Archive for August, 2011
There are no surprises in this months release of the RP Data‐Rismark July Hedonic Home Value Index. House prices continue to decline, falling a seasonally adjusted 0.6% in the month of July and registering the 7th straight month of falls. Since the start of the year, Australian capital city prices have declined 3.4 percent.
» RP Data‐Rismark July Hedonic Home Value Index results – RPdata, 31 August 2011.
Posted in Australian economy, Australian Housing | 16 Comments »
According to figures released from the Housing Industry of Australia, sales of new homes are down 8 percent for the month of July. This follows a similar size fall in June of 8.7 percent and has the housing industry begging the government for more stimulus.
But while the housing lobby tells us we are simply not building enough housing and any shortage will put a floor under prices, just the opposite is happening.
SQM research shows Melbourne now has 45,700 homes on the market, waiting patiently for a buyer as the number of days on the market trend upwards. It predicts stock levels could rise to 60,000 as Spring comes around and investors try to exit the market with little possibility of future capital gains and a high probability of falls. This has seen house prices in Melbourne fall 4.4 percent since December or $800 a week on the median priced property. But with so many houses on the market to choose from, why do you need to build?
On Friday, RBA boss, Glenn Stevens told the Standing Committee on Economics, “How is it that a country of our size—we are not short of land—cannot add to the dwelling stock for the marginal new entrant more cheaply than we seem to be able to do? I cannot get past that basic question.”
Maybe there was never a shortage to begin with? How can a market go from a chronic shortage to oversupply so quickly, and during a period where the number of homes being built its at the lowest level in years?
Any marketing executive will tell you a marketing campaign needs a ‘call to action’, something that will urge the listener to take immediate action. A “shortage of houses” and “we are not making anymore land” could be seen as perfect calls to action for the property industry, urging Australians to get onto the property band wagon at any cost or otherwise “miss out forever”.
Others believe housing has been used as a traded commodity. ANZ’s Australian Chief, Phil Chronican says housing should be “a place to live in, sleep, eat and raise your family” and not a speculative investment vehicle. It’s quite possible houses were brought up as trading stock (or holiday homes) and left empty while large capital gains were being made. Now the market is falling, this excess trading stock comes back on the market – as a place to live in, sleep, eat and raise your family.
What ever the reason, one thing is certain. Most other western countries had housing shortages, and when they turned quickly to oversupply, their bubbles collapse. It looks like we are following in their footsteps.
» New home sales slide 8 per cent – Housing Industry Association – News Limited, 29th August 2011.
» House prices sliding in Melbourne’s suburbs – The Herald Sun, 29th August 2011.
» Sharp fall in new home sales – ABC News, August 29th 2011.
Posted in Australian economy, Australian Housing | 11 Comments »
Channel 9′s reality TV show The Block has tonight transparently shown the nation via their arm chairs, the true depressed state of the property market. Only one of the four renovated houses sold at auction yesterday at the Fitzroy Town Hall. The only property sold – Polly & Warwick’s, fetched a marginal $15,000 over the $840,000 reserve.
The Herald Sun today reported that Victoria’s housing market is tipped to crash with an oversupply of about 70,000 dwellings. This comes as economists predict 100,000 jobs will be lost by years end, with a further 100,000 to disappear next year as the Australian economy struggles with a lack of consumer spending caused, in part, by high household debt levels.
» One buyer, many moments for Block finale – The Age, 21st August 2011.
» Victorian housing crash tipped – The Herald Sun, 21st August 2011.
» Jobs under pressure – The Age, 21st August 2011.
» Job losses imminent in manufacturing industry: Howes – The ABC, 21st August 2011.
Posted in Australian economy, Australian Housing | 13 Comments »
Chronic housing affordability has seen the number of first home buyers drop by almost 50 percent in Adelaide. Figures supplied to the Adelaide Advertiser by Treasury, show only 6570 South Australian First Home Buyers signed on the dotted line to purchase a home in 2010-11, a dramatic drop from the 11,197 and 12,523 commitments in 2009-10 and 2008-09 respectively.
Affordability hit all time lows just before the first GFC jitters in 2008 as both house prices and consequently household debt levels hit all time highs. This and the GFC, caused the RBA to suddenly drop interest rates and the government to introduce the First Home Buyers Boost, neither which addressed the fundamental problems. In fact, the boost actually encouraged young Australians to take on large amounts of debt and the frenzy push prices higher.
Now the boost has finished, and interest rates are ticking up again.
Toop & Toop managing director Anthony Toop said “It was a stimulus package, it wasn’t fixing the problem,” “Confidence within the banking system and the confidence of buyers have diminished which means it’s harder to get money and harder for a buyer to commit to a property.”
Judging by comments posted to articles on mainstream media and social networking sites, it’s also quite possible that young Australians are waking up to just how overvalued property is in Australia and are deciding to defer home ownership. Two weeks ago, 60 minutes aired a story on how, in some cases, it is now cheaper to rent than buy.
Meanwhile, The Telegraph has today reported on the Commonwealth Bank’s decision to pull out of the First Home Saver Account (FHSA) market, citing poor demand for the product. The First Home Saver Account was introduced shortly after the Boost to encourage young Australians to save for a home. It taxes the savings at 15 cents in the dollar and provides yearly government co-contributions but has restrictions that the proceeds of the account can only be used to purchase a home, or otherwise it has to rolled over into superannuation. Account holders must also contribute to the account for four separate financial years before they can access the funds. Recently, the FHSA legislation was changed allowing account holders to roll the money over into an eligible mortgage after four years, if they purchase a home beforehand, in a bid to increase take-up of the accounts.
According to the Telegraph, when introduced, Treasury forecasts predicted $4 billion would make it into 400,000 FHSA (average total of $10,000 each.) But the latest figures show aggregate FHSA only total $173 million distributed among the 27,400 accounts open.
First Home Savers simply find the accounts have too many restrictions. A CBA spokesperson told the Telegraph, 95 per cent of home-hunters preferred to save through term deposits and savings accounts “as opposed to using this particular product”
While first home savings are only taxed at 15 percent, the limited number of providers means there is little competition for savings rates. Currently the best deposit rate for FHSA is 5.50 percent while savers can get 6.51 percent from online savings banks such as uBank or better yields with Term Deposit products. These options also provide little restrictions should the account holder need to access the savings for other emergencies.
The Telegraph also points out the $85,000 cap on the account is too small for Sydney residents. If holders strive to save 20 percent for a deposit and eliminate LMI, then the accounts are only good for purchases up to $425,000. After this, holders will need to open another personal savings account or term deposit to save the remainder of the deposit.
Posted in Australian economy, Australian Housing | 1 Comment »
Talking at an Asia Society Dinner in Sydney, World Bank president Robert Zoellick has warned that fragile confidence from recent events in the United States and Europe have pushed us into a new danger zone “And I don’t say those words lightly.”
But these comments come as no surprise to the average Australian. When surveyed in an Essential Research survey last week, almost half believed the world is close to another global financial crisis. Only 8 percent thought a GFC mark 2 was not very likely.
But the more surprising indicator from the survey shows the majority of Australians said if there was another GFC, they did not want the government to provide any further stimulus like in 2009. It appears Australia voters now see through all the grants and handouts used to prop up the Australian economy. This public opinion should mould well with comments from Chris Evans, the Minister for Tertiary Education, Skills, Jobs and Workplace Relations who said last week that despite the slowing Australian economy and rising unemployment, the government has no plans for new stimulus.
With a rapidly deteriorating global outlook in the past couple of weeks, property speculators have been betting on a rapid reduction in interest rates to fuel a new credit spurge and property surge. However, Philip Chronican has dampened that enthusiasm today saying the Reserve Bank of Australia is still very much worried about inflation and “There’s very little reason for them to cut rates other than the crisis of confidence that we’re starting to see in the rest of the world.”
Today, the Herald Sun reported on comments from economist Harry Dent who says Australian real estate is the most overvalued in the Western World and that our property market could follow a path similar to Japan in the 1980′s. “That’s what Australia could be looking at. I think prices will go back down to where they were in mid-2000, to where young families can start affording a house again – so that could prove a good thing.”
We support Harry Dent’s comments that a crash could prove a good thing. While a crash in the property market of our magnitude would result in considerable short to medium term wealth destruction, in the long term will we gain a sustainable economy again. As Australian’s are gradually waking up too, bailing out or propping up the economy is only a short term delay to the inevitable.
» Danger zone ahead: World Bank chief – The Sydney Morning Herald, 15th August 2011.
» World heading for next GFC: survey – The Sydney Morning Herald, 15th August 2011.
» Don’t bet on the Reserve Bank cutting interest rates – News Limited, 15th August 2011.
Posted in Australian economy, Australian Housing | 18 Comments »
Boy, what a turbulent couple of weeks on global stock markets. In Australia, the All Ordinaries lost 3.75 percent over the week ending 29 July only to accelerate and plunge 7.49 percent the following week. This included a free fall of 4.21 percent last Friday. This week has seen some stability return the markets with a mild recovery of 1.70 percent.
Traders don’t appear to have a single clear reason as to why markets around the world started plunging. In Europe, it was feared the sovereign debt crisis would spread to Italy and Spain and with a potentially large European Union member country defaulting. These fears were worsened with EU parliaments going on August holidays and leaving only the European Central Bank on hand to provide bailouts.
In the United States Tuesday Week, Congress had approved an increase to the $14.3 trillion dollar debt ceiling, preventing an unprecedented default of U.S. debt. Under the plan, the debt ceiling would be increased by $2.4 trillion dollars while also cutting about $2.1 trillion in government spending over 10 years. It took a couple of days, but markets started to wonder if the cuts were in fact all it’s “cut” out to be and if ratings agencies would downgrade U.S. debt anyway.
Those fears were realised last Saturday morning, our time, when Standards and Poor’s took the unprecedented move and downgraded U.S. long term sovereign debt to AA+ explaining, among other things, that the $2.1 trillion in budget cuts “fell short” of the required $4 trillion it believed would be required to keep a triple A rating. Over the weekend, all and sundry went to the defence saying the downgrade didn’t really mean anything, but despite all the reassurances, the Dow Jones Industrial Average plunged 5.5 percent in trade on Monday.
At the peak of the turmoil this Tuesday morning, All Ordinaries index of the Australian Stock Market was down 24.4 percent from the high recorded on the 11th April. At close of trade today, the index is down 16.3% from the April highs.
All this rapid global volatility could be seen as the start of GFC2.
Back at home, both Treasurer Wayne Swan and Prime Minister Julia Gillard was trying to comfort Australians at a time when their super funds were evaporating in front of them. Both said the “Fundamentals” of the Australian Economy is strong, we have record low unemployment and low levels of public debt. There was no mention of Australia’s record levels of household debt. It was an eerily feeling, bringing back memories of Kevin Rudd during GFC1 saying “As Prime Minister I will not sit idly by and watch Australian households suffer the worst effects of a global crisis they did not create”.
GFC1 was essentially about high levels of household debt around the world caused by speculation on housing and that lead to quite substantial housing and debt bubbles. The banks required credit growth and used financial engineering through Collateralised Debt Obligations (CDOs) and Credit Default Swaps (CDSs) to ‘protect’ themselves. When it all went wrong, Governments had to bail them out, effectively transferring the debt from private household balance sheets to the Government’s while at the same time trying in vain to stimulate unsustainable economies, creating surging public debts and sovereign debt problems.
In Australia in 2008, house prices were already starting to come of the boil after our own sizeable bubble. We had quadrupled household debt over a period of 30 years, with growth rates exceeding that of our United States counterparts. With so much money being soaked up in debt repayments, there was not much money left for retail and services underpinning jobs.
Recessions are a normal part of the economic cycle. There will be a period where the economy will get ahead of itself followed by a slow down or correction. However today, Governments have decided we can’t have recessions or let markets run its course, instead we must prop up the economy as soon as it starts to look weak. 2008 was the perfect example, despite a local housing bubble and record levels of household debt, the Rudd government gave $900 handouts to prop up retail, and introduced very generous boosts to the First Home Owner Grants. This does nothing to address the underlying problems, namely our high levels of household debt.
As such, when the stimulus wears off, as it is doing now, we have found out that few can afford a home hence demand for housing credit is at all times low. Of those with a house and mortgage, they paid too much and now can’t afford to undertake discretionary spending, hence Retailing is now at the worst it has been in decades. If shops are not selling stuff, and builders not building homes then you could expect jobs will have to start going.
On Thursday, the ABS released job figures showing unemployment has risen to 5.1%. Economists are now forecasting unemployment will rise further in the coming months. On the same day, other data surfaced showing the number of companies placed into Administration has jumped 25% in June, the second highest monthly total on record.
It comes as a welcome relief today to hear Chris Evans, Minister for Tertiary Education, Skills, Jobs and Workplace Relations indicate the government has no plans for bailouts or new stimulus packages despite the fact that Australia’s economy is slowing and unemployment is trending up. Hopefully GFC2 wont trigger another knee jerk reaction from our Government to bailout unsustainable bubbles, effectively propping them up for another year or two.
» U.S. triple-A debt rating cut by Standard & Poor’s – 5th August 2011.
» More companies going to the wall – The Herald Sun, 13th August 2011.
» Government has no plan for new stimulus – Adelaide Now, 12th August 2011.
Thanks to reader, The_Mainlander for the title.
Posted in Australian economy, Australian Housing | 16 Comments »
Channel 9′s 60 Minutes has tonight shown a story about record number of Australia’s struggling to keep up with their mortgage repayments, suggesting renting may just keep you ahead of the game.
» The Big Squeeze – 60 Minutes, 7th August 2011.
Posted in Australian economy, Australian Housing | 16 Comments »
Last week, figures from the Reserve Bank of Australia showed home loan credit growth was at its lowest level ever recorded, with RBA records dating back to the 1970′s.
On Tuesday the ABS released the latest quarterly update to 6416.0, House Price Indexes: Eight Capital Cities, Jun 2011.
With extremely poor credit growth for housing, there was no surprise to see continued falls in house prices around the country, as Australia suffers from crippling levels of household debt and the unwinding of the First Home Owners Boost.
A reader has asked if we can update the Real House Price graphs, and with the ABS figures hot of the press it was the perfect time to do so. Our last update was in 2008, and it was scary then.
With our housing bubble once again faltering and GFC2 in kicking distance, we are seeing a surge of newcomers to this site. In this context, we will cover some existing ground and explain what real home prices are.
Real Home prices are simply prices (or an index) corrected for inflation. The U.S. is probably a great example, I’ll show this first :
In this case, the index started in 1890 at 100 and tracks house prices, corrected for inflation and relative to 1890. What you will notice, is the index is relatively flat, that is, house prices today in the USA (after a huge bubble last decade) is not much more than in 1880, in today’s buying power. Assuming wages also tracked inflation, this means an American’s great grand parents paid roughly the same for a house in 1890 than today as a percentage of their income.
But as you can see, it wasn’t always like that. Easy credit and a real estate industry promoting ‘facts’ that house prices double every 7 years and a chronic shortage of homes caused a substantial housing bubble last decade, and when households couldn’t borrow any more to keep the ponzi scheme going, it imploded inwards causing GFC1. This is a good example that ‘a permanently high plateau’ (real estate professional speak) isn’t sustainable.
The data source for U.S. home prices comes from Robert J. Shiller, Professor of Economics at Yale University who wrote the book Irrational Exuberance. He frequently updates the U.S. data and posts it on http://www.irrationalexuberance.com
Now lets turn to Australian real home prices :
Yes, that’s America’s “little” bubble – the blue line down the bottom!
Our bubble continues to aim for the sky thanks to tax incentives such as negative gearing and what seems like bottomless stimulus. You will see a small decline during GFC1 before the Rudd Government introduced the First Home Owners Boost. According to Treasury Minutes, “The short term stimulus [BOOST] 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 may of achieved the government’s short term goal and prevented the collapse of housing bubble in 2008, but it begs the question what is the government’s plans now that the BOOST has finished, and housing is once again falling?
The dataset for Australia comes from two sources. The majority of the data (1880 to 2006) comes from Dr Nigel Stapledon from the University of New South Wales. Prior to 2003, Dr Stapleton was Chief Economist for Westpac Bank. This dataset is continued (orange line) using data from the ABS.
Posted in ABS House Price Indices, Australian economy | 21 Comments »