Australian housing overheating and could eventually face a correction: Moody’s

Written by admin on June 29, 2014 – 8:43 pm

On Thursday night, Moody‘s Investors Service warned Australia’s real estate market may be overheating and it “appears to be increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction.”

Echoing warnings from the International Monetary Fund (IMF) last week, Moody’s indicate “both price-to-income and price-to-rent ratios [are] reaching levels well above historical averages. Housing prices continued to rise in Q1 2014 as average year-over-year growth in the eight largest cities inched up to 8.3%, marking the highest growth rate in nearly four years.”

Moody’s indicated our 50 year low interest rates were “playing a dominant role in fuelling the housing market”, but also warned on the role of foreign investors pushing up prices.

The third public hearing into foreign investment in residential real estate was held last week.

Consistent with the Moody’s report, Reserve Bank assistant governor Christopher Kent, told the inquiry its low interest rate setting was more responsible for driving housing prices than foreign investors.

The Australian Bureau of Statistics told the inquiry, data on foreign investment is “patchy”. It regularly scanned trade magazines and newspapers to try to ascertain the level of foreign investment.

“We do scan press reports and real estate specialist magazines to try to identify purchases of real estate, and [to] record those and record valuation changes from those. But I have to say, that’s a bit hit and miss,” assistant statistician Paul Mahoney said.

Foreign Investment Review Board (FIRB) statistics for the three quarters to March show approvals surged 93 per cent representing some 13 per cent of Australian real estate turnover. While it was noted the 93 per cent surge represents approvals and not all approvals are likely to lead to a sale, it also noted many foreigners were flouting the rules and this is likely to cancel each other out. On Friday, the inquiry heard from property industry experts suggesting the latest FIRB are in fact representative of the current market.

Committee chair Kelly O’Dwyer said she believes the rules are being bent, but is unclear how significant the issue is given the lack of data, “I am not prepared to put a figure on it.”

“Suffice to say, it is a very real concern. Evidence has been presented to the committee that would give us cause for that concern.”

One concern is the lack of compliance and enforcement. Some foreign investors considered the $85,000 fines for buying existing dwellings, not new ones, as the cost of doing business in Australia.

It is believed the committee is considering a special tax or stamp duty for foreign buyers to help prevent the Australian property market from further overheating that could lead to even more severe economic stability risks.

Canada faced the same issues Australia now faces. Citizenship and Immigration Canada (CIC) said its foreign investment scheme was “abused” and contributed little to the Canadian economy. It suspended its Immigrant Investor Program (IIP) in July 2012 while undertaking an inquiry into the scheme. In February 2014, it axed the program effective immediately. This action is though to be leading to more demand for Australian real estate.

» Moody’s Warns on Australia House Prices – The Wall Street Journal, 26th June 2014.
» Moody’s sounds alarm bell on housing prices – The Australian Financial Review, 27th June 2014.
» Moody’s warns on Aust house prices – Business Spectator, 27th June 2014.
» Is the bubble about to burst? Australian property market ‘in danger of overheating’ – The Daily Mail, 27th June 2014.
» ABS has ‘patchy’ figures on foreign investment in homes – The Sydney Morning Herald, 26th June 2014.
» Cashed-up foreign real estate investors view $85k fines as cost of doing business, parliamentary committee told – The ABC, 27th June 2014.
» Special taxes considered by parliamentary inquiry into foreign real estate investors – The ABC, 28th June 2014.


Posted in Australian Economy, Australian Housing | 24 Comments »

24 Comments to “Australian housing overheating and could eventually face a correction: Moody’s”

  1. Matty Says:

    Nicely pieced together article. Some major, major flaws in the Australian economy:

    Quote: Chair Kelly O’Dwyer said she believes the rules are being bent, but is unclear how significant the issue is given the poor data, “I am not prepared to put a figure on it.”

    So she’s the chair of the committee…but not prepared to put a figure on it? That’s like Jaime Packer saying he doesn’t know how many gamblers per week he needs through Macau. What a joke: In a well managed country she would be fired instantly.

    Now this will be controversial: But of the Chinese that are wealthy enough to be splurging on “assets” outside of China, has anyone stopped to consider how they gained such fortunes?…… Political corruption is riff in China….You do the maths.

    So now, we have the RBA saying it’s cheap money policy is driving house prices….What? Are you sure…A central bank admitting they play a role in “Asset” pricing? Pricing that is well in bubble territory? What a laugh…So now the RBA are in bed with the government playing down foreign buyers, in the hope to increase foreign “investment”.

    It’s a complete laugh. So sad for those that believe this crap, but then again, their not the ones that spend their spare time and week ends studying this stuff. So, sod them.

    As a TAFE business lecturer correctly told us: People spend far longer planning holidays or car purchases than the important things in business (read life).

    I dunno how much longer this bubble can ride, but I’ve said it before: When it does collapse, those burnt will point their fingers at the banks, the Yanks, the Middle east, the Chinese, Howard, Abbott, Rudd, Glen Stevens….but never at themselves…When they were the ones who could have easily stepped aside and watched it all…

  2. Pete Says:

    Didn’t low interest rates after tech wreck cause 2008…

    Bank for International Settlements warns low interest rate policies may generate next global financial crisis – The ABC – published 1 hour ago.

    “The international body representing central banks is warning its members that record low interest rates are generating conditions for another global financial crisis that may be worse than the first.”

    The Reserve Bank has blood on its hand.

  3. THEO Says:

    I do not see any correction any time soon. The corrupt Labor/Liberal party power monopoly will continue to subsidise the housing industry as it does with many other industries. They will sell off public assets to pay for them thus increasing Australia’s debt. The corrupt monopoly will continue to force the majority of Australians to pay for a minority to become rich. But, let us not allow political parties for all the blame. The voter is the real culprit for the financial disaster that is coming. But what happens to those who don’t vote for anyone, boo and yell at politicians, protest at politicians being bought by rich interest groups that fund their political campaigns and get nauseated at politicians changing the laws every time they come into power. Demonising welfare while allowing vague tax laws and loopholes for the super rich elite to avoid applying their fair share. Politicians misleading us with news of the economy going so well but for the man on the street his plight is getting worse and Australia is run into the ground financially and again, all with voter approval. Who will save those who do not approve of all this?

  4. average_bloke Says:

    Peverse:
    http://www.macrobusiness.com.au/2014/06/tiguboff-parents-should-mortgage-for-kids/

  5. Matty Says:

    @ Average bloke.

    It’s sad that people respect guys like this: I get no income, but I get depreciation. LOL. So you loose money week in, week out and you brag about it? Of course he’s pedalling higher property prices, as his “model” of investment collapses the minute prices slow in capital growth.

    You will read about him one day: Was a billionaire, but lost a fair slice of his value in the crash: Just like the idiots who held Telstra and Centro at $10. It was never really worth that, it was a valuation from a minority of people throwing cash around.

    One the whole, if you step back, it’s a terrible policy when a guy openly states he buys stuff only to hold it forever. It’s the exact opposite of what economics is about: While you don’t want churn for the sake of churn (which creates bureaucracy) peolple holding asset for depreciation is a joke.

    At the end of the day you have two options: Stand by and watch the show, or join it and ride the waves that run either way.

  6. Adam Says:

    Can we start a discussion on this blog on what alternatives there are to this post war capitalism? If its the cycle of capitalism to go boom then bust, what are we really going to do about it other than bemoan or in some cases, cheer on the coming crash?

    Can I ask the author what his leanings are in terms of capitalism and politics? After watching capitalism at work in Australia do you still think capitalism can be saved by reducing government regulation or is it always doomed to perform this way?

  7. MosmanAgent Says:

    The Asian property acquisitions without FIRB approval is rampant.

    It is so easy to check and get an exacting position on this that it has become a joke. Every single property transaction in Australia pays Stamp Duty. All they have to do is extrapolate this data to cross check ownership via the ATO records and then you still see the magnitude of the problem.

  8. Ggswine Says:

    @THEO

    I have to agree with you as much as it breaks my heart to see our country go down the gurgler…

    The labour/libs. All of them. All they want is for prices to keep on going up.

    They have rigged the system so that you can never ever get ahead.

    Every time something happens they pull another rabbit out of their hats. ‘Heres another grant, here’s a capital gains concession, here’s a new investment visa’ it’s insane.

    They will never ever let prices fall to the detriment of their kids and the whole economy.

    Also the RBA will always only have the 1 leaver to control rates. They will be used as a scape goat every time the SHTF. You can see it coming a mile away.

    Economics, real economics, isn’t taught at school.

    You can forget about people making smart decisions.

    Unfortunately this is what’s happened with Australia when 95% of finance goes straight back into housing…

    Time to start new somewhere else I think. US? Houses with land $200k

    Rather then spend my working life scrimping and saving living under the poverty line for a house deposit here in Australia. I’d rather have half the wage and a house paid off at 40 than double the wage and a house on a 30 year loan working till I’m 70 for a 3×1 that’s falling apart in the bad part of town using 60+ % of my income with rates rising and taking all my wage increases.

    After spending, tax, living and housing costs people on median wages earn $0 they literally work for nothing to support baby boomers.

    It’s insane.

    You should work to get more than you put in. Not the other way around. Work smarter not harder.

    Fk Australia right off if you’re under 30

  9. Chockolate Says:

    @average_bloke, the aim of the game is to see just how much debt you can lump onto the populous before people notice their are getting poorer. Debt=wealth, and all that.

  10. Ronaldo Says:

    Let’s do some math…start with average price in Sydney today…what $600,000 is it?
    Let 1 year pass – price now = (600,000*16%)+600,000 = $696,000. Now I can see all those canny investors salivating and planning the next Innsbruck ski trip, but wait, what happens if that increase in prices is maintained for ten years?

    600,000
    696,000
    807,360
    936,538
    1,086,384
    1,260,205
    1,461,838
    1,695,732
    1,967,049
    2,281,777
    2,646,861

    Oh dear, the average price will double in just five years. In ten years the price will be more than two and a half million. Wow! Clearly not sustainable for normal people, who are already tapped out now in terms of mortgage and loan commitments, with projected income increases falling well short of what would be required to keep a market as inflated as this trading any volume, except of course for those cashed up buyers getting ill gotten gains out of China before TSHTF.

    Looking back, Sydney prices have doubled in the past ten years, validating an approximate annual increase of 9-10% as realistic. Yeah I know 16% is pretty steep, so lets make that 10%…

    600,000
    660,000
    726,000
    798,600
    878,460
    966,306
    1,062,937
    1,169,230
    1,286,153
    1,414,769
    1,556,245

    Still more than doubles after 9 years. If someone can explain to me how a market such as this could continue without collapsing, with no one able to enter the market at the bottom because they are priced out, with an economy precariously teetering, please step forth and enlighten me.

    The Coalition is panicking, but it is not panicking about the “budget emergency” caused by Labor’s debt, they know the Australian housing market will collapse, and probably on the Liberal’s watch. Now that will be a budget emergency. This will get interesting.

  11. Nexus789 Says:

    As the poster above points out the predictions are unsustainable. The whole system is due to implode and on the Libs watch. Instead of addressing the structural issues Abbott and the idiots are clearing the decks (impoverishing the already poor) to prepare for the crash.

    The housing crash when it comes is going to be a humdinger as the economy is so distorted – 60% of national assets are property (UK less than 20%) and 45% of the economy is financial services which produces nothing of value. This is not a healthy economy.

  12. average_bloke Says:

    @Chockolate

    Yep, ‘privatise the profits and socialise the losses’.

  13. David C Says:

    The Coalition is panicking, but it is not panicking about the “budget emergency” caused by Labor’s debt, they know the Australian housing market will collapse, and probably on the Liberal’s watch…
    Yes, it couldn’t happen to a bunch of nicer guys could it!

  14. 56andoverit Says:

    We vote with pencils!

  15. GetAlife Says:

    How many years have you people been waiting for a correction ? THERE WILL NOT BE A MASSIVE CORRECTION there may be another slowdown and slight falls in less popular areas but not in high demand inner city affluent suburbs. There are many affordable suburbs even in outer sydney but no, you would not want to live there would you. Get over your bitterness of missing out and get a life instead of speculating on crashes and corrections catastrophes etc

  16. Patrick Says:

    @Ronaldo,

    Bang! They are panicking. The “Budget Emergency” is all about “appearing” to have done something in advance. Some of us don’t like the Libs, but let’s be fair and put ourselves in their shoes.

    A big correction re: industrial unwinding, unemployment, real estate price drop & private debt crisis is on way, no matter who cuts it, it’s a mathematical certainty. Anybody who’s held government in the last 2-3 years knows it. The truth may lie in the fact welfare must be tightened because it’s projected that post-pop half the country will be unemployed and government revenues just won’t cover it. Then put a health budget on top and try running the shop. Tough gig, but I didn’t ask for the job.

    No it’s easier to wheel out “ol Labor debt truck”..unless you come up with a way to tell the people “In 5 years we’re all fucked”

  17. Chockolate Says:

    @GetAlife, you haven’t provided any evidence for your claim, yet this blog provides plenty of well-researched evidence to the contrary.

  18. Nexus789 Says:

    GetAlfie – Don’t think so this time. A crash is coming and I find your simple ‘prices always go up’ mantra amusing. Who us bitter? I don’t invest in property (lazy mans investment) as I have built a couple of companies.

    The global market is due for a massive correction. I don’t think Australia is somehow isolated from the world’s financial system.

    Over a year ago a Forbes article pointed to the worrying profile of the Australian banks loan books. Hardly think they would have improved. Also, all the current borrowing is speculative and the buyers are largely mugs, sorry investors, with very few home buyers. According to modeling using Minsky’s Financial Stability Hypothesis we are in bubble territory.

  19. Matty Says:

    @Nexus

    Yep, agreed. I took my first overseas trip in about 2005 and the economist magazine was running an article I remember reading on the plane. It was about how USA & English property, along with the rest of the world was being driven skywards by increasing levels of debt. Just like the IMF etc. are crowing about Australian, Canadian & Chinese property over the last 5 years.

    Your correct, it is a mathematical certainty. Mathematics is the universal language. Even the cosmo-naughts chasing ET life are betting that 1 + 1 will ALWAYS equal 2, even on a foreign land, far far away.

    I just don’t know why anyone can think that property is a sure thing. If it was so sure, the banks would purchase the properties themselves and take the capital gain themselves. Do they? No! They hold the title of the mortgage while the debt owner pays it back. It’s beautiful, they hold the asset, earn interest while the guy paying for it holds all the risk. I wish I could pass off all my business risk to my customers. It would make my life so much better lol.

    I never new about “Minsky’s” model until a few years ago; but I understood the idea without knowing it’s official name. And it will occur:

    someone borrows for productive debt.
    someone borrows to leverage productive debt.
    someone borrows to finance leverage productive debt.
    someone lies to borrow to finance leveraged productive debt.
    everyone borrows as everyone else is borrowing. (It’s the new norm lol)
    everyone borrows as that’s the only way to survive as everything is sooooo expensive.
    some people decide not to borrow (or their credit stinks soooo bad) and asset prices wobble (permanently high plateau?)
    confidence to borrow disappears…
    Hello economic black hole!

  20. David C Says:

    GetALife, you need to read the comments in the previous story on this blog about the $380 billion bailout fund that the politicians have put in place. In the event that they have to use it do you think that the property market will hold up? Even if you’re not worried the politicans are.

  21. peter62 Says:

    The content below is My letter to Committee Secretary on our concern for not addressing the real problems raised by
    submission such as sub005, 007, 008, 013, 018, 021 and 033.
    These submissions are available from http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Foreign_investment_in_real_estate/Submissions

    There are evidents in Conflict of Interest and corruption in FIRB and in our politicians to allowing current FIRB policies to flourish because :
    Againt our National interest by inflating house price and depleting our house stocks to foreigners. Cover up or ignoring the real cause of our current housing problems.

    No Affordable housing for Australian citizens. The average houses has gone up by more than $200k to $1million + in many suburbs of Melbourne and Sydney since the last election in 2013. It take many years for a couples to save $200k. It is not affordable, a house bubble has been created and driving many people crazy.
    The current weak and corrupted FIRB policy has destroyed their dream of owning a home to raise their children.

    Unfair competition of cheap money from foreign buyers who never contribute taxes such income tax, un declared rental income, Capital Gain Tax (CGT)and Land Tax to our Government. Our local investors provide continues cash flow for Australia Government in these three taxes and money to spend on local services. Local investors pay CGT, rental income tax and land tax to our government in our tax return. Foreigners have no Tax File Number (TFN) and are exempt from these 3 taxes. Our state goverment may reward them with free money from our tax payers for buying a new apartment.

    Simple solutions
    Introduce policy to impose a 20% Sale tax to the buyer and 50% Capital Gain Tax on the seller at settlement for all foreigners without a TFN, otherwise it is not fair for local investors, 1st home buyer or Australia Government. Amend FIRB policy to stop the purchase of our house or apartment with student visa and temporary resident. It pushup demands, inflat house price , deplete existing stocks from local and pay no CGT, Rental income tax and land tax without a TFN.

    Due to absent of Capital Gain Tax and Rental income Tax in FIRB, it is a common practice for foreigner to make a good fortune by flipping an apartment bought it off the plan with a down payment of 10 or 20% of a total price. It is negative cash flow for Australia Government with lost of CGT, push up new apartment price and reduce affordable stock available to Australian citizens.

    It is creating housing bubble, bubble economy, financial stress for our family, high rental and mortgage repayments and high cost of living in Australia. Many business may close and move oversea for cheaper labour and office cost. Unemployment will raise and the housing bubble will burst with negative equity for many home owners.

  22. ben Says:

    The content below is My letter to Committee Secretary on our concern for not addressing the real problems raised by
    submission such as sub005, 007, 008, 013, 018, 021 and 033.
    These submissions are available from http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Foreign_investment_in_real_estate/Submissions

    There are evidents in Conflict of Interest and corruption in FIRB and in our politicians to allowing current FIRB policies to flourish because :
    Againt our National interest by inflating house price and depleting our house stocks to foreigners. Cover up or ignoring the real cause of our current housing problems.

    No Affordable housing for Australian citizens. The average houses has gone up by more than $200k to $1million + in many suburbs of Melbourne and Sydney since the last election in 2013. It take many years for a couples to save $200k. It is not affordable, a house bubble has been created and driving many people crazy.
    The current weak and corrupted FIRB policy has destroyed their dream of owning a home to raise their children.

    Unfair competition of cheap money from foreign buyers who never contribute taxes such income tax, un declared rental income, Capital Gain Tax (CGT)and Land Tax to our Government. Our local investors provide continues cash flow for Australia Government in these three taxes and money to spend on local services. Local investors pay CGT, rental income tax and land tax to our government in our tax return. Foreigners have no Tax File Number (TFN) and are exempt from these 3 taxes. Our state goverment may reward them with free money from our tax payers for buying a new apartment.

    Simple solutions
    Introduce policy to impose a 20% Sale tax to the buyer and 50% Capital Gain Tax on the seller at settlement for all foreigners without a TFN, otherwise it is not fair for local investors, 1st home buyer or Australia Government. Amend FIRB policy to stop the purchase of our house or apartment with student visa and temporary resident. It pushup demands, inflat house price , deplete existing stocks from local and pay no CGT, Rental income tax and land tax without a TFN.

    Due to absent of Capital Gain Tax and Rental income Tax in FIRB, it is a common practice for foreigner to make a good fortune by flipping an apartment bought it off the plan with a down payment of 10 or 20% of a total price. It is negative cash flow for Australia Government with lost of CGT, push up new apartment price and reduce affordable stock available to Australian citizens.

    It is creating housing bubble, bubble economy, financial stress for our family, high rental and mortgage repayments and high cost of living in Australia. Many business may close and move oversea for cheaper labour and office cost. Unemployment will raise and the housing bubble will burst with negative equity for many home owners.

  23. ben Says:

    Unfair competition of cheap money from foreign buyers who never contribute taxes such income tax, un declared rental income, Capital Gain Tax (CGT)and Land Tax to our Government. Our local investors provide continues cash flow for Australia Government in these three taxes and money to spend on local services. Local investors pay CGT, rental income tax and land tax to our government in our tax return. Foreigners have no Tax File Number (TFN) and are exempt from these 3 taxes. Our state goverment may reward them with free money from our tax payers for buying a new apartment.

    Simple solutions
    Introduce policy to impose a 20% Sale tax to the buyer and 50% Capital Gain Tax on the seller at settlement for all foreigners without a TFN, otherwise it is not fair for local investors, 1st home buyer or Australia Government. Amend FIRB policy to stop the purchase of our house or apartment with student visa and temporary resident. It pushup demands, inflat house price , deplete existing stocks from local and pay no CGT, Rental income tax and land tax without a TFN.

    Due to absent of Capital Gain Tax and Rental income Tax in FIRB, it is a common practice for foreigner to make a good fortune by flipping an apartment bought it off the plan with a down payment of 10 or 20% of a total price. It is negative cash flow for Australia Government with lost of CGT, push up new apartment price and reduce affordable stock available to Australian citizens.

  24. DX Says:

    @GetALife

    “bitterness of missing out”?

    lol, i say happiness of staying out.