BIS Shrapnel predicts rates to hit 9.4 percent & housing won’t crash

Written by admin on June 27, 2011 – 9:31 pm

A report from BIS Shrapnel today predicts mortgage rates will climb sharply to 9.4 percent by 2013 as the RBA combats rampant inflation, but there is nothing to worry about as property won’t crash!

It makes the prediction that prices will stay steady “with some cities even showing moderate price growth over the two following years” while acknowledging the decline in house prices to date has been partly caused by rising interest rates. Perth is forecast to surge 19 percent in the next 3 years?

» Rate rises loom but home prices ‘won’t crash’ – The Sydney Morning Herald, 27th June 2011.
» Interest rates heading for 10 per cent, according to BIS Shrapnel report – News Limited, 27th June 2011.
» WA property experts slam 19% increase forecast – WA Today, 27th June 2011


Posted in Australian economy, Australian Housing | 11 Comments »

Rental listings on the rise

Written by admin on June 26, 2011 – 6:10 pm

It wasn’t that long ago the property lobby was screaming of a shortage of houses. In the last six months we have seen a surge of houses listed for sale, and it now appears these are overflowing onto the rental market forcing landlords to drop rents. Owners, unable to sell homes for the price they demand, are pulling their properties off the market as we come into the slower Winter sales period and placing them on the rental market. This has resulted in many rentals properties sitting vacant.

Stats from RPData posted on the Macro Business Blog show there are 22.8 percent more properties advertised for rent than a year ago. In the Northern Territory, the figure is closer to 77 percent, and in South Australia, 40 percent.

The recent surge of available rentals may also be attributable to consolidation among renters. At a stage during the housing bubble, rents were rising faster than inflation, and with other rising costs (energy, food etc) renters may be forced to move back home, or move in with friends as landlords price their properties out of reach.

The Burb Watch Project (http://www.burbwatch.com.au) also show a steadily rising number of rentals advertised and rent reductions around the country.


Posted in Australian economy, Australian Housing | 30 Comments »

Is China’s Construction Bubble ready to Burst?

Written by admin on June 25, 2011 – 1:13 am

The second bailout of Greece has been in the lime light for the past couple of weeks. While Fitch rating’s Andrew Colquhoun said today that Australian and Korean Banks are the most exposed in Asia to the European debt crisis thanks to our dependence on offshore borrowing, is there another crisis brewing around the corner with bigger implications for Australia?

While Eurozone members are bailing out Greece, its believed the China central government has been bailing out its Local Government Financing Vehicles (LGFV) to the tune of 2-3 trillion yuan.

During the last decade, the Western world, fuelled by easy and abundant credit was spending beyond their means. Household consumption was surging along, and China was in the front seat to capitalise on the moment. However, like many other economies, things turned sour in 2008 with the onset of the Global Financial Crisis (GFC). Exports practically dried up overnight for the manufacturing superpower.

To counter the effects of the GFC, Beijing embarked on a massive 4 trillion yuan economic stimulus program. In addition, local governments were told to spend and they did this via local government created companies known as SOEs (State owned enterprises) or LGFV (Local Government Finance Vehicles). They invested in infrastructure and real estate projects such as empty apartments and office towers built to keep GDP ticking along. The heightened activity of SOEs in the real estate markets along with reduced lending standards helped fuel a massive investment bubble and credit boom in 2009 and 2010. According to the Royal Bank of Scotland (RBS), “Chinese banks grew their loans by 65% since the beginning of 2009 as credit expansion was the centrepiece of China’s stimulus package during the global financial crisis. Much of these loans were channelled to LGFVs as well as the property sector.”

SOEs were bidding up prices to record levels, with Beijing’s residential land price record broken by SOEs twice within 6 hours on the 15th March last year. This caused the banning of 78 SOEs from any further real estate investments by the Assets Supervision and Administration Commission a couple days later. The commission believed 94 of the 127 SOEs had been investing in residential real estate, when real estate wasn’t even their primary business.

By June 2010, there were growing concern about who was funding this spending spree. In the post, China’s chief auditor warns of mounting debt on the 26th June 2010, we reported on Liu Jiayi, head of the National Audit Office who wrote in an annual audit report “The scale is large, and the burden is quite heavy” when referring to SOE debts. According to China’s banking regulator at the time, outstanding loans to local government financing vehicles soared 70 percent in 2009, hitting 7.38 trillion yuan at the end of that year. 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.

But, with little ROI and a cooling property market, Beijing has been forced to inject 2-3 trillion yuan into the LGFVs. David Cui of Bank of America-Merrill Lynch Global Research indicates that “LGFV loans are at 10 trillion yuan by the government’s estimate; the ones with no cashflow support”, suggesting a second bailout may not be too far away.

Societe Generale has just released a 50 page report titled “Chinese construction bubble – Preparing for a potential burst.” Using a variety of data (cement consumption, elevators, skyscrapers, roads, railroads etc), it sets about determining if the construction bubble is myth or reality. It believes Chinese construction is ahead of the development curve in a number of areas, but while there is early signs of weakness it can’t find any immediate trigger for a downturn.

According to the report, 60 percent of new elevators manufactured in the world are fitted to buildings in China. The number installed has grown substantially from 10,000 in 1990 to more than 300,000 in 2010, representing a compound growth rate of 20% that “looks unsustainable in the mid-term”. Consumption of cement by China in 2010 exceeded 1,800 million tonnes, accounting for 55% of world demand. Average consumption per head is 1,400kg, four and a half times about the average ex-China consumption of 300kg.

Societe Generale then turns to figures on the delivery of excavators, loaders and bulldozers from the China Construction Machinery Association (CCMA). While demand has been strong up to March, deliveries are starting to fall. Excavators sales are down 65% for the month of May and down 12% over the year. It also reports “In addition, the sales volume of loaders and bulldozers also saw sharp drops May, with that of loaders falling 45% from March, the largest drop since 2001.” It believes a reason for the decline could be from financing constraints.

Fitch’s Senior Director of Financial Institutions, Charlene Chu, told Bloomberg today “We are pretty concerned about a big problem with bad debt over the next few years associated with local governments, property and all of the excesses that have been built up since the stimulus of 2008″.

“If we have a downturn in the Chinese property market it would have a significant impact on the banking sector,”

» Exclusive: China to clean up billions worth of local debt – 31st May, 2011.
» Fitch Says China Property Downturn Would Significantly Impact Banks – 23rd June, 2011.
» Banning SOE Real Estate Investment to Impact the Soaring Price of Housing: An Analysis – The Epoch Times, 23rd March 2010.
» 5 Things You Need To Realize About China’s Gigantic Bailout Of Local Governments – Business Insider, 2nd June 2011.
» Fitch flags credit-risk worry at China banks – Market Watch, 22nd June 2011.


Posted in China | 9 Comments »

Retailers shed jobs

Written by admin on June 18, 2011 – 12:52 am

Property experts make the argument that house prices can’t fall in Australia as we have very low unemployment. But it begs the question if a fall in house prices leads or lags a fall in employment?

The Unconventional Economist set out to answer this question last month and found that in the United States, employment started falling approximately 9 months after house prices hit their peak and started declining. In the United Kingdom and Ireland, employment started falling 6 months after house prices had peaked and started its decent.

Rising house prices lead to rising consumer confidence through the wealth effect. During the boom times, consumers were using their homes as ATMs, often spending beyond their means. But just as rising house prices buoyed consumer confidence, when house prices hit tipping point and start to fall, the purse strings tighten in less time than a drop of a penny. Australians are now saving and paying down debt, and in a big way.

The retail sector is Australia’s largest employer accounting for about 19 percent of GDP. When consumers stop spending beyond their means, retailers must start reducing hours and trimming positions. And they are doing just this.

Tonight’s Channel Ten 6pm news bulletin interviewed some retailers whom say times are still extremely difficult in our two speed economy and the margins are just not present to keep a full workforce. Unfortunately, they are letting staff go. But, Channel 10 reporters indicated soft retail conditions were a result of on-line purchases made overseas, and ignored any effects of a worsening domestic economy where living and house costs are spiralling out of control and where consumers are paying down debt as evident in a large spike in the net savings ratio. I guess this is done, not to impact consumer confidence any more!

But those retailers are lucky – their doors are still open, if only just. On Tuesday, the receivers of clothing and footwear retailer, Colorado announced the closure of 140 stores and the loss of 1040 jobs. On Wednesday, Ferrier Hodgson, Administrators for Angus & Robertson said a further 42 stores would close in the next four weeks, with another 519 employees out of work.

May job figures were released by the ABS, Thursday week. During the GFC, full time jobs were traded for part time jobs as uncertainty settled in. In early 2010, as confidence returned the domestic economy, those part time jobs were traded up for full time jobs.

But as the stimulus starts to wear thin, house prices and consumer confidence are once again falling, and we are once again losing full time jobs while part time jobs show a small uplift. At the same time, Fitch ratings is reporting mortgage delinquencies are at levels not seen since before the GFC.

But will there be a $900 spending handout and a First Home Owners Boost to save us this time?

» Australia’s Colorado retail chain to close – Reuters, 14th June 2011.
» Retail woes worsen as bookseller sacks 519 – The Sydney Morning Herald, 16th June 2011.


Posted in Australian economy, Australian Housing, Unemployment | 17 Comments »

Debt Bubble Cripples Retail Spending

Written by admin on June 8, 2011 – 11:17 pm

In a report released by Access Economics today, it expects retail sales to grow by only 1.3 percent this financial year, sounding the worst period for retail spending in two decades. But, on a positive note, it expects a rebound next year.

David Rumbensm, a partner with Deloitte Access Economics said “People are more cautious and saving more.”

ABS data shows household savings have rapidly sprung back to levels not seen in 25 years after a decade when the household consumption fired along on the expansion of credit. The unsustainable surge in house prices and the wealth effect helped the retail sector along nicely. But pushed under the carpet is the white elephant in Australian lounge rooms – excessive debt levels, gradually accumulated over the last two decades. 90 percent of that debt belongs to residential housing.

While current interest rates are some of the lowest in decades,

Our extremely high debt levels have seen mortgage payments blow out to record levels. While the Boomer’s remember the 17 percent interest rates of the late 1980s, just prior to the GFC the aggregate Australian household was spending double the amount on mortgage interest payments than when rates were 17 percent. And they thought they had it tough.

David Rumbens says “In part, it’s the lift in interest rates that we saw last year that has both cut into incomes and cut confidence.” He believes we can expect another rate rise in the coming months. With the level of debt we have today, a 25 basis point rise in official interest rates has a greater effect than in the 1990s. For this reason, some believe the RBA is resorting to warning of impending rate rises to help cool household’s addiction to debt, rather than inflict the pain of actually carrying through with it.

Only today, credit ratings agency Fitch was forced to revise its estimates of pending mortgage defaults up as their model used data on loan performance between 1980 and 2000 when debt levels were much lower. “These figures show a substantial shift in the indebtedness of Australian borrowers, who are now significantly more sensitive to moves in interest rates than they were 20 years ago,” Fitch said. “For this reason, Fitch believes any downturn could be significantly worse than the recession of 1991, on which the current mortgage default criteria is based.”

While this excessive household debt level, worldwide, was the cause of the GFC, our government decided in its wisdom to prop up our unsustainable economy. Of course, proping up an unsustainable economy means when the stimulus is removed, the economy once again collapses as the root of the problem is not addressed. In fact, as you can see in the graph of household debt above, Australian’s started reducing their reliance on debt after the GFC, only for the government to provide free money to help encourage more accumulation of it via a period of fast house price growth.

With the effects of the stimulus running out, Australian’s are now once again saving like never before in a bid to keep their heads above water and pay down the crippling debt levels. House prices are falling, and the negative wealth effect means consumer confidence is falling.

“In part, it’s house prices having peaked and now starting to turn down has also cut confidence and willingness to spend.” said David Rumbens.

Deloitte Access Economics predicts that household savings will start to level out, and that a jobs and wage growth will help fuel a rebound in consumer confidence and retail sales next financial year.

Have your say. Is this possible?

» First home buyer defaults more likely: Fitch – The Age, 8th June 2011.
» Australia Retail Sales to Increase From Two-Decade Low, Access Report Says – Bloomberg, 7th June 2011.
» Retail sales ‘to bounce back next year’ – The ABC, 8th June 2011.
» Retail sales expected to pick up after horror year: Access Economics – Smart Company, 8th June 2011.
» Christmas retail figures shaping up to be the worst since the early 90′s – Who Crashed the Economy, 23rd December 2010.
» Time to pick and choose: Housing or Jobs – Who Crashed the Economy, 21st March 2009.


Posted in Australian economy, Australian Housing, Unemployment | 16 Comments »

“Household arrears are a concerning trend” – ANZ Chief Executive

Written by admin on June 2, 2011 – 11:26 pm

Philip Chronican, ANZ’s Chief Executive Officer, Australia has today said “Household arrears are a concerning trend. It is a problem that is going to stay for a while,”

The comments come a week after Fitch Ratings reported mortgage arrears had hit record highs. Mortgage arrears greater than 30 days increased from 1.39 percent to 1.79 percent in the March quarter this year. Arrears on low-doc loans hit 6.74 percent, up from 5.7 percent in the December 2010 quarter and above the peak 6.70 percent result recorded during the global financial crisis.

Meanwhile, the government is getting ready to cut the $1 million dollar retail deposit guarantee saying Australia and the domestic banking system survived the global crisis in good shape. It’s suggested the cap will be reduced to a figure between $100,000 and $250,000 in line with schemes in other advanced economies. . .

» Rising mortgage arrears a worry: ANZ – Sydney Morning Herald, 2nd June 2011.
» Mortgage arrears hit record highs – ABC News, 26th May 2011.
» Low-doc mortgage arrears top GFC peak – The Sydney Morning Herald, 26th May 2011.


Posted in Australian economy, Australian Housing | 11 Comments »