Based on analysis of advanced economies over the past three decades, housing busts preceded by larger run-ups in household debt tend to be more severe and protracted.

This is one finding presented in the International Monetary Fund, World Economic Outlook April 2012, titled Growth Resuming, Dangers Remain.

Australia is not absence from the list of advanced economies who have witnessed a rapid rise in household debt. Down under, we have almost quadrupled our household debt as a percentage of household disposable income over the past thirty years causing many to question if this level of debt burden is sustainable.

Most of this debt has been piled into our residential property market, which has now experienced price declines for five consecutive quarters while the growth of housing finance falls to levels not seen since records started some 35 years ago.

According to the IMF report, in the five years preceding the Great Recession (GFC) of 2007, advanced economies recorded an average household debt to income increase of 39 percentage points. A quick look at the Reserve Bank of Australia figures suggest Australia’s household debt to income ratio increased by a bit more than 37 percentage points.

Chapter 3 of the IMF report sets out to determine the relationship between household debt and the depth of economic downturns.

It found the declines in economic activity after a housing bust are not simply reflective of the decline in the asset price and the associated destruction of household wealth. It is a combination of the former and pre-bust leverage that ultimately explains the depth of the contraction. Simply put, the more household debt, the bigger the bust and this holds true regardless of a banking crisis or not. Economic downturns following high debt housing busts are also more protracted, with declining consumption lasting for at least five years.

According to the report, in economies with high household debt, household consumption can fall by more than four times the amount that can be reasonably explained by falling house prices alone. This is caused, in part, by more pronounced de-leveraging, as households try to repair their weak balance sheets. In low debt housing busts, as could be expected, there is no discernible decline in household debt to income ratios.

De-leveraging can result from a number of factors including a realisation that house prices were overvalued, a tightening of credit standards, a sharp revision in income expectations and an increase in economic uncertainty. Uncertainty can also lead to an increase in household savings, at the expense of consumption.

High debt busts typically cause greater falls in real GDP and larger increases in unemployment.

As unemployment rises due to falling consumption, the ability of households to service their large debts diminish causing defaults and foreclosures starting what the IMF call a ‘self-reinforcing contractionary spiral’. Estimates presented in the report suggest a single foreclosure can lower neighbouring house prices by 1 per cent, but a wave of foreclosures could wipe as much as 30 per cent off local prices.

Negative equity can also have a role to play, with a U.S. study finding homeowners with negative equity spend 30 per cent less on maintenance and home improvements, than those that don’t. Maintenance and home improvements either retain or increase the relative value of the home.

Similarly, as supply exceeds demand or as foreclosed homes sit vacant on the market, months of neglect and deterioration further reduce values. Vacant homes and unemployment can also result with social issues such as high crime rates making areas less desirable to purchase in.

» World Economic Outlook, Growth Resuming, Dangers Remain – International Monetary Fund, April 2012.

A graph prepared by Steve Keen has featured on the Kohler Report (ABC News) last night showing how Australia’s house price correction is tracking with the Japan and USA housing bubbles.

Kohler told viewers around the country, “disturbingly, according to this chart it’s the same decline from peak at the same point of the big Japanese and American housing crashes of the early 1990′s in Japan, and 2006 to now, in the US.”

» Kohler Report – ABC News, 2nd May 2012.
» Australian House Prices down 10% from Peak – Steve Keen’s Debtwatch, 1st May 2012.

Rate cuts by the Reserve Bank of Australia (RBA) in November and December 2011 has done nothing to restore confidence to the housing market with the official Australian Bureau of Statistics (ABS) House Price Indexes released today showing house prices in Australia continue to fall, clocking up five consecutive quarterly price declines. In the March quarter, the weighted average of established house prices in Australia’s eight capital cities fell 1.1 percent and for the twelve months to March, prices have fallen 4.5 percent.

After a bad CPI figure last week, the RBA has slashed the official cash rate today by 50 basis points to 3.75%. Even if the majority of Australian banks choose to pass the cut onto mortgage holders, this cut, like cuts in November and December is expected to provide little to no support to Australia’s housing market buckling under the pressure of high household debt. Just yesterday, the RBA released housing credit statistics showing housing credit growth is at the lowest rate since records started 35 years ago. With housing credit growth this low, Australia’s housing bubble could be on borrowed time.

» 6416.0 – House Price Indexes: Eight Capital Cities, Mar 2012, Australian Bureau of Statistics – 1st May 2012.
» Australian House Prices down 10% from Peak – Steve Keen’s Debtwatch, 1st May 2012.
» Confidence the missing ingredient – The Sydney Morning Herald, 1st May 2012.

While property experts gather around to corroborate stories of a recovering property market, data released today from the Reserve Bank show housing credit rose just 0.4 percent in March to bring the yearly growth rate to 5.3 percent. Housing growth has been stuck firmly at an annual rate of 5.3 percent since January and at the lowest ever recorded figure since records started 35 years ago.

Housing credit growth had been running at double digits until the Global Financial Crisis, but excessively high household debt levels have caused household’s to re-adjust their appetite for debt in a more uncertain climate.

This reluctance to take on debt is also observed in housing finance commitments that is currently hovering around levels last seen in the late 1990s.

The housing industry is feeling the full effects of low housing credit growth. Figures released from the Housing Industry Association today show new home sales are at 1994 levels, falling 9.4 percent seasonally adjusted, in March 2012.

After annual CPI came in at only 1.6 percent last week, the Reserve Bank of Australia is almost certain to cut the official cash rate tomorrow. But with housing credit growth at levels not seen in decades, it is hard to see any resulting housing recovery.

» New home sales crater – Macrobusiness, 30th April 2012.
» Home sales sink to lowest since 1994 – The Age, 30th April 2012.

Transparency surrounding real estate investment by foreigners has returned with the Foreign Investment Review Board Annual Report 2010-11 showing 9771 real estate investments worth $41.5 billion was approved in 2010-11.

In December 2008, the Rudd Government announced a change to legislation, it claimed, was designed to ‘streamline’ some of the administrative requirements for the Foreign Investment Review Board (FIRB). As part of these changes, temporary residents could purchase Real Estate in Australia without having to report or gain approval from the FIRB and would allow the FIRB to concentrate on larger issues in the ‘National Interest’.

As you can see from Chart 2.1 extracted from the Foreign Investment Review Board Annual Report 2010-11, Real Estate transactions do make up the majority of the applications considered by the FIRB, but many questioned the timing of the announcement. It was at the height of the GFC, and two months after the announcement of the First Home Owners’ Boost, designed to help prop up Australia’s Real Estate sector. House prices had fallen 4.7 percent. Opening up the floodgates to foreign temporary residents could be seen as a further measure to help provide extra demand and keep the housing market afloat.

By March 2010, the media was flooded with articles 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 a heated public.

The press release by the former Assistant Treasurer, Senator the Hon 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.”

According to the FIRB Annual Report 2010-11, “As of 24 April 2010, temporary residents residing in Australia are no longer exempted from notification of proposed acquisitions of established residential real estate for their own residence, established residential real estate for the purposes of redevelopment, new residential real estate and vacant residential land. Temporary residents were previously exempt from April 2009 under the changes announced in December 2008. ”

The Financial Year 2010/11 is the first full year temporary residents must apply to the FIRB and where records have been kept. It may never be known just how many temporary residents purchased Australian Real Estate in the years 2008/09 and 2009/10.

» Foreign Investment Review Board Annual Report 2010-11 – Foreign Investment Review Board, 20th April 2012.
» Government Tightens Foreign Investment Rules for Residential Housing – Assistant Treasurer Nick Sherry, 24th April 2010.
» Australian Federal Government gets tough on foreign ownership rules – News Limited, 24th April 2010
» Real Estate Investment by Foreign Residents : Top Secret – Who Crashed the Economy, 4th January 2012.
» Australia for Sale – Who Crashed the Economy, 27th March 2010.
» Foreign investment is overheating our property market – The Punch, 10th April 2010.
» Secret government business – The Age, 30th December 2011.

In RP Data’s April update on the Australian housing market, it believes the market is stabilising on the back of interest rate cuts late last year. You can watch the full update here.

The update features a graph showing Monthly Transaction Volumes and gives the following commentary, “Our estimate of transaction volumes have been updated to January, however with the seasonally slowdown in market conditions over both January and December, it’s difficult to gauge how market demand has changed this year.”

While RD Data is correct in suggesting the months of December and January are historically slow due to Christmas, it is interesting to note January 2012 transaction volumes are down significantly from January 2011. It will be interesting to watch this space to see what volumes do in the coming months. RP data said leading up to December it was clear buyer activity had stabilised, and “we would expect the number of sales to increase on the back of lower interest rates.”

The Housing Industry Association (HIA) and RP Data yesterday jointly released its April update to the HIA-RP Data Residential Land Report. Over the year to December 2011, the number of residential land transactions have fallen 27 percent, and according to the report has hit a fresh low. HIA Chief Economist, Harley Dale was quoted in the report saying “The volume of residential land sales has been below the previous trough set during the GFC for five consecutive quarters now.”

“Over the five quarters to December last year land sales ran at a volume 40 per cent lower than their long term average.”

Tim Lawless added his belief that the vacant land market conditions are the weakest in more than decade.

Switching back to the RP Data’s April update, Tim Lawless flicks up the following chart on Housing Finance Commitments, but I fail to hear any mention on it in his commentary.

It is the same graph we presented in our last post and shows mortgage approvals are at levels similar to the mid 1990′s. As the majority of buyers need to get a loan for their property purchases, the downwards trend correlates with transactions.

The expansion of credit contributed to stellar house price growth throughout much of the last decade and quickly ground to a halt during the GFC as consumers became more debt and risk adverse. The peak in January 2010 was due to Rudd’s First Home Buyers’ Boost, a short-term stimulus according to Treasury that 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.

This federal stimulus ended in December 2009. Some state based stamp duty exemptions ended in December last year. House prices have been falling for over a year and it’s hard to see any driver outside of more stimulus or potentially a significant cut in lending rates that would contribute to a recovery. Near zero interest rates in many other countries have failed to halt the decline in house prices as the burden of high household debt scars potential borrowers.

Based on data from housing corrections in other countries, falling transaction volumes is the canary in a coal mine and leads a decline in prices.

» Australian Housing Market Update – April 2012 – RP Data, 12th April 2012.
» Vacant land market weakest in more than a decade – RP research blog, 20th April 2012.

“Paying your mortgage down before the bust is the most effective way of avoiding getting into negative equity once housing prices start to fall.”

This is the statement Luci Ellis, Head of the RBA’s Financial Stability Department made last week in her address to the Federal Reserve Bank of Atlanta 2012 Financial Markets Conference about the US housing ‘meltdown’. According to a graph shown during her address, the number of Australian households ahead with their mortgage repayments greatly exceed that of America over the last decade. But, it wasn’t shown by how much.

Back home, Australian’s appear to be heeding this advice. Household’s had a poor record of savings for most of the last decade, in some cases spending more than earned in the quest for the great Australian dream. The twelve months immediately following the collapse of Lehman Brothers saw witness to a surge in the household net savings ratio to around the 10 percent mark, and has remained at this level ever since. It is considered a reasonable portion of these savings have been ploughed into mortgage repayments as the attitudes towards debt change following the GFC and the US housing bust.

But with housing prices falling for over a year now, it would appear another group of Australian’s have found an even more effective measure to avoid getting into negative equity. They have decided not to leverage up into an asset bubble in the first place.

Home loan approvals for owner occupied dwellings in February is down another 2.5 percent, seasonally adjusted, according to the Australian Bureau of Statistics. This comes after a little rise last year as some first home buyers’ locked in state based stamp duty exemptions before they expired at the end of the year.

A look at home loan approvals excluding refinancing show the market is still the doldrums with approvals hovering at levels experienced during the late 1990′s. A sharp roll-off started in 2008 as the GFC took hold and reached its trough as the Rudd Government announced the First Home Owners’ Boost and the RBA started slashing interest rates. This buoyed the market until the grant ceased at the end of 2009.

With the debt adverse consumer who chooses to sit sensibly on the sidelines or with others who simply cannot access a mortgage at today’s home prices, it is unclear what, if anything, will plug the decline in house prices. Housing grants and stimulus appear to work, but they are not sustainable or in the the best interests of a healthy market.

» Moderator’s Opening Remarks for Panel Discussion on Mortgage Finance – Luci Ellis, RBA, 11th April 2012.
» 5609.0 – Housing Finance, Australia, Feb 2012 – Australian Bureau of Statistics, 11th April 2012.

Measures by China’s central government to cool its once bubbling property market is continuing to yield results with figures from the National Bureau of Statistics (NBS) showing a 17.5 percent drop in the number of home sales in the first quarter this year. According to the bureau, new house prices in 45 out of 70 cities declined in February, while 21 cities reported no change in price. The Beijing Real Estate Association reports prices for new residential houses in Beijing are down 20.7 percent yoy.

China has just reported the slowest economic growth in three years with GDP falling to an annualised growth of 8.1 percent for the first three months of this calendar year.

Late last year, under the headline “Chinese prop up property market,” the Australian Financial Review suggested the Chinese were the only thing keeping Harry Triguboff’s “cement mixers turning”.

This week at the opening of Meriton’s Vantage apartment block in Rhodes NSW, Mr Triguboff said interest rates where too high, demanding the RBA’s governor Glenn Stevens to drop rates, “He has to drop. I can’t believe it’s that high.”

He told the Australian Financial Review, “It got to a stage [last year] where I had 85% of purchasers who were Chinese, and now it’s down to 65%.”

“We’re very happy with Chinese coming here, but we must have our own.”

If we assume there hasn’t been a surge in domestic buyers as interest rates are apparently too high (not the price and leverage required to purchase one), then the figures can only mean one thing. Fewer Chinese are buying Harry’s apartments. Could falling house prices back in mainland China, have the Chinese questioning if property always goes up?

In late 2008, the Rudd Government made administrative changes to Foreign Investment Review Board (FIRB) legislation which could be seen as one measure to encourage foreign buyers to purchase our property and help keep demand up for our ailing property market.

If this is the case, it could be another lifeline gone in the who wants to be a property millionaire game show.

» China Property-Sales Drop Shows Risk of Hard Landing – Bloomberg, 14th April 2012.
» Home prices in most cities stop growing in Feb – China Daily, 18th March 2012.
» Beijing housing prices 21% down in Q1 – China Daily, 9th March 2012.
» Real Estate Investment by Foreign Residents : Top Secret – Who crashed the economy?, 4th January 2012.

As housing affordability hits crisis point in Sydney, NSW Opposition Leader John Robertson has called for a debate on the effect negative gearing is playing on housing affordability.

A report released last week from the McKell Institute showed seventy precent of under 35s can no longer afford to buy a home.

He told Sky News he has yet to discuss the idea with the Gillard government, but we believe further support should be welcome. This time last year, reports surfaced that the Gillard government was in talks with Senior Federal Labor figures and unions about winding back negative gearing as one way to tackle housing affordability.

A two day tax forum in October last year re-ignited the debate where Saul Eslake, an economist for the Grattan Institute said our tax system was “riddled” with loopholes, taking aim at negative gearing. “There is no country in the world that allows negative gearing as generously as the Australian tax system does” said Eslake.

Negative gearing is thought to be one aspect of Australia’s flawed tax system which has caused a large mis-allocation of capital to be directed towards the unproductive residential property sector. On many metrics, Australia’s house prices today are more unaffordable than at the peak of the American housing bubble.

The much ignored Ken Henry tax review in 2009 warned elements of our tax could affect macroeconomic stability. It stated “The existing tax system is also likely to encourage excessive leveraging in pursuit of tax-preferred income. Where capital inflow is used to finance less productive assets, this can also affect long term macroeconomic stability. In this regard, recommendations to provide a more neutral tax treatment of savings, to reduce the benefits from negative gearing and eventually abolish stamp duties on housing would also help improve macroeconomic stability.”

The report recommended a more uniform savings income discount be applied across most asset classes to prevent tax distortions created from negative gearing.

Figures from the Australian Taxation Office show Australia had 1.7 million loss making property investors in 2008-09, losing collectively $6.5 billion.

9th April : Wayne Swan has quickly entered the debate, ruling out any changes to negative gearing.

» NSW leader John Robertson calls for debate on changes to negative gearing – The Australian, 8th April 2012.
» Wayne Swan stands by negative gearing – The Australian, 9th April 2012.
» Negative gearing still on the chopping block agenda – Who crashed the economy?, 5th October 2011.
» Negative gearing rort added to endangered species list – Who crashed the economy?, 21st April 2011

For as long as I care to remember, the Real Estate salesmans’s call to action has been, “It’s never a better time to buy”.

But for the 27 percent of the first home buyer cohort who followed this advice the year before last, their homes are worth less than they paid for them, potentially leading to a situation known as negative equity.

According to RP Data, negative equity is on the rise around the country as we settle into our second year of house price falls. In the December 2011 quarter, 6.4 percent of homes were worth less than the purchase price, up from 4.9 percent in the preceding quarter.

Last month, RBA Head of Financial Stability, Luci Ellis briefed the Australian Mortgage Conference on prudent mortgage lending standards. Highlighting why some households default on their mortgages, she told the conference unemployment, especially during a recession was one cause. “So the really large upswings in mortgage arrears rates have, perhaps not surprisingly, tended to occur at the same time as large increases in unemployment.”

Additionally, falling home prices was cited as another factor for rising arrears, something she believes we need to be “alert” of. “If something bad happens to you and you can no longer afford your repayments, it is better to sell and have a bit left over after discharging the mortgage. If the property value has fallen below the loan balance, though, you are in a much worse situation. You can’t easily sell if you are in trouble or even if you just want to move to a cheaper area or a more appropriate home, or to where the jobs are.”

In conclusion, Ellis stresses Australia does not have the “ingredients” ripe for a US style housing crash, but warned mortgage lenders needed to remain prudent. ” It must be hard to resist the disappointed customers who just want to borrow that bit extra to purchase their dream home, especially when the loan officer is also trying to make budget on new loan approvals. But in the experience of the United States, we have seen what can happen when lenders yield to that temptation.”

Earlier this year we wrote on NSW repossessions rising 22.5% in 2011, including a link to a story on channel 7′s current affairs program Today Tonight called mansion repossessions..

On Friday night, it was Channel 9′s A Current Affairs turn with a story titled “Home Buy Bargain.” According to the story, repossessions are rising sharply around Australia in recent years. The story features Paul Flynn, who specialises in mortgagee properties saying he’s never seen anything like it. Read the transcript or watch the video here.

With house prices continuing to fall, mortgage repossessions on the rise and RBA Head of Financial Stability, Luci Ellis stressing mortgage lenders need to be prudent, just the opposite is happening. In a News Limited article, published last week titled “HOME OR BUST: Default fears as Australian banks return to high-risk loans”, it reports on RateCity data suggesting almost 70 percent of mortgage lenders are now writing home loans with deposits as small as 5 percent. This compares to 50 percent, two years ago. With little to no growth in mortgage lending, banks are resorting to higher LVR to try to encourage growth. But this comes at a very risky time in our economy.

Just yesterday, The Australian published an article, “Australian housing market just a jobs crisis away from collapse.” It paints the picture of weak housing market with sales turnover at 16 year lows, listings up 23 percent over the past year and construction of new homes down 25 percent since the stimulus ending in June 2010. But, as the article states, the best leading indicator is mortgage approvals. Most people require a loan to purchase a property. Mortgage approvals have plunged 25 percent since the first home buyers boost ceased.

According to the article, despite a very weak market, falls have been somewhat benign as arrears remain low. The Australian writes “People losing their jobs or running into trouble with their own small business is the main cause of people falling behind on their mortgage. Forced loss of employment has been very low until now.”

“Rising unemployment could unleash a wave of distressed sales in the housing market. With the fundamentals of housing supply and demand already so weak, the price movement could be much larger than the present downward drift, with which the Reserve Bank appears comfortable.”

Last month we reported on Roy Morgan’s private unemployment gauge – ABS unemployment figures ‘defy belief as job losses mount’- Roy Morgan. Historically, both the ABS and Roy Morgan indexes have tracked each other, but in recent months Roy Morgan’s index has taken a turn for the worst. The separation is thought to be attributable to the different measures used to create each index, and suggestions the ABS figures are likely to be lagging.

Rising unemployment is consistent with expectations. Falling house prices are hammering consumer confidence through the negative wealth effect, causing consumers to tighten their purse strings. With jobs underpinned by discretionary spending, and you don’t have to look to deep at the retail sector to see the consequences unfolding.

Do you expect house price falls to start accelerating this year with increases of unemployment? If so, by how much?

» Homes with negative equity on the increase – The Sydney Morning Herald, 20th March 2012.
» Property price falls lock homeowners into loans – Adelaide Now, 20th March 2012.
» Prudent Mortgage Lending Standards Help Ensure Financial Stability – Reserve Bank of Australia, 23rd February 2012.
» HOME OR BUST: Default fears as Australian banks return to high-risk loans – News Limited, 15th March 2012.
» Australian housing market just a jobs crisis away from collapse – The Australian, 19th March 2012.
» Home buy bargains – A Current Affair, 16th March 2012.

Last week, the producers of Real Estate 4 Ran$om posted the 40 minute documentary for public viewing on vimeo. Real Estate 4 Ran$om is about property speculation and its impact on the broader economy.

» Real Estate 4 Ransom – Vimeo.com

While the property lobby bangs on about a housing recovery this year, the Australian Bureau of Statistics today released its January housing finance figures showing the total value of housing finance fell 2.3 percent, seasonally adjusted. Most of the fall was attributable to a 7.1 percent fall in the value of loans provided to investors.

The number of loans issued for the purchase of new dwellings fell 6 percent and for the purchase of established dwellings, 1.2 percent. The number of loans for the construction of homes made a slight positive increase, up 0.2 percent.

» 5609.0 – Housing Finance, Australia, Jan 2012 – The Australian Bureau of Statistics, 13th March 2012.

In a report released yesterday by Standards & Poor’s, it predicted Australian House Prices could fall by more than 5 percent in 2012 should China experience a soft landing with a GDP growth rate of 8 percent.

Earlier this week China’s Premier Wen Jiabao announced his government would target a GDP growth rate of 7.5 percent in 2012. In China’s 12th five year plan, it has lowered growth to 7 percent during the 2011-2015 period to what S&P term a medium landing.

Other scenario’s tabled in the S&P report was a house price fall of greater than 10 percent if China’s GDP growth was 7 percent and a collapse exceeding 20 percent if China experiences a hard landing with GDP growth falling to 5 percent.

With the Australian banking sector having a large exposure to residential house prices, the report titled “China Soft Landing Would Moderately Impact Australia’s Housing Market” was one of three reports released on Wednesday. S&P is also focusing closely on the RMBS and LMI providers with reports titled “Australian LMI Providers Likely To Stand Firm Amid China Jitters” & “A Soft Landing In China Is Unlikely To Affect Australian RMBS”

» Lower GDP target is healthier – China Daily, 9th March 2012.
» China drop to hit house prices hard – The Age, 9th March 2012.
» S&P Articles Analyze Impact Of China Slowdown On Aust Sectors – Reuters, 7th March 2012.

Last month we had a chuckle at a News Limited article encouraging children into the property market. It tried to sell the idea that while minors would have their investment income taxed at 46.5 cents in the dollar it “also means a greater potential benefit from negative gearing.” We can only assume these minors will offset negative gearing losses against their pocket money.

You don’t have to look too far to see the property lobby is extremely desperate. We have been bombarded this year with stories that it is never a better time to buy, especially so for first home buyers.

Statistics from RP data show only 373,000 sales were recorded last year down 25% from the decade average and sitting at a 16 year low. In Brisbane there were 37 percent fewer sales last year.

This year is expected to no better with interest rates scaring off most buyers. A survey by realestateVIEW.com.au of 1475 participants found the number looking to purchase had fallen to 32.7 percent. The same survey last year found 43.5 percent of participants were eager to buy.

Rising interest rates were the primary concern among buyers with 23 percent put off by the banks raising rate out of sync with the RBA. Housing affordability and runaway household expenses were also on the mind of many.

realestateVIEW.com.au General Manager Petra Sprekos said “Consequently, we’re finding most are adopting a wait-and-see approach.”

With price falls around the country entering its second year the wait and see approach is a good one. In some areas property prices are falling faster than what renter’s are paying in annual rents.

» Should your children own property? It’s not always child’s play, but can be done – News Limited, 20th February 2012.
» House sales fall as buyers dry up, according to RP Data – The Courier-Mail, 7th March 2012.
» Uncertainty scaring off home buyers – The Sydney Morning Herald, 7th March 2012.

ANZ plans to slash 1000 jobs. Qantas announces 500 jobs to go. Billibong will shed 80 local jobs. Air Australia enters administration with 300 staff stood down.

Jobs are going left, right and center. Above is a subset of higher profile jobs losses announced just this week.

Yet, despite all the doom and gloom on the jobs front, the ABS announced yesterday the unemployment rate has actually decreased 0.1 points to 5.1 percent in January.

This comes as a bit of a surprise as Roy Morgan has earlier announced unemployment had spiked 1.7 percent in January to 10.3 percent – (2.21 million Australians unemployed or underemployed – Highest ever recorded. Unemployment at 10.3% – A record 1.28 million Australian’s looking for work.)

Historically, the Roy Morgan and ABS unemployment figures have tracked each other. That is until recently.

Roy Morgan has just filed a press release comparing, from its point of view, the two sets of figures – Roy Morgan Unemployment Figures (10.3% in January) show situation ‘on the ground’ while ABS unemployment figures (5.1%) defy belief as job losses mount around Australia.

It states the methodology between the two surveys differ as the the ABS data may lag what is actually happening “on the ground.” To jump through the hoop and be classed as unemployed by the ABS, you must have been looking for work in the four weeks prior to the survey and be available for work when the survey takes place. Roy Morgan on the other hand simply classifies a person as unemployed if they are not employed and is looking for work. This would suggest the ABS figures will lag Roy Morgan’s by a month or two.

If this is the case, we can expect the ABS unemployment will start trending upwards. It should also be noted many of the job losses haven’t yet occurred, but have been announced. In the example of ANZ, it plans the cull 1000 workers from its workforce before September.

» 2.21 million Australians unemployed or underemployed – Highest ever recorded. Unemployment at 10.3% – A record 1.28 million Australian’s looking for work. – Roy Morgan, Friday 3rd February 2012.
» Roy Morgan Unemployment Figures (10.3% in January) show situation ‘on the ground’ while ABS unemployment figures (5.1%) defy belief as job losses mount around Australia. – Roy Morgan, Friday 17th February 2012.
» 6202.0 – Labour Force, Australia, Jan 2012 – The Australian Bureau of Statistics, Thursday 16th February 2012.

Last month we reported on the ANZ’s decision to break away from the RBA and start setting lending rates independently.

Today ANZ has decided to put interest rates up, raising the standard variable rate from 7.3 to 7.36 percent. While the 6bps move is a drop it the ocean, it could be a sign the ANZ is testing the waters to see what backlash raising rates will bring. Should we be expecting larger moves next month?

And when will the other banks follow suit?

The move follows UBS research released earlier this week suggesting banks could be losing money on new mortgages due to rising funding costs. This “dangerous situation” provides banks little incentive to offer mortgages and could cause them to simply stop lending.

[ Westpac has followed suit, raising its standard variable rate 10bps to 7.36 percent. ]

» First time buyers could be hit by lending drought – Mozo, 7th February 2012.

In a surprise move today, the Reserve Bank of Australia has decided to keep interest rates on hold for February. The ASX Target Rate Tracker had the chance of the official cash rate being decreased to 4.00 percent, at 100% yesterday. Even I was 100% certain rates would be cut today.

Yesterday, the Australian Bureau of Statistics (ABS) released data showing retail turnover in Australia continues to decline, even in December during the lead up to Christmas. Seasonally adjusted, retail turnover fell 0.1% in December with growth levels now at levels not seen since 1984. This isn’t a surprise to us, considering household net savings ratios are at levels not seen in 25 years as households continue to control the purse strings and concentrate on paying down household debt.

On Friday, Roy Morgan Research released data showing unemployment was up 1.7 percent in January to 10.3 percent. According to the research, it is the highest unemployment rate in a decade – since January 2002 when the unemployment rate sat at 10.9 percent. Roy Morgan’s unemployment data normally tracks the ABS data, just a little higher, but in recent months has started to deviate away from official ABS data.

Even if rates were cut today, it is unclear if the banks would have passed any of the cut on to mortgage holders. However, rest assured, deposit rates would have been cut. The big winners from today hold in rates is self funded retirees and other individuals with exposure to cash products. They can continue to spend as normal, without having to make any cutbacks, something often missed by the cries of the media.

On the flip side, the Aussie has surged today reaching $1.08 and a six month high against the greenback. This is likely to put further pressure on manufacturers, retailers and the tourism industry already suffering from the effects of dutch disease.

In the statement from the RBA on the monetary policy decision, it indicated the “acute financial pressures on banks in Europe were alleviated considerably late in 2011″ and while much still remains to be done, some progress has been made forward.

The central bank notes while unemployment has started to trend up in 2011, it has been “steady over recent months.”

Also steady or “stabilising” is the central bank’s view of residential housing after house prices had declined for “most” (not all) of the year. There has been a lot of debate in recent years about the central banks roles in asset bubbles, suggesting central banks should in fact be addressing the problem of bubbles and not sweeping them under the carpet. As residential property is a confidence game and with comments from the industry that we have hit bottom, maybe, just maybe, the RBA has err’ed on the side of caution and decided not to re-inflate the bubble by dropping interest rate at a time when everyone is still so confident Australia doesn’t have a debt fueled housing bubble. We can only dream!

» Statement by Glenn Stevens, Governor: Monetary Policy Decision – The Reserve Bank of Australia, Tuesday 7th of February 2012.
» Retail turnover falls 0.1% in December 2011 – The Australian Bureau of Statistics, 6th February 2012.
» 2.21 million Australians unemployed or underemployed – Highest ever record. Unemployment at 10.3% – Roy Morgan Research, Friday 3rd February 2012

The latest installment of the official House Price Index from the Australian Bureau of Statistics (ABS) was released today showing Australian house prices continued to fall in the December 2011 quarter. The weighted average of the eight capital cities fell 1.0 percent in December, ending a year where house prices fell in every quarter. For the year, 4.8 percent was wiped of the value of Australian homes.

Brisbane led the falls, slashing 6.7 percent from values. Adelaide, considered one of the more affordable capital cities racked up second place at 6.4 percent.

Assuming there is no further government interference in Australia’s housing market, this years falls is considered to be the start of many in a long period of painful deleveraging. The Economist Magazine reports Australia has one of the largest property bubbles in the world and is overvalued by 53 percent on a rent to price metric. It also believes Australia, Belgium, Canada and France have property markets that are more overvalued today than at the peak of the American housing bubble.

While housing lobby groups in the USA cried a chronic shortage of houses, and central bankers said not to worry – there is no bubble, thus there can’t be a crash, Yale Professor Robert Shiller was raising concern about America’s housing bubble. His real house price index is shown above in blue.

After 5 years and 5 months, the S&P/Case-Shiller Home Price Index for 10 composite cities show house prices have fallen 32.8%.

In Australia (red/orange line), some analysts believe house prices may have bottomed out. On a more serious note, Henry Blodget asked the same question to Robert Shiller about the United States property market while in Davos on the weekend.

Shiller answered, “When people phrase it that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now. We do have some good news. Permits are up. Notably, the National Association of Homebuilders Housing Market Index is up and that’s a forward-looking index. But it’s not up very much. If you look at the rate of change it looks dramatic but it’s still at a low level. ”

Blodget suggested property prices in the United States was starting to look like ‘fair’ value relative to long term historic trends (i.e. graph above of real house prices), but Shiller argues what does ‘fair’ value actually mean in an economy like this. Shiller is questioning if America will overshoot. “Now the question is whether we’ll overshoot, which is a common thing that happens after bubble burst.”

As Shiller has looked at bubbles going back hundreds of years, Blodget naturally asked if Shiller has ever seen a bubble where there wasn’t a major overshoot. His reply “Well, the problem is we’ve never had, in the United States, a bubble like this, of this magnitude before. That’s the problem. That’s the fundamental problem of economics.”

But this isn’t a problem limited to America. In Australia, Dr Nigel Stapledon from the University of NSW and former Westpac Bank Chief Economist has compiled real home prices for Australia. In a Morgan Stanley research paper written by Gerald Minack titled “Australian Strategy and Economics : Living in a bubble”, Minack provides the following graph of real median Melbourne house prices dating back further than our graph above.

As you can see, today’s prices are unprecedented in Australia, eclipsing the speculative land boom in Melbourne after the gold rush era (we were digging up stuff then, too) and leading to the Australian Banking Crisis in 1893.

» 6416.0 – House Price Indexes: Eight Capital Cities, Dec 2011 – Australian Bureau of Statistics, 1st February 2012.
» Can’t happen! – cause it’s never happened before! – Who Crashed The Economy, 14th July 2010.
» Housing Bottom? What Are They Thinking? – Business Insider, 29th January 2012.

According to SQM research, Melbourne’s rental vacancy rate surged 1 percent in December to a 6 year high of 4.4 percent as the city deals with an oversupply of residental property. There is now 16,000 rental properties sitting empty.

A fortnight ago, the Herald Sun reported on a rental glut in West Melbourne where the vacancy rate had hit 22 percent in the month of November. December’s figures show further increases with West Melbourne now sitting at 26.4 percent. New four bedroom, two bathroom homes are reported to be renting for $275/week.

The increases are not limited to Melbourne. In the Sydney suburb of Rhode, the rental vacancy rate is now 13.6 percent. Gordon is 8 percent.

» Melbourne full of empty homes – The Age, 26th January 2012.
» Rental vacancy rate an ‘ominous development’, says SQM – News Limited, 26th January 2012.

According to Skelton Sherborne, a freight forwarder of mining and construction equipment, imports of heavy machines into Australia fell 62.5 percent in November and December. Skelton Sherborne Director Brad Skelton said the last slowdown of this rate occurred in December 2008 / January 2009 when imports fell 77 percent.

He told the Australian Associated Press, “If everything is as wonderful as they (miners) say, why is there a slowdown in the last two months in the volume of equipment coming into the country?”

“That’s what I can’t reconcile … the real underlying story is that there is a lot of concern about just what’s going on in the world”

Earlier this week the International Monetary Fund (IMF) predicted non-oil commodities will continue to fall in 2012. It expects prices will come off 14 percent this year as world growth weakens further.

Mr Skelton said “And if commodity prices fall, I don’t think Australia is immune to a pretty difficult 2012 economically.”

» Miners stop importing machinery – The Age, 25th January 2012.
» IMF: Most Commodity Prices To Fall In 2012 – Dow Jones Newswire, 24th January 2012.