30th October 2013.
» CommSec Economic Insight: Bubble trouble: Measuring housing market hype – CommSecTV/YouTube, 24th October 2013.
Posted in Australian Housing | 30 Comments »
The overwhelming fear of his five year old son being priced out of the property market – forever, has forced a Sydney property lawyer to act. He has moved to secure his son’s future by purchasing a one bedroom $710,000 Potts Point apartment.
Reserve Bank Governor, Glenn Stevens said today “lenders and borrowers alike would be well advised to take due care,” and “that decisions be based on sensible assumptions about future returns”
While it is his opinion there is no bubble and overall credit growth is still subdue, he warns “borrowing is increasing quite quickly in some pockets” citing finance approvals for Sydney housing have surged 40 per cent in the past year. “So this is an area to which we will, naturally, pay close attention.”
» Lawyer buys $710,000 city unit to set up son, 5, on ground floor of property market – The Sydney Morning Herald, 29th October 2013.
» Remarks to Citi’s 5th Annual Australian & New Zealand Investment Conference – The Reserve Bank of Australia, 29th October 2013.
Posted in Australian Housing | 16 Comments »
Fund Manager can’t understand why people [Joe Hockey] feel the need to say a market is not in a bubble.Written by admin on October 27, 2013 – 7:00 pm
In our last post, we quoted Australia’s Treasurer, Joe Hockey when interviewed on CNBC in New York denying a bubble exists in Australia’s overheated property market.
Last fortnight, The Australian Financial Review’s Christopher Joye interviewed First Eagle portfolio manager Matthew McLennan.
Q: You are clearly very knowledgeable on the Australian economy – what are your views on the resurgent Aussie housing market?
It is interesting to me when you hear a politician saying this is not a housing bubble – that is just a supply-constrained market.
At the end of the day, I think the Australian housing market is instinctively on the full side of fair value in a situation where the natural constituency, the marginal buyer, is already quite levered.
I don’t understand why people feel the need to say a market is not in a bubble. I don’t think that’s a prudent approach when you see large levels of leverage and fairly low rental yields. While I get it that you want to support confidence, I don’t know what the upside is in talking down legitimate risks.
We’ve always made money by not losing money. Ultimately you feel far more confident when a management team tells you what it is worried about than when it displays complacency.
Mr McLennan said he wouldn’t invest in our banks “because the raw equity-to-asset ratios . . . are lower than our comfort zone.”
“I have a few question marks over the Australian economy and think the outlook could be potentially quite challenging,”
» Why this $80bn fund manager won’t touch Australian banks – The Australian Financial Review, 19th October 2013.
» Interview transcript: First Eagle portfolio manager Matthew McLennan – The Australian Financial Review, 19th October 2013.
Posted in Australian economy, Australian Housing | 7 Comments »
Australia’s Treasurer, Joe Hockey, has been caught in an interview on CNBC in New York shamelessly spruiking the Australian Real Estate market.
The interviewer asked Hockey, “Let’s talk about the Australia housing, a very favourite topic on my own, close to my heart as I have a home in Sydney I don’t want to see it go under. We have record high prices in Australia, record low interest rates and some worry about a bubble – do you think it is a bubble about to burst and cause a housing crash like America’s experience.
Hockey replied with “Not at all. A lot of commentators, particularly over here, don’t understand the Australian housing market. The fact is, we have a very generous immigration program. And we have very slow supply coming in to the market. Now rising house prices in Australia help to make some of the more marginal new housing developments affordable and realistic and deliverable. And in turn, that increase in supply helps to manage the market. So, Australia is a long way from a housing bubble.”
“And the second thing is many Australians are heading toward personal superannuation that in value exceeds the equity they in their house and that’s part of the balance in the equation.”
“A lot of Australians put a lot of new capital into their homes – renovate their homes, upgrade their homes – and we have the largest homes on average perhaps in the Western World, and the world more generally in size. So it’s a very different asset class in Australia than in other jurisdictions”.
Nobel Prize winner warns on Australian housing bubble.
On Monday, Yale Professor Robert Shiller picked up a Nobel prize in economics for his research into housing asset bubbles. He needs no introduction to frequent readers here – we often publish his Real House Price Index. His research lead to warnings in 2005 that the United State housing market was in a bubble.
He used his prize to warn of the rise of global house price bubbles, singling out China, Brazil, India, Australia, Norway and Belgium.
Shiller said “There are so many countries that are looking bubbly.”
» Australian Treasurer: US shutdown has taught us a lesson – CNBC, 14th Oct 2013.
» Nobel Prize winner Robert Shiller warns of ‘bubbly’ global home prices – The Sydney Morning Herald, 15th October 2013.
» Nobel Prize U.S. winner warns of “bubbly” global home prices – Reuters, 14th October 2013.
» Shiller’s Nobel win is a nod to the asset bubbles we lived through – Market Watch, 14th October 2014.
Posted in Australian economy, Australian Housing | 37 Comments »
In an interview with Neil Mitchell’s 3AW on Friday, Prime Minister Abbott said “Don’t forget Neil that if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset.”
His comment prompted Neil Mitchell to respond prudently with, “But interest rates can’t stay at this level, people are going to get burnt!”
Abbott shunned any responsibility, lumping it on the central bank by saying, “I am sure the Reserve Bank is very conscious of the fact that there are a whole range of things that need to be managed here and I would be confident that the Reserve has got its eye on housing prices and will appropriately manage the level of interest rates.”
His ignorance is likely to have heads shaking at the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and even the International Monetary Fund (IMF) who have all been sounding alarm bells in recent weeks.
Australia’s housing bubble and associated household debt is acting as a leech, sucking blood out of the economy. In the low interest rate environment, The RBA is struggling to keep the housing market under control, while supporting the faltering broader economy and attempting to cool the strong Australian dollar.
One of the causes of euphoria in the housing market is a broken taxation system, severely distorting the economy and something clearly the responsibility of the Federal Government, not the Reserve Bank. Two Howard Era tax concessions instantly spring to mind.
The 50% capital gains discount introduced in 1999 – when coupled with negative gearing introduced decades earlier, accelerated the accumulated loses of residential property investor making the playground much more geared towards speculative capital gains and not rental yield.
And the hot topic in the recent months – Allowing Self Managed Super Funds (SMSFs) the ability to borrow and leverage up into the property bubble, introduced by Liberal’s in September 2007. This not only creates a risk for the residential property market, but has severe implications for our superannuation system as well.
Abbott is hoping renewed confidence in the housing market will result in more homes being built – alleviating some of the supply side constraints. However, this could be flawed thinking as there is little evidence to date to suggest this will happen as most speculators play in the established residential housing market. If Abbott wanted to show some leadership and create a tangible outcome, he could quarantine negative gearing and make it only available for new dwellings.
Australia’s housing bubble is a significant issue that needs the concerted effort of the Federal Government, the RBA and APRA. Setting the Reserve Bank up to fail shows both poor leadership and poor form.
» Interview with Neil Mitchell, Radio 3AW, Melbourne – The Prime Minister of Australia, 27th September 2013.
Posted in Australian economy, Australian Housing, Negative Gearing | 38 Comments »
I never thought I would see the day. In fact, in 2008 I joked with some Journalists on who was going to be the first to get Australia’s Real Home Price Index into a mainstream paper. None of us thought it could ever happen.
So you still need to pinch me today when I stumbled across News Limited’s Tabloids and The Australian publishing this graphic:
In the original article published in the Australian Conservative, it was called “The most important graph in Australia’s history.”
Bob Day AO, Managing Director of Homestead Homes and Federal Chairman of Family First writes for News Limited:
FOR more than 100 years the average Australian family was able to buy its first home on one wage. The median house price was around three times the median income, allowing young homebuyers easy entry into the housing market. As can be seen from the accompanying graph, the median house price is now – in real terms that is – relative to income, more than nine times what it was between 1900 and 2000.
It’s a story we have told for many years.
That’s $600,000 they are not able to spend on other things – clothes, cars, furniture, appliances, travel, movies, restaurants, the theatre, children’s education, charities and many other discretionary purchase options.
The economic consequences of this change have been devastating. The capital structure of our economy has been distorted to the tune of hundreds of billions of dollars, and for those on middle and
low incomes the prospect of ever becoming homeowners has now all but vanished.
And while the slump in business conditions over the past years have been blamed on everything from the GFC to the high Australian dollar, the real culprit has been the massive redirection of capital into high mortgages.
Oh shit, is this for real.
It did stop short of a comparison with United States subprime bubble, so readers could easily comprehend the scale – but it’s a fantastic start.
Meanwhile, in other news, The Australian Financial Review reports today the International Monetary Fund will investigate Australia’s Housing Bubble and the risks it poses when it sends a team to Australia later this year. The AFR writes :
News of the visit comes after the IMF this month urged regulators around the world to consider using so-called macroprudential tools, such as limits on loan-to-valuation ratios or increased bank capital requirements, to prevent banks fuelling house price bubbles.
It will be interesting if the visit puts more pressure on Australian regulators to step up to the plate and act.
» Bob Day: Current Australian house prices more than nine times median household income – The Advertiser, 23rd September 2013.
» Bob Day: Current Australian house prices more than nine times median household income – The Australian, 23rd September 2013.
» Massive supply-demand imbalance puts home prices out of reach of many – Australian Conservative, 19th August 2013.
» IMF turns spotlight on Australia’s housing market – The Australian Financial Review, 24th September 2013.
Posted in Australian economy, Australian Housing | 22 Comments »
If you can believe the real estate spruiker, emergency low interest rates have put a fire under Australia’s housing market. And as Australia already suffers the side effects of a large housing bubble developed over the past decade, investors will need to use extreme caution as signs emerge Australia’s central bank has just lost control of monetary policy.
Housing bubbles around the world were created early last decade by an abundance of cheap credit, the very same conditions present today. Government policy from both sides prevented a long overdue correction in our overheated housing market (‘PM appeals in vain to the shafted generation’), but the effects of an unsustainable domestic economy persist and have forced the RBA to drop the official cash rate to an emergency low of 2.50%, a level not seen in 60 years.
A change to the official cash rate has, to date, had little stimulatory effect. In the years leading up to the global financial crisis, Australian households had consumed more than they earned and accumulated debt at alarming rates. The collapse of Lehman Brothers five years ago – last week, signalled a new age in Australia where prudent households used falling interest rates to pay down their debts at a faster pace.
Data from the RBA last week suggests between 50 and 90 per cent of the 2.25 percentage point savings on interest rates have been used to make prepayments on mortgages around the country and goes some way in explaining why retail spending remains in the doldrums. But not everyone has mortgages. The falling cash rate has also had a significant impact to savers with money in the bank, especially retirees who now have less income and have been forced to cut back on spending putting more pressure on a deteriorating domestic economy.
Investors’ lead Mortgage Credit Growth
In recent months there has been an up-tick in credit growth for residential mortgages. According to AFG, Australia’s largest mortgage broker, investors comprise of 36.7 per cent of new home loans in August. In contrast, first time buyers now make up only 11.3 per cent of the market.
In NSW last month, investor loans made up a unprecedented 49.5 per cent of mortgages processed – the highest level of investor activity ever recorded for any state according to AFG.
AFG’s General Manager of Sales and Operations, Mark Hewitt says “With property prices starting to rise, and rates set to remain low for a while yet, a lot of investors are anticipating the next property cycle.”
For some investors, the tiny returns on cash have ‘forced’ them to seek greater yields in the property market. It is believed a reasonable portion of the investor activity is the Self-Managed Superannuation Fund (SMSF) sector. In September 2007, legislation came into effect allowing SMSF the ability to leverage up to purchase property in the fund.
Led by endless number of “super” spruikers (‘The stampede into property by self managed super funds is a risky business’), Mum & Dad SMSF investors are being coaxed into investment structures they don’t understand and this has led many experts including the regulators to worry about this growing trend. For those that know what they are doing, they have worked out there is only one thing more tax effective than negative gearing, and that’s investing in property through their SMSFs.
Loans in SMSF must be non-recourse, but depending upon the diversification of the fund, some super funds could lose substantial wealth if Australia’s property bubble were to correct. This no doubt would anger younger generations who are not only locked out of housing, but will be paying increased taxes to fund the pensions of those who will have recklessly lost their superannuation.
Currency Wars: USA 1, AUST 0
Capital inflows from the mining boom and the perception Australia has a miracle economy has seen the Australia dollar surge in recent years. The persistently high Australian dollar along with high energy and labour costs have made Australia uncompetitive on a global stage and have been slowly hollowing out the Australian economy. According to the ABS, jobs in the manufacturing sector are now at its lowest level since records started in 1984. The story is not much better in retail and tourism. Rising unemployment could be a real challenge for a housing bubble built upon perceived perpetual growth.
A decision by the US Fed this week not to scale back their 85 billion a month stimulus program sent the Australian dollar back over 95 cents. The RBA has a target to bring the Australia dollar down to 85 US cents and this may force the hand of the RBA to further slash interest rates in the coming months to bring the Australian cash rate closer in-line with world interest rates, and prevent a greater inflow of capital into Australia, causing rise of the Aussie.
“It’s a disaster”
If the residential property market is “hot” now, can you imagine what another rate cut or two will do to it?
Robert Mead, Pimco’s head of portfolio management in Australia calls it a disaster. He told the AFR, “If the only impact from stimulatory policy elsewhere in the world is to inflate our residential prices, it’s a disaster,”
And how far will the RBA go to hit their target of 85 cents?
Tony Adams, Colonial First State’s head of global fixed interest rates and credit told the AFR, “The RBA is after 85c but I don’t think they are going to get there.”
So, it was quite timely for the International Monetary Fund (IMF) on Monday to release its report titled “Key Aspects of Macroprudential Policy.”
In announcing the report, José Viñals remarked “Policymakers learned the hard way that systemic risks could not be addressed through the traditional mix of macroeconomic policies”
“A new approach was needed to fill the policy gap and ensure financial stability in both advanced economies and emerging markets.”
Following the move by New Zealand’s central bank in August to clamp down on risky lending (‘RBNZ takes action to limit damage from housing bubble’), there has been some discussion if the same policies should be applied here. The Australian Prudential Regulation Authority (APRA) has written to banks warning about relaxing lending standards (‘With record low rates and pent up demand fuelling prices, APRA’s putting lenders on notice’), while it works out how to best proceed.
The banking lobby has naturally fired back, suggesting any tightening of lending will push first home buyers out of the market, not that there are many left! Applying Loan-Value-Ratio (LVR) limits on mortgages may also have little effect with SMSFs who are only able to borrow up to 80 per cent. Maybe the correct course of action is to reverse legislation allowing super funds to leverage into the property bubble? But if negative gearing is a sacred cow, one wonders if allowing super funds to leverage into asset bubbles will also be untouchable?
Who is going to act first? Time is ticking.
» The stampede into property by self managed super funds is a risky business – The Business (ABC), 17th June 2013.
» Mortgage Index September 2013 – AFG, 2nd September 2013.
» With record low rates and pent up demand fuelling prices, APRA’s putting lenders on notice – The Business (ABC), 11th September 2013.
» IMF takes aim at housing bubbles – Australian Financial Review, 17th September 2013.
» RBA watchful as cheap money heats housing market – The Australian, 18th September 2013.
» Regulators should target loan serviceability to head off trouble – The Australian, 19th September 2013.
» Australian dollar climbs to three-month high and shares jump after US Fed maintains stimulus – The ABC, 19th September 2013.
» Home owners use interest rate cuts to pay down mortgages – The Age, 20th September 2013.
» IMF Executive Board Discusses Key Aspects of Macroprudential Policy – International Monetary Fund, 16th September 2013.
» Making Macroprudential Policy Work – International Monetary Fund, 16th September 2013.
Posted in Australian economy, Australian Housing | 14 Comments »
News segments spruiking the real estate market and reminding buyers to hurry up and buy now or miss out for ever has been the staple of 6PM news bulletins on Saturday night.
But the tide might be changing.
Channel 10 reports tonight of a fickle and cautious buying public, smarting up to the used-house salesman rhetoric.
“With the distraction of the federal election over, the Sydney and Melbourne property markets have had record high auction numbers this weekend. But new research shows that Aussies young and old aren’t necessarily buying the real estate rhetoric” reported Channel 10.
“But increasingly savvy buyers are suspicious of real estate experts and their vested interests” – Can’t understand why?
According to the first quarterly LEDA Real Estate and ReachTEL Consumer Property Confidence (CPC) Index of 1,700 buyers, only 53 percent trust what the real estate industry said about the property market.
And only 20% said they trusted real estate agents.
Barry Goldman, LEDA founder told Real Estate Business “In principle, the industry has a pretty poor reputation when it comes to truth and honesty,”
“The biggest issue is that most of the industry commentary is generated by the self-interest of real estate agents or, alternatively, the self-interest of the media that publishes advertising for real estate.”
“Effectively, the media wants advertising sales, so they will always try to put a positive slant on the real estate market – irrespective of the conditions.”
You can watch Ten’s news story here
» Going once, going twice – Channel 10 News, Saturday 14th September 2013.
» Only 1 in 5 Australians trust agents – Real Estate Business, Tuesday 3rd September 2013.
Posted in Australian Housing | 10 Comments »
New Zealand’s central bank appreciates the bigger the bubble, the bigger the bust. Today, it has taken action to curb potential damage from a bigger housing bust by restricting lending in the hope of cooling New Zealand’s overheated housing market.
Reserve Bank Governor Graeme Wheeler said “In the current situation, where escalating house prices are presenting a threat to financial stability but not yet to general inflation, macro-prudential policy offers the most appropriate response.”
From the 1st October 2013, mortgages with a LVR (loan-value-ratio) over 80 per cent must not account for any more than 10 per cent of new bank lending by dollar value. Currently lending to this segment is 30 per cent.
In explaining the reasoning for the new macro-prudential policy, the Mr Wheeler said:
Housing plays a critical role in our economy. It represents almost three quarters of household assets, and mortgage credit accounts for over half of banking system lending. Housing is a major source of value and of risk to the household sector and the banking system.
The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy. Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future. This is particularly the case in a market that is already widely considered to be over-valued.
House prices are high by international standards when compared to household disposable income and rents. Household debt, at 145 percent of household income, is also high and, despite dipping during the recession, the percentage is rising again. Furthermore, the growth in house prices is occurring after only a small correction following the house price boom of 2003-2007 that saw New Zealand house prices increase more rapidly than in any other OECD country.
The Reserve Bank is not alone in expressing these concerns. Over the past several months the IMF, OECD, and the three major international rating agencies have pointed to the economic and financial stability risks associated with New Zealand’s inflated housing market.
The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.
According to the RBA, Australian household debt to household disposable income sat at 148.3 per cent in the March 2013 quarter.
» Limits for high-LVR mortgage lending – Reserve Bank of New Zealand, 20th August 2013.
Posted in Australian economy, Australian Housing, NZ Housing | 24 Comments »
ABS data released today show house prices in Australia has fully recovered, surpassing record highs last achieved in June 2010. The weighted average of the eight capital cites recorded a 2.4 per cent increase to the June 2013 quarter and a healthy 5.1 per cent change for the year to June 2013.
For the quarter, all eight capital cites recorded growth in house prices except Hobart – falling 1 per cent.
Perth lead the gains, recording a 3.4 per cent increase in the quarter, followed by Darwin (2.9 per cent), Sydney (2.7 per cent), Melbourne (2.4 per cent), Brisbane (1.9 per cent), Canberra (1.0 per cent) and Adelaide (0.3 per cent).
Despite a healthy housing market, the Reserve Bank of Australia today dropped interest rates to 2.5 per cent, a record low in Australia. Interest rates might be at record lows, but households and business Australia wide is struggling to make ends meet under crippling high household debt levels and falling consumption, further exposed in recent times by a cooling China and resource sector.
But record low interest rates could now be creating an even bigger housing bubble ultimately leading to severe financial instability when the bubble finally deflates, potentially triggered by rising unemployment or a crisis in China. Yesterday, Roy Morgan Research reported on its latest unemployment survey showing the unemployment rate in Australia is now 10.1 per cent up 0.4 per cent. Another 9% of the workforce is considered underemployed.
The problem of low interest rates fuelling bigger property bubbles is something the Reserve Bank of New Zealand is also struggling with. It needs to drop interest rates to support a cooling economy, but the single interest rate lever leaves the out of control gung ho housing sector leveraging up into even more debt, creating even larger issues long term.
It is expected the RBNZ is about to embark on macroprudential controls including capping the number of high risk low loan-to-value ratio loans as it fears rising property values will create financial instability. Time will tell if Australia is forced to consider similar measures.
» 6416.0 – House Price Indexes: Eight Capital Cities, Jun 2013 – The Australian Bureau of Statistics.
» 48,000 jobs created in July, but unemployment up to 10.1% and under-employment virtually unchanged at 9.0% – Roy Morgan Research, 5th August 2013.
» Analysts fear RBA’s rate cuts could fuel property price bubble – 6th August 2013.
Posted in ABS House Price Indices, Australian economy, Australian Housing, NZ Housing, Unemployment | 44 Comments »
News Limited is generally considered to have a pro housing slant, but today it has printed a series of articles suggesting housing affordability is the top issue facing voters in this year’s election.
“HOUSING affordability is a burning issue for Australian voters – more important than border security, broadband and even education” reports Jacson Gothe-Snape.
The claim is backed-up by research conducted by Auspoll showing 84 per cent of Australians believe housing affordability is more important than education (82%), border security (78%) and ‘fast, affordable broadband’ (68%). It is unclear what the sample size and methodology of the Auspoll survey is.
Two weeks ago Who Crashed The Economy reported on the poor policy both the Howard and Rudd governments have implemented over a decade to create and then keep our housing bubble from collapse. (‘PM appeals in vain to the shafted generation’).
Comments to the article suggest those effected need to get more political and have their voice heard. Even Baby Boomer Khol said “We need to get political!!”
David Stolper, Senior Research Partner at Auspoll said “People are angry and frustrated by the lack of affordable housing but surprisingly this anger has yet to be directed at our political leaders, This disconnect is puzzling given the options for the Federal Government to improve the situation by coordinating land supply and incentivising the development of new homes”.
The trouble is when you talk to any politician about housing affordability, they want to fix the problem with a bigger grant. (Is this New’s Limited’s motive, knowing Rudd is back in town?)
The deeper issue is a housing bubble and banking system too big to fail. Implementing any affordable housing policy that doesn’t further distort an already over extended market could cause our economy to nose dive in to a significant recession.
Only today, ratings agency Moody’s has warned our big four banks have the highest exposure to residential mortgages than any peers in other developed countries it has studied, making our banking system vulnerable to a US style collapse if a significant house price correction were to occur.
Tony Hughes of Moody’s Analytics told the Australian Financial Review today, “Irrespective of the complacency of local analysts, who sound a lot like many US housing cheerleaders circa 2006, this exposure represents a major concentration risk for banks and the Aussie economy. Houses appear to be overvalued. One merely hopes that the looming correction is a smooth one.”
“The high degree of exposure to the domestic mortgage market raises many concerns. Recent experience has shown that house prices can fall significantly and trigger serious banking meltdowns.”
Moody’s warning today follows similar concerns raised by the International Monetary Fund (IMF) in November last year. (‘Too big to fail‘)
At the time it reported, Australia’s four major banks, The ANZ, Commonwealth, Westpac and NAB hold 80 per cent of the countries banking assets and 88 per cent of residential mortgages. Such dominance in the market, each with similar business models and reliance on overseas funding would leave the majority of Australia’s banking sector exposed to common shocks. “The combination of high household debt and elevated house prices is a risk to banks’ large mortgage portfolio.”
» Voters want Federal Government response to housing affordability – News Limited, 15th July 2013.
» Banks vulnerable to housing collapse – The Australian Financial Review, 15th July 2013.
» MOODY’S: Australian Banks Are Too Exposed To An ‘Overvalued’ Housing Market – Business Insider Australia, 15th July 2013.
» Here’s The Chart That Moody’s Says Could Be A Sign Of An Australian Housing Bubble – Business Insider Australia, 15th July 2013.
» Too big to fail – International Monetary Fund (IMF) warning on our banks exposure to the housing bubble – Who Crashed The Economy, 18th November 2012.
Posted in Australian economy, Australian Housing | 63 Comments »
Generation Y, Kev wants you on board.
During Kevin Rudd’s comeback leadership victory speech he had a message for our young generation:
Before I conclude, let me say a word or two to young Australians.
It’s clear that many of you, in fact too many of you have looked at our political system and the parliament in recent years and not liked or respected much of what you seen.
In fact as I rock around the place talking to my own kids, they see it as a huge national turn-off.
Well, I understand why you’ve switched off; It’s hardly a surprise.
But I want to ask you to please come back and listen afresh.
It is really important that we get you engaged, in any way we can.
We need you, we need your energy, we need your ideas, we need your enthusiasm, and we need you to support us in the great challenges that lie ahead for the country.
And with your energy, we can start cooking with gas.
The challenges are great, but if we are positive and come together as a nation we can overcome each and every one of them.
After 22 years of consecutive growth fuelled by unsustainable fiscal “prop-ups” and distortions, the current generation is faced with an unattainable housing dream and an uncertain future. To put those 22 years in perceptive, Professor Ross Garnaut says “Between the recession of 1990-91 and now, mid-2013, Australians have enjoyed the longest period of economic expansion unbroken by recession of any developed country ever.”
Distortions from our home grown housing bubble and the record levels of household debt currently present in Australia has spilled over into the broader economy. When combined with the end of the mining boom, it is causing youth unemployment to sky-rocket. For the first time in decades, this generation is starting to struggle to get a job, let alone provide their own shelter – something even Generation X struggles with today. And with both sides of politics continuing to pursue any avenue possible to keep our miracle economy from collapse and expanding for yet another consecutive year, it’s no surprise our younger generation is disillusioned in the system.
Without government intervention, there is little doubt the Australian housing market would have collapsed in 2008 in parallel with other over extended housing markets around the globe. At the time, The Courier Mail reported “STRESSED home owners and investors are flooding the market with thousands of houses but agents say they can’t find any serious buyers for some properties.” The number of homes listed for sale was surging. Prices were falling.
First Home Owners’ Boost
This trend remarkably reversed when a month after Lehman Brothers filed for bankruptcy and among the backdrop of a global “systemic meltdown” caused by irresponsible lending and excessive household debt levels, Prime Minister Kevin Rudd announced the First Home Owner Boost (FHOB). For first home buyers purchasing an existing dwelling, the FHOB was a $7,000 “boost” to the existing $7,000 first home buyers grant first introduced on the 1st July 2000 to offset the GST. To help stimulate new residential building, first time buyers building a new home would get an extra $14,000 boost.
The rumour mill contains unverified reports suggesting the 2008 stimulus package prepared by Treasury to combat the GFC didn’t include a First Home Owners’ Boost. Rather, Treasury had proposed more prudent saving through the First Home Saver Account (FHSA). If the reports are right, it was our Politicians that dreamed up and implemented this gem called the ‘Boost’.
These rumours do bode well with Treasury Executive Minutes stating “The FHOB was announced 14 days after the FHSAs became available as part of the Government’s first stimulus package designed to counter the effects of the global financial crisis. This short-term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market. Contrary to this measure, the FHSA is designed to encourage saving over the medium to long term.”
And to bring forward purchases, it did. By October 2009, 190 thousand first home buyers buckled under the temptation of free money, and took up the offer. A small portion went through the agony of losing their homes in the years that pursued. The lure of free money and no appreciation for the size and serviceability of today’s mortgage was far too great.
Open the Foreign Floodgates!
At the time of the GFC, Australian household’s carried more household debt as a percentage of household disposable income than their American household counterparts. To cover all bases and ensure there wasn’t a devastating collapse of the housing market like in the United States, the government also “streamlined” the administrative requirements for the Foreign Investment Review Board (FIRB). As part of these changes, temporary residents (e.g. Chinese) could purchase Real Estate in Australia without having to report or gain approval from the FIRB in a bid to help support the market. It was sold to the Australian public as allowing the FIRB to concentrate on larger issues in the ‘National Interest’.
By March 2010, the media was flooded with articles (Australia for Sale) on Australian’s being outbid by an army of Chinese residents, effectively pricing Australian’s out of their own housing market. But the ‘streamlining of administrative requirements’ actually meant no records were kept, or more specifically it would seem that these foreign temporary residents no longer needed to lodge applications with the FIRB. There was public outcry and no real data to support just how big or small this issue actually was.
The outcry had grown so intense, that on the 24th April 2010 the government buckled and a tightening of foreign investment rules relating to residential property was announced, complete with a package of new civil penalties, compliance, monitoring and enforcement measures. The government even went to lengths to set up a 1800 hot-line for residents to report suspicious property buyers and help calm an outraged public.
The press release by the former Assistant Treasurer, Nick Sherry said “The Rudd Government is acting to make sure that investment in Australian real estate by temporary residents and foreign non-residents, is within the law, meets community expectations and doesn’t place pressure on housing availability for Australians.”
Kev’s Property Portfolio
Five years on, the unsustainable stimulus measures implemented in 2008 is wearing thin. Credit growth for mortgages is at near 37 year lows despite interest rates sitting at 53 year lows. Gaping cracks are now starting to appear in the China miracle and the “mining boom is over” according to Rudd. Many metrics now have the economy in a worst position than during the depths of the GFC.
And Rudd is now back as Prime Minister.
For the shafted generation, already disillusioned by Australian politics, it begs the question, what surprise now? What can be pulled out of the hat?
Their concerns are not unwarranted when on Tuesday, News Limited publishes a story titled, “Rudd’s luxury property portfolio miles from Struggle Street”
With a $10 million dollar portfolio of homes in Canberra, Brisbane and on the Sunshine Coast, can Rudd really be trusted to make decisions in the best interests of Australia?
Or more precisely, how soon before the next housing stimulus package will be announced? How big can this bubble get?
Howard & Costello
But, Rudd can’t be given the credit for creating or nurturing Australia’s housing boom, only for pulling out every stop possible to save it. Rudd had in fact inherited a housing bubble “too big to fail”, when Labour rose to power in November 2007.
The Liberal’s Howard and Costello had more to do with creating the housing bubble.
Only last weekend, Former Prime Minister John Howard was rallying Liberal constituents in a Coalition rally at the Melbourne showgrounds. He told loyal supporters, he had left the economy to Labour in 2007 with no net debt.
But the same can’t be said for household balance sheets.
While Howard and Costello had the reins of the Australian economy, household’s packed on significant amounts of household debt. Some of the drivers was poor policy such as the 50 per cent capital gains discounts which when used in conjunction with negative gearing, really started to fuel speculation in housing markets. Other poor policy could include change of legislation to enable self managed super funds to leverage into the housing bubble.
www.nicholsoncartoons.com.au – 25th Sep 2002
But Australia wasn’t the only country in the world to experience a significant housing bubble caused by an abundance of cheap credit, hence some of the blame should sit with Howard and Costello’s failure to act on the household debt problem. And have a feel for our regulators, trying to instil sanity and protect the public from irrational government decisions. ASIC is currently overwhelmed with rouge “super” spruikers encouraging SMSF to speculate in leveraged property. Last month, one insider told ABC’s The Business, it’s a “ticking timebomb.”
The bigger the bubble gets, the harder it becomes to pilot a soft landing. By the time Rudd inherited the housing bubble, it was too big to fail. And when Lehman Brother’s collapsed, Rudd pretended everything was a-okay domestically – “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.”
It’s no wonder younger generations have given up on politics. Can you really blame them?
» Rudd’s luxury property portfolio miles from Struggle Street – News Limited, 2nd July 2013.
» The stampede into property by self managed super funds is a risky business – The ABC, 17th June 2013.
Posted in Australian economy, Australian Housing, China, First Home Owners' Boost, Foreign Investment Review Board, Negative Gearing, Unemployment | 28 Comments »
Since the GFC, Australia has literally bet the house on China. We have put all our eggs in one basket. And like Australian housing, you shouldn’t become complacent on the China miracle either.
Throughout much of last decade, many western households around the world spent more than they earned. China’s low cost emerging manufacturing sector was the primary benefactor of this unsustainable global spending spree.
This quickly changed during the GFC when debt bubbles started bursting, and global consumption rapidly declined. Demand for Chinese manufactured goods dried up and inventories soon started to pile up.
To prevent collapse, Beijing embarked on a massive 4 trillion yuan economic stimulus program. But, additionally, it told local governments to spend like mad and they did this off balance sheet, though SOEs (State Owned Enterprises) and LGFV (Local Government Finance Vehicles). This set the foundations for a large fixed asset investment boom to follow. The beneficiary this time was us, via the Mining boom.
One of many photos published by Foreign Policy on June 21st 2013.
China built apartments, office towers, shopping centres, roads, transport infrastructure etc. Most were superfluous, would sit empty and with no cash flow, and create future issues when the debt comes due for refinancing.
Like other significant credit bubbles, the trick is to quickly move on the debt to the unsuspecting to reduce your risk before it blows up. China’s lenders created Wealth Management Products (WMPs). I love the name – it simply sells itself. Zero Hedge explains:
“The so-called ‘Wealth Management Products’ that are discussed widely and yet little understood are basically higher yielding vehicles pitched to a greater-fool retail audience with the goal of reducing banks’ risk at the behest of the PBOC. Of course that is not how these stuffed-to-the-gills-with-risky-development-projects deals are pitched to the investing public but they have allowed banks (and implicitly local governments) via the infinitely virtuous loop below to fund any and all things construction-based… until now.”
This has now been going on for a decade, but at an rapidly accelerated place in the five years since the GFC. About twice a year, pictures emerge of a new ghost city similar to the much publicised city of Ordos in Inner Mongolia.
Last week it was Foreign Policy’s turn to publish photos of the district of Chenggong, a 41 square mile city built 11 miles South of Kunming in China’s Yunnan province. The new city designed to house 1 million by 2020 includes 15 university campuses.
Two weeks ago, Ratings agency Fitch warned China’s credit bubble is now unprecedented in modern world history. The Sydney Morning Herald reported, “China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.”
Prior to the Fitch warning a fortnight ago, the China central bank – The People’s Bank of China (PBOC) had always stepped up to provide extra liquidity when the banks and shadow banking system was under pressure allowing the problem to continuously snowball. But what happens when one day, the PBOC decides not to step up to the plate?
We came close to this last Wednesday week (19th) when the Shanghai Interbank Offered Rate, or Shibor surged and credit markets in China began to freeze over. At first the PBOC was nowhere to been seen, spooking financial markets around the world. Commentators started talking of a Lehman style collapse. The cause was believed to be a massive withdrawal of deposits in early June, including maturing wealth-management products (WMPs). Could investors be getting cold feet? Why would you not want to reinvest?
The PBOC was forced to intervene a couple of days later, once again saving the banking sector – for now. But it warned the days of easy money are over. Credit markets in China has loosened a little but still remain tight, and this is expected to have the intended impact of curbing growth going forward.
The question remains, not if, but when will the big credit crunch come.
The consequence for Australia is likely to be more severe this time. Australia has depended on mining to keep household incomes elevated and mask the effects of high household debt, caused from a significant housing bubble. As mining and the domestic economy slows, jobs are being lost.
Albert Edwards from Societe Generale says “Australia is a leveraged time bomb waiting to blow” and makes comparisons to the US subprime crisis caused in part from (CDOs) collateralised debt obligations blowing up.
“It is not a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble [household debt] built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”
On Wednesday night after a leadership challenge, Prime Minister-Elect Kevin Rudd delivered the following in his leadership victory speech:
“We have a great future, but that future is not guaranteed. In recent times I’m been thinking a lot about the state of the global economy,”
“There are bad things happen out there. The global economy is still experiencing the slowest of recoveries.”
“The china resource boom is over. China, itself, domestically is showing signs of recovery.”
“And when China represents such a large slice of Australia own economy, our jobs and opportunities for raising our living standards, the time has come for us to adjust to the new challenges.”
“New challenges in productivity. New challenges also in the diversification of our economy.”
Channel 9′s 60 Minutes will tonight air a segment on Chinese ghost cities. It will claim “vast new megacities bigger than London or New York are shooting up all over the country at a rate of 20 a year.” Tune in at 7:30pm.
» Presenting Chinese Wealth Management Product’s Infinite ‘Risk’ Loop – Zero Hedge, 24th June 2013.
» Haunting photos of China’s latest ghost city – Macrobusiness, 24th June 2013.
» The Empty City – Foreign Policy, 21st June 2013.
» China’s credit bubble is unprecedented: Fitch – The Sydney Morning Herald, 18th June 2013.
» Fitch says China credit bubble unprecedented in modern world history – The Telegraph (UK), 16th June 2013.
Posted in China | 10 Comments »
Ratings agency Fitch has warned China’s credit bubble is now unprecedented….
» Fitch says China credit bubble unprecedented in modern world history – The Telegraph, 16th June 2013.
» China’s credit bubble is unprecedented: Fitch – The Sydney Morning Herald, 18th June 2013.
Posted in China | 14 Comments »
On Saturday, the Herald Sun reported the average W.A. job seeker has experienced a fifteen per cent fall in hourly rates from the same time last year. The average hourly rate is now $51.60 a hour, down from $59.80 a year ago.
Geologists have seen the largest falls and can now expect $52 an hour, down from $71 last year. The hourly rate for an engineer has fallen from $80.40 to $70.70.
But it’s not only the mining and resources industry taking a hit.
Today, Car manufacturer Holden has given their staff the ultimatum – Take a pay cut, or suffer the same fate than Ford. This time last month, Ford announced it will close its manufacturing plants in Australia in 2016 with a loss of 1200 jobs.
In the announcement today, Holden Managing Director Mike Devereux said it costs $3,750 more to build a Holden in Australia than overseas. $2,000 is due to high labour costs.
» FIFO workers accept pay cuts – Herald Sun, 15th June 2013.
» Holden seeks worker pay cuts in Adelaide – The Australian, 18th June 2013.
» Holden warns of exit if pay cuts rejected – The Sydney Morning Herald, 19th June 2013.
Posted in Australian economy | 5 Comments »