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.

The U.S. Commerce Department last night reported sales of new homes sunk 33 percent in May to the lowest level since records began in 1963.

The May collapse is also the biggest monthly drop on record and follows the end of federal tax credits used to prop up the unsustainable housing market.

» New-home sales plunge 33 pct with tax credits gone - Yahoo, 23rd July 2010.

RBA deputy governor Ric Battellino has today downplayed the housing bubble saying house prices in Australia, relative to income, was reasonable.

In his speech today, Mr Battellino said ‘‘People feel that house prices in Australia are quite high and that’s quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated,’’ ‘‘But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.’’

This comes after comments this time last month from Ms Luci Ellis, Head of Financial Stability Department for the RBA who said “Recent data suggest that we do not have a credit-fuelled speculative boom on our hands”

Last week, a report into the Irish banking crisis found the Irish central bank deliberately left out data in a crucial report forecasting a crash in the property market months before the collapse of their bubble in 2007.

In October 2005, now present U.S. Federal Reserve Chairman Ben Bernanke told congress he didn’t believe there was a housing bubble in the U.S. shortly before the market crashed.

» No house price bubble: RBA - The Sydney Morning Herald, 15th June 2010.

» Central Bank hid property crash forecast - Independent.ie - Sunday June 13th 2010.

» Bernanke: There’s No Housing Bubble to Go Bust - The Washington Post, Thursday, October 27, 2005.

BIS Shrapnel’s Residential Property Prospects report 2010-2013 predicts house prices around the country to continue its momentum upwards. Contained in the report is predictions of a 22% increase over the next three years for Perth and 20% for both Sydney and Adelaide, while all other capital cities will see growth exceeding 11%.

The predictions come as mortgage approvals have plunged in the past 7 months and now sit at a 9 year low.

» Sydney house prices to soar 20 percent by 2013 - Dynamic Business, 15 June 2010.

» Modest Growth Forecast For Oz Residential Property Prices - NineMSN, 15th June 2010.

As expected by the majority of economists, home loan approvals continued to fall in April making it the seventh straight monthly decline. April recorded a 2.8 percent fall for owner-occupied finance commitments. The last time we saw numbers this weak was in March 2001.

We normally publish our own charts like the one last month, Mortgage approvals plunge to nine year lows showing a link between mortgage approvals (demand) and house prices. However the Sydney Morning Herald has done a wonderful job today with this graph :

As you can see, there is a close correlation between mortgage approvals and house prices. As the majority of people require housing loans to be able to purchase a home, when mortgage approvals fall, the soft demand results in house prices cooling.

However, this time it appears to be different. When the housing market started to show signs of weakness, Wayne Swan opened up our property market to foreign buyers. It was those foreign buyers, using cash or loans from their home countries that propped up our house prices, causing a large divergence between mortgage approvals and house prices. Some agents were reporting as many as 30% of purchases were to foreign buyers, which as you can see, helps counteract a fall in house prices from the shortfall of mortgage approvals.

In late April and under immense pressure from the public, the government reversed their decision on streamlining foreign property purchases, effectively turning off the tap overnight. Housing statistics take a while to come through the pipeline, and potentially we could be in for quite a shock soon. Already we are witnessing rapidly falling clearance rates.

» 5609.0 - Housing Finance, Australia, Apr 2010 - The Australian Bureau of Statistics, 9th June 2010.

Reserve Bank Boss Glenn Stevens has today warned Australian households to reduce their debt levels and start saving. The warning stems from the European debt crisis, with Mr Stevens saying markets can ignore problems they know about for a long time before something triggers a sudden collapse. “Markets can happily tolerate something for an extended period without much reaction, then suddenly react very strongly as some trigger brings the issue into clearer focus”

Mr Stevens said “The big rise in debt in the past couple of decades has been in the household sector” and that it wouldn’t be wise for this to continue and build. Doing so would expose households to significant shocks in the future.

A report yesterday from Standard & Poor’s supported Mr Stevens view. ”We believe the larger debts and higher leverage expose some Australian mortgage holders, especially those with less equity in their houses, to potentially greater financial shock if high unemployment and interest rates, alongside a collapse of residential property values, were to occur,” said Standard & Poor’s credit analyst Vera Chaplin.

The warning today follows one in May this year when RBA Governor Glenn Stevens told Channel 7’s Sunrise viewers that leveraging up in property wasn’t a “riskless, easy, guaranteed way to prosperity.”

Extremely high levels of household debt has only been a problem over the last 15 years. For most of the ’80s household debt sat on an average of about 40 cents for every $1 a household earned. Today, the level is 4 times that amount at just under $1.60 of debt for every dollar the household earns.

In December 2009, figures from the Reserve Bank of Australia showed total household debt as a percentage of disposable income at 155.8%. Of that, 138.2% or the vast majority of it is housing debt due much in part of Australia’s huge housing bubble.

As Stevens rightly says markets have ignored this problem of household debt for a long time, about 15 years now, and the consequences could be severe if an external shock was to occur.

Just as worrying is the pace of household savings. As houses continued over the past decade to outstrip wages, extra money was required from household budgets to meet repayments on this high level of debt. The first thing to get soaked up was household savings.

But this does leave highly leveraged households extremely vulnerable if there were a short term loss or reduction in household income and they were unable to met the repayments on their debt, something a little bit of savings might help with. As more money is soaked up into housing, less money is left in household budgets to be spent in the domestic economy. Retailers and small businesses are already beginning to bear the brunt of these consequences and many have lost their jobs.

External shocks could be the collapse of the property bubble in China, which could dent Australia’s resource exports or a further liquidity crisis in global lending.

When the GFC first hit, it was a wake up call for many. Almost immediately households began to de-leverage and start saving. However with economists saying Australia escaped the GFC (has it really begun?), households are back to their old ways of spending more than they earn and piling up the debt. Europe should be a timely reminder. The debt is killing us.

» RBA’s Stevens Says Household Debt Must Remain Prudent (Update1) - Bloomberg, 9th June 2010.

» ‘Financial shock’ risk for borrowers - The Sydney Morning Herald, 9th June 2010.

As expected, this weekend’s surge of listings as investors and owners cash in and head for the exits has seen auction clearance rates take a dive.

The auction clearance rate in Melbourne had been running in the vicinity of 85 percent, but according to revised numbers from the REIV, it hit at low of 72 percent last weekend. Of the reported 808 auctions this weekend, a 70 percent auction clearance rate was obtained. This result is reported to be the worst for two years.

In Glen Waverley the auction clearance rate over the last three weeks has averaged 42 percent. Brighton, Albert Park and Port Melbourne failed to sell more than half the homes up for auction over the past three weeks.

The Age reports Buyers advocate Mal James saying the oversupply has caused a price correction of up to 10 per cent but many sellers are yet to lower their expectations. ”The market has definitely eased in the last three weeks - you can feel it, There is so much stock out there at the moment and the market is not absorbing it up like it did in April when there were frenzied auctions.”

Mark Armstrong of Property Planning Australia says “There’s no doubt the market is not as strong as it was, It’s a fantastic thing for buyers. They can overlook poor-quality or overvalued property because there are so many more options out there.”

The real test will be the weekend after the Queen’s Birthday where 1,000 properties are due to go under the hammer in Melbourne.

» Property tide turning in buyers’ favour at last - The Sydney Morning Herald, 5th June 2010.

The Australian Newspaper has reported International Hedge Funds have been shorting Australian Banks for fears of a housing crash in Australia.

According to the paper, a unnamed New York hedge fund manager said there were doubts the strength of Australia’s property market could be sustained. “There’s a lot of scepticism in the US regarding the Australian property market, A lot of people have doubts about whether the strength of the market is going to be maintained.”

“I think it’s the case funds are shorting the banks. If you’re of the view that property is going to come off, then shorting the stocks is a very clean way to express that view. It’s an attractive trade.”

» US hedge funds dump Australian bank shares - The Australian, 5th June 2010.

The Australian Bureau of Statistics (ABS) has today reported home building approvals have fallen 14.8% between March and April this year, seasonally adjusted.

April is the third month building approvals have moved downwards, and this follows the sixth straight month of falling home loan approvals.

» 8731.0 - Building Approvals, Australia, Apr 2010 - Australian Bureau of Statistics, 1st June 2010.

The number of properties being listed is surging around the country with experts predicting some owners are heading for the exits. Data from the REIV reveals there were 924 reported auctions last weekend, 900 scheduled for next weekend and a record 1000 the week after.

Louis Christopher from SQM Research has noted an increase in the amount of listings in all capital cities and suggest owners are wanting to lock in prices after a period of extreme price growth. “I think vendors are realising this is as good as it gets, and if they want to get a good price then they need to sell now. Normally during the period of winter you see volumes drop off, so if we were to continue to see these types of results in June, that would be abnormal.”

President of the Real Estate Institute of Australia, David Airey says there could be some corrections in coming months and as vendors start to realise demand isn’t as high as they would like it to be.

» Experts warn surge in number of properties for sale could force house prices down - Smart Company, 31st May 2010.