The Sydney Daily Telegraph has reported banks are refusing to offer bridging credit as the risks start to mount.

Bridging loans are used by homeowners to buy a property before they sell their existing one. But with homes taking longer to sell in a weak market, and selling at lower prices, the risks of such loans are too high for the banks.

The Telegraph indicates some lenders have approved bridging loans to clients only for the sale of the existing home to fall well short of what was agreed to. These issues are only likely to get worse as the market bubble starts to deflate. Unrealistic vendors may even have trouble selling their existing homes at all.

The Telegraph writes :

Mortgage Choice broker John Manciameli said the banks’ aversion to bridging finance may be due to the fact Sydney homes are taking a lot longer to sell, elevating the lenders’ risk profile into alarm-bell territory.

» Home loans a bridge too far - The Daily Telegraph, 28th August 2010.
» Banks blocking homeowners renovation funds - News Limited, 28th August 2010.

Under the Coalition Government’s housing policy, struggling renters on public housing lists will be given rental vouchers to help pay more for their rents in the private sector.

According to data from Australian Property Monitors, medium rents increased by only 1 percent in the June quarter with many capital cities recording falls. In overheated Melbourne for example, rents fell 1.4 percent for houses and 2.9 percent for units.

In roughly the last 10 years that Australia’s housing bubble has been growing, house prices have outstripped wages (the owners income used to service the debt). Outside that fact that household debt has ballooned, this has not caused much hardship (yet) as buyers simply borrow more money.

However, rents are not like this. Renters can not simply go to the bank when landlords continue to put rents up greater than wage inflation, year after year. Rents come from the renters income, primarily their wages or pensions.

In recent years, private sector landlords have been spurred on my lobby groups to raise rates by 20 percent per annum. Simply, renters have ran out of capacity to service their rents have have been forced to downsize or move back in with the parents. Worse still, aged pensions have not kept abreast of rents either, forcing many parents to move into their baby boomer sons & daughters homes. Many are not that lucky, having to turn to public housing for help.

However, the Liberal party has a plan to fix all this by offering rental vouchers funded by state money should they gain power.

”The idea is one that obliviously needs to be negotiated with the states, because effectively it is their money we are talking about, although I suppose the implication is that the Commonwealth would help contribute to this over time to sort of make the idea work,” said Gary Humphries, Liberal Senator for the ACT and Shadow Parliamentary Secretary for Families, Housing and Human Services.

It’s said the policy was written after consultation with real estate and property groups. Senator Humphries said “We’ve talked to a number of stakeholders, not particularly any representing renters or people like that”.

Tenancy and social housing groups believe the scheme will drive up rents, no different to a first home buyer’s boost driving up house prices, causing even more problems and financial hardship in the long term.

It’s unclear, if the policy, which is not yet funded, will be indexed at 20 percent per annum, to ensure landlords can obtain the rental increases they deserve. Treasury has been unable to cost the policy due to lack of detail.

» Coalition plan for rental vouchers - The Sydney Morning Herald, 27th August 2010.

Real estate experts in the U.S. suggest houses are now a bad investment, indicating there is no law to say real estate will appreciate in value.

For a century prior to the great housing bubble that started in the 1990’s, house prices only appreciated in line with inflation. This ensured your great grand parents paid the some portion of their household income for housing, that your grandparents did, and that of the baby boomer generation. But then in the late 1990’s, something changed. The experts said real estate only goes up, some suggesting that house prices double every 7 to 10 years. With access to easy credit, this fueled one whopper of a housing bubble around the world.

Now that the bubble has burst, experts agree with Stan Humphries, chief economist for the real estate site Zillow saying house prices will only go up with inflation. “There is no iron law that real estate must appreciate, All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Dean Baker, co-director of the Center for Economic and Policy Research says “People shouldn’t look at a home as a way to make money because it won’t”. He estimates it will take 20 years to recoup the $6 trillion USD of housing wealth lost since the start of the housing crash in 2005.

» Housing Fades as a Means to Build Wealth, Analysts Say - The New York Times, 22th August 2010.

» Now They Tell Us: Experts Say Housing Is A Lousy Investment And Always Will Be - Yahoo Finance, August 23, 2010.

Morgan Stanley chief strategist Gerard Minack has today warned clients that Australia’s housing bubble is 40 percent over fair value and could be popped if banks tighten credit or the loss making landlords start to sell.

He claims investors have become “Ponzi borrowers”, relying on capital gains to service massive property loans. Data from the Australian Taxation Office show rents has not covered the costs of an investment property since 2000 and hence property depends upon capital gains to make money.

Already this year, we have seen banks start to tighten credit. In January two of the big banks dropped loan value ratios to as low as 80%. This has caused mortgage approvals for owner occupiers to plunge 28% over the year.

Last month we saw investors start to desert the market with loan approvals for investors also falling. The number of houses on the market is rising consistently, suggesting that loss making landlords are in fact starting to dump their investments as the forecast of large capital gains dissolve, something that is needed to sustain their loss making ventures.

» Morgan Stanley analyst bearish on housing market - The Australian, 17th August 2010.

» Housing bubble trouble for the middle class - The Sydney Morning Herald, 17th August 2010.

Nobel Prize-winning economist Joseph Stiglitz told a Sydney forum on Friday that “There is the beginning of a cause of concern, and it would probably be prudent to take some actions” on our housing bubble. Professor Joseph Stiglitz was a former world bank chief economist.

His predictions could be on the money if mortgage approvals is anything to go by. The ABS has today released Housing Finance Data showing once again finance commitments for owner-occupied housing fell 3.9 percent for the month of June and 28.4% from its peak last year. Economists had only expected a 2 percent drop. The number of approvals have not been this low since 2001.

AMP Capital Investors chief economist Shane Oliver said “It’s basically telling us the housing recovery that we’ve seen over the last 18 months has come to an end,”

CommSec economist Craig James also expressed concern, saying “In the last couple of months, investors had served to prop up the overall market but that wasn’t the case this time around.”

» Forever blowing bubbles - The Sydney Morning Herald, 9th August 2010.

» Home loan approvals weakest since 2001 - Yahoo 7 Finance, 9th August 2010.

Yesterday, the China Banking Regulatory Commission (CBRC) announced stress testing of banks with modeling to include a 60% price fall of house prices in China’s 7 top tier cities including Beijing, Shanghai and Shenzhen.

Today, it has been reported the stress tests will not only include banks, but extend to other industries closely linked to housing such as cement and steel. The China Daily reported :

“The banking system has made quite a lot of loans to industries upstream and downstream from the real estate market and their risks are intimately connected to the real estate market,” the Shanghai Securities News said. “Therefore, regulatory agencies have demanded that corresponding stress tests should also be conducted for industries such as steel, cement and building materials.

The stress tests follow recent reports that 64.5 million urban electricity meters recorded zero electricity consumption over a 6 month period. Based on these numbers, it is predicted China could house 200 million people in these empty apartments. This should come as no surprise as in April, we reported on a China Reality Research report suggesting nearly a fifth of all recently sold properties were kept vacant.

Due to low interest rates, cash deposits in China fail to keep up with Inflation. As a result Chinese prefer to put their money into assets that “hold value” such as property. In a blog published by the Sydney Morning Herald, Malcolm Turnbull writes :

One property analyst was very candid when asked why there were so many apparently unoccupied flats in Beijing as there were no lights on at night: “The flats are occupied. Cash is living there.”

Stress testing on other industries should raise concerns back in Australia. How much of our resources and mining boom was a result of China’s housing bubble, and what will be the impact for Australia when it pops?

» China widens stress tests to steel, cement - media - The China Daily, 6th August 2010.

» Chinese Debt Binge is fueling a dangerous property bubble

New home sales have continued a downwards trajectory, with the Housing Industry Associating reporting its home sale index falling 5.1 percent in June. This follows a 6.4 percent drop in May.

Melbourne recorded the largest falls, sliding 10 percent for the month. Western Australia and Queensland trailed, falling 5.2 and 5.1 percent respectively. South Australia recorded a fall of 4.2 percent.

» New home sales fall for second month - The Age, 2nd August 2010.

We are continually told that a shortage of houses means prices will continue to out pace the buyer’s ability to afford them, and that money grows on trees.

However two other shortages are starting to show its head in Australia’s property bubble. The shortage of greater fools - someone that will buy a property for more than what you brought it for is causing auction clearance rates to tumble and prices to drop.

According to RP Data-Rismark figures released today, house prices are on the decline, falling 0.8 percent in June, and the largest fall since April 2008. The lack of greater fools were the most in Perth, where prices fell 2.5 percent, followed by Brisbane which fell 1.3 percent.

The shortage of greater fools has been caused partly by another shortage, one of credit and evident by a plunge in mortgage approvals this year. Australia has been in a credit crunch since January, after many of the banks dropped Loan Value Ratios (LVR) to around the 80 percent mark.

The Australian residential mortgage credit crunch was caused by a boost hangover. After the Federal Government boosted the First Home Buyers Grant, the banks ran after first home buyers like a cat in a mouse plague. Caught up in the frenzy, banks, in particular Westpac and the Commonwealth didn’t cotton on to the number of 100% LVR loans they were writing and that APRA requires LMI (Lender’s Mortgage Insurance) premiums to be put aside an not adsorbed into normal operations.

It was suggested by BusinessDaily in January, that Westpac had to increase the paid up capital of its mortgage insurance subsidiaries by more than $330 million, kicking off the drop in LVRs. Since then, the debt crisis in Europe has only helped exacerbate the problems as money gets more and more expensive.

» House prices hit the wall - Yahoo News, 30th July 2010.

» Home prices drop after 17 months of gains - The Age, July 30th 2010.

According to research conducted by the National Australia Bank, expectation of house asset price rises have fallen around the country. NAB chief economist Alan Oster said ”There has been a very big change in expectations.”

Melbourne lead the falls with most respondents predicting prices will only increase 0.7 percent over the next year, down from the expected 5.8 percent growth in March when the last survey was conducted. A 0.7 percent rise would see prices fall in real terms (not keeping up with inflation).

Sydney siders now expect just 2 percent price rises for the year, down from 5 percent in March.

Perth respondents predict prices in WA to rise 2 percent from the 5.5 percent predicted in March.

Adelaide also fell to 2 percent, from the previous result of 5 percent.

Canberra residents are the most optimistic, predicting a gain of 2.9 percent over the next 12 months, down from 5.1 percent last quarter.

Developers have contributed the fall in expectations to the drying up of credit. Since the start of the year, many banks have asked for 20% deposits on investment loans (and for FHB). Some of the plan investors were caught out, after committing to purchasing properties only to find out they can’t access the funds now due to the banks tightening of credit.

Owner buyers have sited interest rates and a bigger divergence between incomes (loan serviceability) and home prices as the reason for their fall in optimism.

Since the start of the year, mortgage approvals have been spiraling downwards, hitting 9 year lows two months ago. This has resulted in auction clearance rates falling around the country. The fall in clearance rates staring April also coincides with the Federal Government’s reversal of FIRB legislation which allowed an influx of foreign buyers prop up the weak Australian market.

» Home prices seen stagnating: survey - The Sydney Morning Herald, 29th July 2010.

As Australia progressed through the stages of the housing bubble, all range of excuses were invented to support the unsustainable credit binge on property. We were told if we look back over 100 years, houses double every 7 years. Then there was a shortage of houses, high immigration and the fact that Australia is different - What happens in the rest of the world, can’t possibly happen here in Australia.

Now as mortgage approvals plunge and auction clearance rates fall like dominoes, attitudes are starting to change. Focus has moved from the fact that property only every goes up, to that it can’t crash - at worst it will plateau. We have entered the denial phase of the bubble clock. The objective of speculator’s cheer leaders is to limit the damage.

According to Smart Company, President of the Real Estate Institute of Australia, David Airey said that there has never been a major price collapse in residential property history, and even though the market may cool he is confident the market will sustain at least a flat growth rate through the rest of the year.

Looking back at history and at Australian house prices in real terms (corrected for inflation), we can see the more recent boom and busts of the 1970 and 1980’s. In real terms, house prices fell 9% between 1989 and 1992. The 70’s boom saw prices correct by 17% between 1974 and 1979. A 27% fall was the result of a bubble in 1950.

But the most interesting speculative bubble occurred in Australian in the late 1880’s. According to the data above prices fell 32% from 1891 to 1898.

In 1880 there was a speculative land boom in Melbourne fuelled by wealth that had been created during earlier gold rushes. There was strong population growth, with the population of Greater Melbourne rising by more than 70 per cent over 10 years from 1881. The land speculation engulfed most members of society and was helped by large increases in lending. The Federal Bank was founded in 1882 by James Munro and the funds used to speculate on suburban real estate.

A certificate of shares in the Federal Bank of Australia, Ltd. Issued in Victoria in 1887. Source : Museum Victoria

The crash began in 1891 with land prices falling to around half of their perceived value at the peak of the boom. For example, average property prices peaked at around £950 in Brighton in 1888 and then fell to around £400 in 1893 and £300 in 1898. Property in Collins Street which was selling for £2000 a foot at the top of the bubble had an asking price of £600 and still was unable to attract buyers.

While the trigger is not 100% clear, its believed the crash started when banks started restricting their lending for land at the end of 1887. Another observation was the large amounts of land brought onto the market resulted in poor rental yields. Coupled with high levels of leverage, more and more speculators experienced cash flow issues. (I guess they didn’t have negative gearing then!)

Mortgage defaults and bank runs started a period in history known as the Australian Banking Crisis. The peak of the crisis was signalled by the Federal Bank failing on the 30th January 1893. Five months later, 11 commercial banks had suspended trading.

But while history is all well and good, what comes apparent when looking at historical data is that we have never had a speculative property bubble this big. It’s probably short sighted to say it can’t happen based on history. I’m sure if someone predicted 10 years ago that property prices would hit these current levels in 2010, someone would have said - it can’t happen, cause it’s never happened before!

» Backlog of property listings will put pressure on price growth, experts say - Smart Company, Tuesday 13th July 2010.
» Australian banking crisis of 1893 - Wikipedia.
» Three Australian Asset-price Bubbles - John Simon.

Auction clearance rates are continuing to decline around the country, with rates significantly lower that the same time last year.

According to Australian Property Monitors, Sydney had a clearance rate of 49.8 percent last weekend, while Melbourne recorded 55.6 percent. For the same period last year, Sydney cleared 70.5 percent and Melbourne, 78 percent.

Brisbane’s clearance rate for the weekend was 47.1 percent, and Adelaide recorded 47.6 percent.

Meanwhile, the Australian Bureau of Statistics released housing finance figures today showing the number of home loans has risen 1.9 percent after 8 straight months of decline. The positive news was quickly offset by data showing that while there was more loans approved, the size of the loans shrank, suggesting buyers will have less money to spend in the market in coming months, putting downwards pressure on house prices.

Enzo Raimondo, President of the Real Estate Institute of Victoria says some vendors needed to adjust their asking price in line with market trends.

» Home auction rates hit lowest in a year - News Limited, 12th July 2010.

» Clearance rates fall under 50% in Sydney, as market cools - Sydney Morning Herald, 12th July 2010.

» Home loans on the rise - The Sydney Morning Herald, 12th June 2010.

The Daily Telegraph has revealed the Federal Government has decided to boost the contribution threshold on its First Home Saver Accounts.

For the 2010-11 tax year, if a first home saver contributes up to $5,500 to their account, the government will chip in the same 17% or $935 on $5,500. While the government indicated the scheme would be “periodically indexed”, the 2009-10 contribution threshold remained at $5,000, the same limit than in 2008-09 year earlier.

In an earlier post on the 22nd May 2010 we expressed our view that the government doesn’t really have any idea with the FHSA or affordability in Australia. Take-up has been poor due to too many restrictions, and we saw the $75,000 cap far too limiting if first home buyers were to require a deposit of 20%.

According to the Australian Tax Office, the new account balance cap for 2010-11 is $80,000 up from $75,000 for 2009-10 & 2008-09.

With this is mind, it is interesting to read The Daily Telegraph article :

Treasury figures showed a couple who opened a first home saver account in October 2008 would save more than $88,000 after five years by putting aside just 10 per cent of their income.

Bankwest analysis released this week suggested that Australian couples now needed an $85,800 deposit for a median-priced house in Australia, based on couples saving 20 per cent of their combined pre-tax income for 4.5 years.

The only way the couple could save that amount in their FHSA by October 2012 is if they opened separate accounts, otherwise they would hit the cap. This is actually a requirement of the FHSA, as accounts must be individual accounts, not a joint accounts. But it penalises anyone who wishes to purchase a house by themselves.

As BankWest analysis suggest, a single account holder wishing to purchase a home on their own now needs a $85,000 deposit for a medium priced home. The Australian Government must have their head in the sand regarding affordability if they think a $75,000 cap is adequate. A deposit of $75,000 is lucky to get you a medium priced home.

» $4000 home buyer bonus - The Daily Telegraph, 10th July 2010.

The latest rental price data from RP data shows rents for houses have remained flat over the June quarter.

Hobart recorded the largest falls in rents, falling 1.5 percent. Melbourne was close behind at 1.4 percent, while Brisbane, Adelaide, Perth and Darwin recorded no change. Sydney witnessed a rise of 2.3%, followed by Canberra increasing by 2.1 percent.

While official ABS data for this quarter is not available until the 28th, the flat result from RPData suggests rents have not kept up with the pace of inflation for the first time in three years, signalling a sharp U turn in rent increases.

Note : Last data point estimated from RPdata Rents and TD Securities Inflation data. Official data due 28th July

After decades in which rents tracked CPI, in 2006, property lobby groups started to spur on landlords that they can raise rents faster than inflation/wage growth, i.e. faster than renters ability to service the rent increases. Some lobby groups spurred investors to “jack up” rents by 20% per annum. It appears any excess capacity to pay higher rents have been soaked up, and now rental properties are un-affordable, resulting in lower demand.

» House rents flat in June quarter - The ABC, 7 July 2010.

According to Kenneth Rogoff, the former chief economist of the International Monetary Fund and Harvard University professor, China’s property market is beginning a collapse. “You’re starting to see that collapse in property and it’s going to hit the banking system”

Xu Shaoshi, People’s Republic of China’s Minister of Land and Resources is reported to have indicated property prices will probably fall in some regions of China in about three months time. “In about a quarter’s time, the property market will probably reach a full correction and prices will fall, but it’s hard to predict the extent of the price falls,

Standard Chartered Bank analysts expect property prices to drop as much as 30 percent in the big cities in the 2nd half of 2010.

» China Property Market Beginning Collapse That May Hit Banks, Rogoff Says - Bloomberg, 6th July 2010.

» China’s housing prices to fall, official says - Market Watch, 5th July 2010.

Bloomberg today reports that Australian home prices are now 82% higher than in the U.S. and that rising interest rates may pop the bubble.

According to Jeremy Grantham, Australia’s home prices need to fall 42 percent to “return to trend,” - “It’s like a time bomb, just waiting for the rates to become increasingly impossible to support, All bubbles break, they’re the only thing that matter. They break because we live in a mean reverting world. Things go back to normal, even Australian housing prices.”

John Taylor from FX Concepts LLC manager of the world’s largest currency hedge fund said “The Australian housing market went through 2008 well, But I wonder about the 2011 and 2012 period.” He says, relative to incomes, average house prices in Australia are “colossally high”.

Chief equity strategist at CLSA Asia-Pacific Markets, Christopher Wood said the first home owners boost has put Australia on the path to it’s own subprime mortgage crisis. “In the long term, that policy will boomerang back on the Australian economy and the government because all they’ll have succeeded in doing is incentivizing people to buy houses who can’t afford them — very similar to the subprime issue in America”

» Housing Shortage Makes Australian Home Prices Almost Twice U.S. - Bloomberg, 5th July 2010.

New Zealand Finance Minister Bill English has told Business Leaders at Auckland’s Mood of the Boardroom breakfast yesterday that by international measures, Australia’s and New Zealand housing markets are “still way overpriced” even going as far to say they are higher than China.

“By any international measure, our housing market it still way overpriced. Ours and Australia’s are even more expensive than China’s. Is it going to stay that way? I would like to hear the case as to why it would,” English said.

» NZ housing ’still way overpriced’ says English - The New Zealand Herald, 1st July 2010.

The government has often boasted how Australia has dodged the worst of the global financial crisis, but a study released today shows the length some Australian’s have gone to stay afloat.

Despite National Accounts showing the aggregate of all households in Australia are spending 6.6% of their disposable income on dwelling repayments, over 50% more than when Interest rates peaked at 17% in 1989, Australian’s are shameful of losing the family home. Shame has prevented many from contributing to the survey.

The study conducted by the University of Western Sydney and supported by the Reserve Bank of Australia interviewed people suffering mortgage stress. It found “people are literally eating the bare minimum - just rice - obviously looking after their children, but putting the repayment of the mortgage above every other thing that they could possibly devote an expenditure to” according to Professor Phillip O’Neill from the University of Western Sydney. He points out this is not just in the past tense - it is still happening.

The ABC reports he goes on to say the Federal Government should be careful about overstating how easily Australia got through the crisis when so many people are still struggling.

“But he says the drastic moves my some homeowners has helped prevent the kind of mass mortgage defaults seen in the United States, during the global financial crisis.”

“If we did have large-scale defaulting in a neighbourhood in Australia, we would have a toxic affect spreading of negative equity and that would be alarming,”

With so little money being spent in the local economy, business and retailers are bearing the brunt of the cut back in spending. This is likely to result in jobs loses as the crisis continues to deepen, only exacerbating the problem.

» Homeowners ‘living on rice’ to pay mortgage - The ABC, 30th June 2010.

The Housing Industry Association (HIA) has today reported a plunge in the volume of new house sales in May, the weakest since July 2008.

Sales fell 6.4 percent in May after reporting a rise of 6.2 percent in April.

The falls in new home sales follow mortgage approvals sliding for seven straight months, the weakest since March 2001. Auction clearance rates have also taken a turn for the worst, dropping under 60% in Melbourne and Sydney.

» New home sales plunge in May - The Age, 30th June 2010.

Auction clearance rates have been dismal at late, and today is no exception. Figures from the REIV show a preliminary Auction clearance rate for Melbourne of 65 percent from the 773 auctions held today. The same weekend last year had a clearance rate of 87 percent.

Clearance Rates from Long Weekends have been removed

The auction clearance rate has been trending down over the past months as confidence evaporates from the market and investors head for the exit. Last weekend, there was 942 auctions, a record for this time of the year.

Auction clearance rates have been a favoured statistic among property speculators and is used to demonstrate the health of the market. While some statistics take months to propagate through the market and be reported, Auction clearance rates are known on the day it happens.

Matthew Bell, a Senior Economist at Australian Property Monitors says there is an extraordinarily strong relationship between prices and auction clearance rates. This would suggest, prices are due to fall, if they have not already. Median prices is just one statistic that can take months before their results are known.

There is also a strong relationship between finance approvals (people generally need to borrow to purchase a property, be it to live in or as an investment) and house prices. We have also seen consecutive month to month falls in finance approvals, hence most data at the moment is pointing to house prices falling in value in the second half of this year.

» Weekly Auction & Sales Results, Market Overview - Real Estate Institute of Victoria, 26th June 2010.

» In defence of Auction Clearance Rates - Business Day (FairFax), 26th June 2010.

China’s annual audit has reveled some of China’s provinces have serious debt problems. Liu Jiayi, head of the National Audit Office wrote in the report “The scale is large, and the burden is quite heavy”.

In 2008 when global demand for China’s products started to fall, the government, like many around the world embarked on a stimulus program to flight off recession. Much of this was undertaken by local government created companies or SOE (State owned enterprises) investing in infrastructure projects such as empty apartments and office towers. Earlier this year we reported that the central government had banned 78 SOE from making further investments in real estate.

The Telegraph reports that many of the Chinese provinces are large and equivalent to major European countries. It cites an example of the The southern province of Guangdong having the same population than Germany. Previously the budgets of provinces were state secrets and this is the first time the level of debt has been disclosed.

Northwestern University Professor, Victor Shih believes the total sum of local government debt in China could be 11.4 trillion yuan or equivalent of 71 percent of China’s nominal GDP. He has researched more than 8,000 state owned local investment companies concluding that orders to ramp up spending on infrastructure after the GFC could leave China with widespread debt problems.

According to China’s banking regulator, outstanding loans to local government financing vehicles soured 70 percent last year hitting 7.38 trillion yuan at the end of 2009. As infrastructure projects continue to burn cash with little return on investment, Mr Shih suggests China could be in for a “pretty large-scale financial crisis around 2012″ if nothing is done to address the issue.

» China’s chief auditor warns mounting local government debt a risk to economy - The Telegraph, 24th June 2010.

» China auditor: local govt debts pose economy risk - Bloomberg, 24th June 2010.