Australia : Home of the McMansion

Written by admin on November 30, 2009 – 7:28 pm

The size of the Australian home has overtaken the U.S. to become the biggest in the world. The average size of the new Australian home is now 215 square meters, up 10% over the past decade. In contrast as the U.S. comes to grips with the worst recession since the Great Depression, the size of U.S. homes have been downsized to 202 square meters, down 5% from a peak of 212 square meters.

Our neighbour, New Zealand comes in at 196 square meters, while the biggest homes in Europe go to Denmark at 137 square meters. In Britain, homes are only 76 square meters.

» Home truths: Australia trumps US when it comes to McMansions – The Sydney Morning Herald, November 30th 2009.


Posted in Australian Housing | 1 Comment »

New home sales in downward spiral as stimulus measures wears off

Written by admin on November 30, 2009 – 6:57 pm

New home sales fell for the 2nd month in Australia as the effects of the unprecedented financial stimulus wears off. The Housing Industry Association reported today sales of new homes fell 6.9 percent in October, following a fall of 4.3 percent in the month previous.

» New home sales retreat: HIA – Sydney Morning Herald, 30th November 2009.

» New home sales fall 6pc in October in second consecutive decline – The Australian, 30th November 2009.


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First Home Buyers flee market in droves

Written by admin on November 28, 2009 – 10:52 am

The Sydney Morning Herald reports there were only 2626 first home buyers in NSW in the month of October after the First Home Buyers Boost was slashed to $3,500.

This is a fall of 57% from the previous month where 6079 buyers made a rush to ensure they picked up a share of the extra $3,500, in many instances bidding prices up far in excess of what the grant was worth and over committing at a time of emergency low Interest rates.

Over the 12 months, 59,000 NSW first home buyers purchased their first home with an average rate of 4915 a month.

The first home buyers boost will be removed entirely at the end of the year.

» First-home buyers fade away – The Sydney Morning Herald, 28th November 2009.


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Australia’s 18 years of economic expansion will continue for years to come

Written by admin on November 25, 2009 – 10:23 pm

Australia deputy governor Ric Battellino has stolen the limelight today with comments that we have only just entered a new upswing and that our 18 years of economic expansion has many more years to run.

“It is now 18 years since Australia has experienced a negative in year-ended GDP growth, a very prolonged economic expansion. With the economy having only recently entered a new upswing, it is reasonable to assume that we will see this growth extended for a few more years yet.”

This very bullish forecast is on the back of further expansion of the resources sector and the development of “some very large gas projects”. Mr Battellino indicates Mining investment, which is already at record levels as a share of GDP, could rise substantially further in the next five years or so.

As far as the housing market is concerned, Mr Battellino believes we can cope with higher house prices. He acknowledges Australian’s are spending a lot more on dwellings now in real expenditure terms than 15 years ago, but growth in the population and continued high immigration along with solidly rising household incomes will underpin demand for housing.

Mortgage repayments in Australia is generally paid with by wages and not GDP points. It is not quite clear how the mining boom or one or two large gas projects will cause household incomes to rise across the country.

However we can only pray he is right as Mr Battellino also acknowledges Australia has a oversupply of dwellings.

“Census data show that the number of dwellings built has exceeded the increase in the number of households by a large margin. As a result, the ratio of the number of dwellings to the number of households has been rising over time; as at 2006, there were 8 per cent more dwellings in Australia than there were households.” said Mr Battellino.

He believes most of the surplus reflects holiday houses and second homes. This was a similar case to that of the U.S. and U.K. When money was tight, owners off loaded their holiday and second homes in droves causing a large oversupply of homes in a very short duration.

In October last year Mr Battellino indicated Australia’s housing market had crashed in 2003, and that we were actually leading the U.S. & U.K. by three years.

The bullish talk from the RBA further supports Australia is in store for another 25 basis point rise come next Wednesday.

» Housing & the economy – Ric Battellio RBA, 25th November 2009.
» RBA signals golden era of growth ahead – The Sydney Morning Herald, 25th November 2009.
» High home prices sustainable: RBA – The Sydney Morning Herald, 25th November 2009.


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Home deposit rules could stem price bubble

Written by admin on November 22, 2009 – 1:48 pm

Amid fears another house price bubble is brewing in Australia, RBA Assistant Governor Guy Debelle has entered into debate with the suggestion of regulating the size of deposits home buyers must provide banks, in a bid to prevent credit fuelled asset bubbles.

Back in September the International Monetary Fund endorsed preventive action by central banks to pop asset bubbles with rate rises. Using Interest Rates to pop bubbles is seen as a blunt instrument, as not only does it control asset bubbles, but it will also restrict credit used by businesses to fund purchases of more productive assets, used to generate real wealth.

When Dr Debelle was asked what could be done to address bubbles, such as our current housing bubble, aside from raising interest rates, his response was the tightening of loan to value ratios. He gave the example of Hong Kong where some flats have risen in price by more than 40% this year. Last month, a very concerned Singapore and Hong Kong started reducing the maximum LVRs.

Australian Banks have already started to reduce LVRs, but the maximum LVR is not mandated in Australia.

But while Banks can do their bit, the government must take some ownership of the current housing asset bubble they have just created. Buyers went on a frenzy after the government poured petrol on the first home buyer grants. Rather than giving free money away, governments should be encouraging responsible savings and home purchases.

In February 2008, the Government introduced the First Home Savers Accounts. The accounts provide a means for first home buyers to save to purchase a house by giving a 17 percent co-contribution up to $850 a year for every dollar saved, while taxing any interest at a generous 15%.

The accounts however has been a flop with buyers, partly due to many restrictions placed on the money such as a minimum contributions of $1,000 needs to be made over the course of at least four separate financial years before any withdrawals are possible.

This in parallel with First Home Owners Boost this year giving an instant and additional $7,000 grant on top of the existing $7,000 first home owners grant for existing homes and an extra $14,000 for new homes made the first home saver accounts too restrictive and a lot of hard work. Why save $20,000 of your own money and wait four years to get a $3400 contribution from the government, when you could buy during the FHOB period and get instant gratification of $14,000 from the government?

The good news is the boost is being wound up, and should be a distant memory come the 1st January next year. However the government seems insistent in keeping the original first home owners grant of $7,000. This grant was first introduced in 2000 after the introduction of the simplified tax system or GST in Australia. The purpose of the grant was to offset the effect of GST on home ownership.

Ten years later, surely we don’t still need to offset the effects of the GST? Perhaps the grant should be phased out, and the First Home Saver Accounts be fine tuned. The requirement for four years savings, could be reduced to two years, and the co-contribution be increased to 35% and capped at $7,000, so that after four years of demonstrated saving, first home buyers can walk away with a $7,000 co-contribution from the Government.

This coupled with mandated, lower maximum LVRs effecting the entire mortgage market and not just first home buyers could go a long way to a more sustainable housing market.

» Home deposit rules could stem price bubble – The Sydney Morning Herald, 20th November 2009.


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Households set to feel debt squeeze

Written by admin on November 21, 2009 – 9:00 pm

The Sydney Morning Herald reports :

Households will begin to feel the impact of more interest rate rises, after years of racking up more debt, a report shows today.

The Melbourne Institute Bulletin of Economic Trends for November flagged the increased likelihood of a Reserve Bank rate rise in December as the economy’s recovery gathers pace.

However, the research group noted that rising household debt would become a bigger factor for Australians as interest rates rise.

This year has been lost on Australians. While the rest of the world comes to grips of the consequences of spending beyond their means, year in, year out, Australian’s have been out accumulating more debt.

That said, we did get off to a good start, but the temptation of “emergency low” interest rates got the better of us.

As the Sydney Morning Herald article indicates, Household debt as a percentage of household disposable income has been accumulating into a mountain for years. In the June 2008 quarter, debt peaked at 159.0%. If your household disposable income was $100,000, the “average” household would have $159,000 in debt.

The GFC brought a rethink of debt levels. Australian’s started paying down debt in droves, and for the next 6 months they made a good go at it. But then the RBA intervened and sent Interest Rates plunging.

The above graph shows the percentage of disposable income used to service debt. The blue line represents mortgage repayments, while the red line shows total debt repayments. Look what Falling interest rates did to payments.

However note, the payments today, at emergency low interest rates are still higher than in 1989 when interest rates peaked at 17%. It is due to the shear mountain of debt households have now compared to 1989.

Interest rates are now on the way back and with the level of debt owing, will cause payments to skyrocket. With Market expectations for Interest rates to return to 5.25%, Australian’s may have wished the paid down more debt when they had a chance.

» Households set to feel debt squeeze – The Sydney Morning Herald, November 20th 2009.


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Rents through the roof! . . . Jobs through the floor.

Written by admin on November 21, 2009 – 8:15 pm

Some of the papers this week are running stories about sky rocking rents. Portrayed as a good thing, the reports show rents for houses in Rose Bay, NSW up 58.3%, and prices for units in West End in Brisbane up 39.4% among just some of the double digit rises.

Even in little old Adelaide, the News Limited reports Happy renters lift market prices saying rents for homes in Magill are up 16.7% and Glenelg Units are up 20.0%. I’m sure the renters are indeed happy!

Cutting through all the real estate hype, Nationally rents on houses only increased 3.4%. But all the hype is enough to make any landlord jump, and put up rents 40% this year, in fear that they will miss out.

The graph above shows the ratio between rent increases and CPI. Historically, rents have always increased at a sustainable pace in line with CPI. Then in late 2006 you will probably remember the endless rents through the roof articles. Landlords around the country, lead on by lobby groups started jacking up rents, at a pace far greater than CPI.

Prior to the start of Australia’s housing bubble, house prices only increased in the long term at the rate of inflation. When the adrenalin of current bubble kicked it, home prices were out striping incomes by a long way. Despite the fact that today many people believe money grows on trees, the real fact is the money has to come from somewhere. First Australian’s dipped into savings, then when that ran out, people turned to credit. As more and more of the household’s budget is eaten up with housing expenses, discretionary spending is being cut back and this is bad news for jobs.

In Australia using 2006 figures, 35% of households have a mortgage, 28.5% rent. Now with rents out pacing household income, the same sacrifices have to be made. Unfortunately this comes at a bad time, with many employees on reduced hours, and some even losing their jobs. The more rents out pace income, the less money will be spend on goods and services and more jobs will be in the firing line.

While housing expenses (both homes and rents) out pace household incomes, not a lot can be done to save jobs.

Reality is, eventually this will correct. More and more people are being forced out off rental properties as they can’t meet the repayments. The money is simply not there. Moving back in with the parents is one option, boarding with several people and splitting the expenses is just another. SQM research shows vacancy rates are starting to trend up in many areas.

An article in the Brisbane Times also reports people turning to public housing :

MORE Australians may be forced to turn to public housing because prices and rents have ballooned well above the inflation rate in the past decade, a federal report on welfare says.

The Australian Institute of Health and Welfare says house prices have increased at twice the rate of inflation since 1996 and rentals are almost $100 a week higher than if they had gone up in step with inflation since 1996.

That’s another $100 a week not supporting jobs.

» Housing, rental balloon leaves more in need – The Brisbane Times, 17th November 2009.

» Happy Renters Lift Market Prices – Adelaide Now, 18th November 2009.

» Griffith rents increase by 41pc – The Canberra Times, 29th November 2009.

» Rents rise across the country – The Age, 18th November 2009.

» Rents soar 40 per cent in inner-city Brisbane – The Brisbane Times, 18th November 2009.


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Worst house building slump since WW II

Written by admin on November 19, 2009 – 6:27 pm

The ABC reports on a Housing Industry Association (HIA) report revealing this year marks the seventh straight year of weakness in housing starts, with Australia experiencing the longest slump in new home building in its post-war history.

The HIA argues new building is being crippled by bottlenecks and that it is a supply side problem, not a demand problem as house prices continue to rise and are out of the reach of the majority of buyers.

» Worst house building slump since WW II – The ABC, 18th November 2009.


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Housing the bubble that no one dares burst

Written by admin on November 14, 2009 – 11:56 am

The Age’s Tom Ormonde today wrote an article about the housing bubble that on one dares burst.

THE phrase ”safe as houses” was always ridiculous, and not just because it’s a cliche. Bricks, mortar and gaudy imitation period features can be a good investment, but frequently aren’t, particularly when procured near the top of a boom.

Ask anyone who bought an apartment in Tokyo during Japan’s real estate and sharemarket bubble of the late 1980s. Prices there still haven’t recovered.

In Britain and the US, anyone who bought a house in late 2006 is likely to be regretting it now, if not living in a tent or caravan. Had they waited, they could have got in for up to 30 per cent less.

Article continues here.

» Housing the bubble that no one dares burst – The Age, 14th November 2009


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Next boom in house prices continue to outpace wages

Written by admin on November 2, 2009 – 12:57 pm

The next housing boom has begun, outstripping wages and further reducing household spending, which ultimately will put further pressure on unemployment as purse strings continue to tighten.

Economists had predicted house prices would rise 3% for this quarter, but ABS data released today show a much larger boom in house prices. Australian house prices surged 4.2% in the September quarter setting a new all time peak for prices.

House Prices

It was low interest rates that first triggered the bubble in house prices resulting in the current Global Financial Crisis. The Reserve Bank must now rapidly hike interest rates from emergency lows to a more normal footing of around 5%.

» House prices jump – again – The Sydney Morning Herald, 2nd November 2009.


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Price limits set for first home buyers

Written by admin on November 1, 2009 – 10:35 pm

As part of the “winding back” of the housing stimulus measures, Housing Minister Tanya Plibersek has announced there will be caps on the amount first home buyers can spend on their first pad while still being eligible for the $7,000 first home buyers grant (FHBG).

From the 31st of December, the FHBG will be scaled back to $7,000 and caps will be applied to the grant. In NSW, WA & NT this limit will be $750,000. Queensland will have a higher limit of $1 million, while Melbourne is capped at $600,000.

According to a spokesperson for the South Australian Treasurer, Kevin Foley, there are no plans to introduce a cap in South Australia.

The caps equate to 17x average wages for Qld, 12.6x for the NT, 11.9x for NSW, 10.6x for WA and only 9.8x for Victoria.

The FHBG was first introduced as compensation for when the GST (Goods and Services Tax) was introduced in 2000, some 9 and a bit years ago. Tanya Plibersek has been quoted saying “A strong housing market is critical for underpinning confidence and supporting jobs in the Australian economy”, yet little does she know that as housing cost continue to outpace household income, less money is available in the household budget after housing expenses to support the rest of the economy by purchasing goods and services. The grant is a failure as it does little to encourage new building, rather it only inflates existing asset prices and suffocates discretionary spending which underpins domestic jobs.

As any effects of the GST have well and truly passed, now should be the time for the government to consider abolishing the grant entirely. It is no longer needed.


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