Archive for the ‘Australian Housing’ Category
As widely anticipated, troubled Shanghai Chaori Solar Energy Science and Technology Co. failed to make the scheduled interest payment on a bond this Friday, 7th March 2014. Chaori could barely scratch together five percent of the 89 million yuan due. Unlike Credit equals Gold No 1 no one stepped up to bail out Chaori.
While small, some describe this as a “Watershed” or “Bear Stearns” moment.
The default in the PV Solar Cell Manufacturer is expected to mark the first of many onshore bond defaults for China that will occur in industries suffering from overcapacity such as steel, nonferrous metals, coal, renewable energy & of course real-estate. The near default of Credit equals Gold No 1 on the 31st January resulted from a trust holding bad loans to and equity in coal miner Shanxi Zhenfu Energy Group who collapsed in 2012 and had since ceased production.
Some analysts, including ones from Bank of America, call Friday’s default a “Bear Stearns moment” signalling the start of the Chinese shadow banking crisis, much like Bear Stearns was to the US subprime crisis.
Overnight Copper prices posted the biggest decline since 2011 in heavy volume caused by concerns of slowing growth in China from rising debt and defaults.
The default is expected to accelerate the number of individual bond holders who have been assessing risk and seeking out “less risky” investments such as Australian & Canadian Real Estate. On February 11th, Canadian Finance Minister Jim Flaherty announced the axing, effectively immediately, of a 28 year old visa scheme attracting wealthy foreigners to Canada. On the other hand, the Abbott Government is set to expand our residency visa scheme to the Chinese in what some suggest may cause an even greater housing bubble and further destabilise the already distorted Australian economy at a time when the Reserve Bank is sounding alarm bells.
» Watershed moment for China markets with Chaori Solar bond default – The Sydney Morning Herald, 7th March 2014.
» China Gets 1st Onshore Bond Default as Chaori Doesn’t Pay – Bloomberg, 8th March 2014.
» China Bear Stearns Moment Seen by BofA in Solar Default – Bloomberg, 7th March 2014.
» Copper tumbles after China bond default – The Financial Times, 7th March 2014.
» Shunned Chinese buyers to turn from Canada to Australia – The Sydney Morning Herald, 24th February 2014.
» Visas for wealthy to be expanded – The Australian Financial Review, 8th March 2014.
» Credit equals Gold No 1. – Who Crashed the Economy, 29th January 2014.
» GFC2 – Will it be made in China? – Who Crashed the Economy, 30th June 2013.
Posted in Australian Housing, China | 7 Comments »
Roy Morgan unemployment figures released yesterday show an estimated 1.561 million Australians are now unemployed. This represents 12.3 per cent of the workforce and is now the highest figure since February 1994, some 20 years ago. An additional 1.08 million Australians are classified as underemployed, working part time while looking for more work.
Australia’s deteriorating jobs market was cited by the Reserve Bank of Australia (RBA) as one reason the bank left the official cash rate at an emergency 2.5 per cent yesterday.
“The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher. Growth in wages has declined noticeably,” the RBA media release noted after the Banks’ monthly meeting. “Looking ahead, the Bank expects unemployment to rise further before it peaks.”
Rising unemployment is expected to put pressure on Australia’s housing bubble, but the market exhibited little stress in the December 2013 quarter according to analysis by ratings agency Fitch. A study of Australian Residential Mortgage Backed Securities (RMBS) show the rate of arrears for the December 2013 quarter was 1.21 per cent, the lowest figure since 2009 according to Fitch.
But Fitch warns lenders not to be complacent and drop lending standards warning “Higher levels of unemployment, a slowdown in the housing market, and rising interest rates, could lead to servicing pressure, and in turn, higher delinquencies.”
» Roy Morgan Unemployment jumps in February (up 1% to 12.3%) – highest for 20 years since February 1994 (also 12.3%). Unemployment amongst 18-24yr olds rises to 28.0% (up 6.8%) – Roy Morgan, 5th March 2014.
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 4th March 2014.
» Mortgage arrears at lowest December level in four years – The ABC, 5th March 2014.
» Roy Morgan unemployment hits 11.3% – highest in 19 years – Who Crashed the Economy, 4th February 2014.
Posted in Australian Housing, Unemployment | 6 Comments »
Back in October last year we reported on data from Google Trends showing an increased number of Australians hitting Google to research the term “Housing Bubble”.
This month (February 2014) has seen a significant increase of internet searches and we are barely half way though the month (The last data point includes incomplete data from February).
Searches for the term “Property Bubble” in Australia:
Searches for the term “Housing Bubble” in Australia:
This is good news if the mass population is starting to do their own research, rather than listening to the push media.
Posted in Australian Housing | 10 Comments »
As widely expected, the Reserve Bank of Australia has left the official cash rate at an “accommodative” 2.5 per cent citing “on present indications, the most prudent course is likely to be a period of stability in interest rates.”
This now has many calling a bottom to the interest rate cycle.
The statement on today’s monetary policy decision reports, “The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher. Growth in wages has declined noticeably.”
“Looking ahead, the Bank expects growth to remain below trend for a time yet and unemployment to rise further before it peaks.”
Roy Morgan today released unemployment figures for January 2014 showing unemployment is now 11.3 per cent, the highest result since January 1995. 1.44 million Australians are now out of work and another 1.105 million are under-employed. Together, this makes up 20 per cent of the workforce.
Since departing from ABS index in 2010, there is a distinct upward trend in the Roy Morgan unemployment figures with no signs of abating.
Yesterday, MacroBusiness published insights from Saul Eslake (‘Eslake: Unemployment much higher than it looks‘) on expectations of continued deteriorating unemployment. Eslake noted, “The RBA has never raised rates while the unemployment rate is rising; indeed, it tends to keep lowering them.
“Further, we argue that given the majority of the decline in participation is of prime working age people, rather than retirees, and therefore it is akin to uncounted unemployment. From this we conclude that the actual unemployment rate is significantly worse than official [ABS] figures suggest. As we continually stress, if the participation rate had remained at the 2009-11 average then the unemployment rate would be 7.1%. The increase in this adjusted unemployment rate has accelerated markedly over the second half of 2013. And it is this that leads us to believe that the RBA may be getting behind the curve on labour market weakness.”
His analysis includes a graph, published in the Macrobusiness article overlaying the official unemployment rate, cash rate and a “participation adjusted” unemployment rate, clearly highlighting his claims the RBA is falling behind the curve on unemployment.
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 4th February 2014.
» Eslake: Unemployment much higher than it looks – Macrobusiness, 3th February 2014.
Posted in Australian economy, Australian Housing, Unemployment | 42 Comments »
Most Australians disagree rising house prices are “a good thing.” That’s the finding of a new polling by Ipsos and reported by Jessica Irvine in the News Limited papers today. Jessica writes:
A majority of Australians now think rising house prices are bad for the country, with exclusive new polling showing more than half the population disagrees with the statement that “rising house prices are a good thing for Australia”.
According to the survey of 1043 people conducted last November the following disagree with the belief rising house prices are a good thing:
Australia Total 53.7%
Aged 18-29: 50.8%
Aged 30-49: 55.8%
Aged 50+: 53.4%
Attitudes are also changing towards Negative Gearing. In a poll conducted by Fairfax at Christmas, there was overwhelming support from 74% of 3831 readers to abolish negative gearing. The article attracted some 235 comments, with the vast majority in favour of axing the tax dodge.
As attitudes of Australian voters change, it will make it easier for government to implement the required reforms to the domineering property sector without fear of extensive voter backlash.
» Most Australians disagree rising house prices are “a good thing” – The Couriermail, 10th January 2014.
» Cabinet Papers 1986-87: Negative gearing almost axed – The Sydney Morning Herald, 28th December 2013.
Posted in Australian economy, Australian Housing | 40 Comments »
What lobby group has the loudest voice? In the last decade, without doubt it has been the property lobby. But there are signs the others are starting to wake up.
In responding to yet another poor Australian Industry Group’s Performance of Services Index (PSI) the Retail Trader’s Association executive director Russell Zimmerman told the Australian Financial Review, “We need to see consumers free up spending, people are putting more money away or onto mortgage repayments.”
According to the Australian Financial Review, “The Ai Group index indicated that retailers did not get the bumper Christmas sales season they had hoped for.” The index, measuring activity in the Australian services industry has contracted for the 23rd consecutive month, slipping 2.8 points to 46.1. A figure under 50 indicates contraction.
The Retailers Traders Association is fighting with a housing bubble zapping more and more money out of the economy and having a negative impact on discretionary spending. As house prices continue to outpace wages and household incomes, retailers are forced to take a back seat, with a bigger portion of household income funnelled into larger and larger mortgages.
Some are unable to keep their heads above water, resulting in job losses. The Herald Sun reported, “Ai Group chief Innes Willox said any uptick in festive-fuelled retail activity was more than cancelled out by a deteriorating jobs environment.”
But they continue to fight on. Apparently we were suppose to have one of the best Christmas’s on record. Now the January sales is forecast to go gang busters. The concept is Australian’s are sheep. If they are lead to believe other people are spending up big, then hopefully you too will spend up big. Let’s see if it happens in January.
But it’s not only the Retailer’s Traders Association that is waking up. In the same paper than Zimmerman’s quote, on page 38 Paul Howes, National secretary of the Australian Workers Union is warning about SMSFs adding to our debt-fuelled housing bubble.
He makes reference to Grattan Institute calculations showing $36 billion a year is lost in revenue due to favourable treatment towards property. Let’s hope the May budget starts to address this.
He suggests the reason why the sector is not being “checked” is “because it is the noisiest and most powerful group of rent seekers in the country.”
Howes writes, “The housing rent-seekers’ constant squawking, and exploitation of the peculiarly Australian obsession with property, means reforms of the sector has become the third rail of Australian politics.”
“Yet if we continue kicking the can further down this particular road, it is tough to see how economic disaster can be avoided.”
“There are those using their SMSFs to invest in property debt today who will enjoy the swelling of the bubble during their retirement and die before it bursts.”
“Good Luck to them. But the job of government is to prioritise the long-term future of the majority ahead of the self-interested, short term gains of a minority.”
On Monday, Australia Industry Group also revealed PMI (Performance of Manufacturing Index) fell to 47.6 points for the month of December 2014.
As jobs continue to be lost, will we see other lobby groups rise to the challenge and start to drown out the relentless self interest of the property lobby? One can only hope so, for the long term prosperity of this country.
Posted in Australian economy, Australian Housing | 9 Comments »
On the 18th of December 2013, the U.S. Federal Reserve finally announced it would begin to taper or wind down QE3 – an $85 billion a month shot in the arm to keep the economy afloat after the worst recession since the 1930s.
Starting in January 2014, the Fed will wind total purchases down a notch to $75 billion a month. Depending on how the economy reacts, the Fed will continue to cut in each meeting throughout the year. Fed chairman Ben Bernanke said “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases. However, if the economy slows, Bernanke says they will consider skipping a reduction in a meeting or two, or if the economy accelerates could taper a bit faster.
Reactions are mixed. Some believe the Fed will have difficulty removing the stimulus fast enough to prevent inflation, while many others believe the only reason there are signs of growth in the U.S. economy is due to the sheer size of QE3. Take it away, and the unsustainable, fragile economy will quickly falter.
Opinions also vary as to why the Fed has announced the taper. While some believe the U.S. economy is showing good progress. Others some warn QE3 has only served to create more asset bubbles – namely a stock and new housing bubble, but has done little to improve the broader economy and support job growth. And now the Fed needed to act decisively to prevent these bubbles getting much bigger.
The only thing for certain is after such a large and prolonged stimulus, the result to global stability of the tapering will be a wildcard this year – Anything could happen.
China Economic Growth Model “Unsustainable” – Deputy Finance Minister Wang Bao’an
The other global wildcard for 2014 is China and has far greater implications for Australia. Last year we raised the question if the second stage of the GFC would be made in China and if WMPs would replace CDOs as the buzz word in this crisis. (GFC2 – Will it be made in China? – June 30th 2013)
At the time, a credit freeze in China had caused the Shanghai Interbank Offered Rate (Shibor) – a measure of the cost of commercial banks to lend to each other, to surge. After a couple of days of abstaining, the People’s Bank of China (PBoC) was forced to intervene and inject liquidity into the market. Only two weeks prior, ratings agency Fitch warned China’s credit bubble was now unprecedented in modern world history.
In the days before Christmas, and not long after the Fed taper was announced, it was happening again with lending benchmark rates hitting the highest levels since the June crisis. Once again, the PBoC came to the rescue injecting 29 billion Yuan to provide short term relief. Minsheng Securities Macroeconomics analyst, Zhang Lei told the Global Times “The cash injection can only ease the problem in the short run, Banks will face tight liquidity until mid-2014, as an increasing number of financial instruments will be maturing in the first half of next year.”
The concern is a plethora of loans taken out by State owned Enterprises (SoEs) to fund public infrastructure and real estate investments, many empty or under utilised and with low returns – if at all. The projects are an attempt to keep economic growth chugging along, but at some stage the debt must be refinanced.
In an rare and unusual stand, China’s Deputy Finance Minister Wang Bao’an wrote an article in the latest issue of Qiushi, a bi-monthly political theory periodical of the Central Committee of the Communist Party of China saying China’s current economic growth model is “unsustainable.” He described the Chinese economy as “high input, high resource consumption, high pollution, high growth” with “low output, low efficiency, low profit, low tech”.
In a recent column for the Project Syndicate website, billionaire investor George Soros believes the biggest risk in the World Economy now is China – you can forget the USA. No doubt we will see more in this space as the year progresses.
Back home, trends are somewhat clearer barring any external shocks. The Australia Dollar is expected to continue falling this year resulting in broad price increases on imports. The RBA said it will be comfortable with 85 cents. One of the world’s largest investment firms, BlackRock, believes the dollar could fall to 80 cents this year (Aussie dollar headed for US80¢ with RBA to cut rates again, says BlackRock – SMH.) A crisis in China could push it below 80.
After an approximate 15 per cent fall since April, already we are starting to hear the odd whinge about petrol prices at $1.65 litre. Most Australian’s have taken the overpriced Australian dollar for granted without a second though – cheap petrol, cheap electronics, cheap apparel even cheap overseas holidays. The depreciating dollar is coming as a shock. It’s not so much of a case of prices are getting expensive, but a case that prices were abnormally cheap and are just returning to where they should have been had we not had a resource boom. In December, we quoted from Professor Ross Garnaut’s latest book – “No developed country has experienced as large a sustained appreciation in its real exchange rate as Australia has through the China resources boom,” “In turn, this means that no developed country has ever successfully worked through such a fall in the real exchange rate and associated contraction of incomes.”
The other shock will be income growth or rather the lack thereof. Treasury’s chief economist David Gruen told a conference in November last year, “Our estimates say that if we achieve productivity growth similar to its long run average, the next decade will see the slowest income growth in Australia for half a century by a lot.” This comes from an expected decline in Australia’s terms of trade and is consistent with views from the International Monetary Fund (IMF) and the Australian Productivity Commission. (Slowest living standards growth in ‘our lifetimes’ – SMH)
The Australian Bureau of Statistics (ABS) Wage Price Index for the September 2013 quarter reported an seasonally adjusted 0.5 per cent increase, the second lowest increase since the introduction of the Index in 1997. Over the year to September, wage growth was 2.7 per cent, the lowest annual rate since 2000 (Tech Wreck).
Late last year an Organisation for Economic Co-operation and Development (OECD) report (House prices, labour costs leave economy vulnerable: OECD – AFR) showed Australia had the largest appreciation in relative unit labour costs in the OECD effectively putting Australia at a competitive disadvantage to the world. This coupled with the high cost of living and constrained discretionary spending from Australia’s housing bubble (High housing costs make Australia’s economy uncompetitive – ABC) and household debt overhang is expected to see unemployment continue to accelerate this year.
All eyes will also be on the May budget after the Mid-Year Economic and Fiscal Outlook (MYEFO) showed a substantial deterioration in the domestic economy. During the boom years, Australia’s wealth was squandered on various tax relief’s. Cuts will now need to be made placing Australian households under even more pressure.
Finally, there seems little scope for double digit house price growth the experts are once again predicting (annual tradition around the holiday period). As per the Australian headline, House prices [are] at the mercy of the budget (outside of an external shock). In the article, Dr Andrew Wilson talks some sense, “Nothing will stop a housing market quicker than a declining business cycle and that’s certainly what we have the prospects for in NSW and Victoria,” “Rising unemployment will cause lower wage growth, which reduces the capacity of buyers to borrow.”
What are your predictions for 2014?
» Slowest living standards growth in ‘our lifetimes’ – The Sydney Morning Herald, 21st November 2013.
» Low wage growth, job fears hold inflation down – The Australian, 18th November 2013.
» Aussie dollar forecast to fall to 80 cents in 2014 – The ABC, 31st December 2013.
» U.S. and China: When the giants unwind Commentary: Withdrawal of stimulus could well cause a fresh crisis – Market Watch, 30th December 2013.
» Vice-minister calls for new economic growth model – China Daily, 3rd January 2014.
» China tries to deal with its mountain of debt – The Sydney Morning Herald, 30th December 2013.
» House price growth at mercy of budget – The Australian, 1st January 2014.
» China move calms credit concerns – The BBC, 24th December 2013.
Posted in Australian economy, Australian Housing, China, US economy | 15 Comments »
Holden managing director Mike Devereux has today officially confirmed the closure of Holden’s manufacturing facilities in Australia. The company has decided to cease manufacturing operations at the end of 2017.
Today’s announcement puts at grave risk Australia’s entire automotive manufacturing industry as land man standing, Toyota and the dependant component industry is forced to evaluate if it can survive with lower economies of scale. Toyota is expected to announce a decision on its Altona plant early next year.
Yesterday, I explained the persistently high Australian dollar, caused by a bad bout of Dutch Disease was one driver of many for the decision to pull out of Australia. Australia’s automotive assembly plants need to produce more cars than consumed locally to remain at a competitive scale, but the dollar makes our exported goods expensive on an international market while reducing the cost of imported cars.
But, it wasn’t the only. As Alan Kohler hits on the head today, The price of land is [also] hurting Australia.
Australian’s demand high wages as the cost of living is un-sustainably high in Australia, namely the cost of put a roof over one’s head. Kohler writes :
The high price of land in Australia is one of the reasons businesses like Holden and Qantas are uncompetitive and the combination of several recent developments is making the situation much worse.
Australian house prices are already among the highest in the world, both in absolute terms and relative to income, and are now starting to rise rapidly again, especially in Sydney.
On many metrics Australia has some of the most overpriced housing in the developed world. Abnormally high housing costs is slowly killing Australia.
» Holden to stop Australian manufacturing in 2017 – The Australian Financial Review, 11th December 2013.
» The price of land is hurting Australia – Business Spectator, 11th December 2013.
Posted in Australian economy, Australian Housing | 35 Comments »
Fund Manager Roger Montgomery featured on the ABC’s The Business last night to talk about the misleading Auction clearance rates being banded around the market at present.
He says the Sydney 83.7% clearance rate reported on November 9th, according to Financial Analyst Mark Bayley is nothing like it – more like 49%.
He took viewers’ through the numbers:
Andrew Wilson from Australian Property Monitors (APM) reported there would be 789 auctions or houses available for sale on that particular weekend in Sydney; listed for sale. What is interesting is he subsequently reported 471 auctions that 448 took place and 23 were withdrawn and then they reported – the first problem is 318 just went missing and what is interesting is the way the numbers are reported – the 83.7% clearance rate is based on the smaller number of 471 that were reported for have had been auctioned or put up for sale and not the ones that were reported prior to the weekend.
So the missing ones simply don’t get reported by the agents as having been put up for auction at all, or having been pass in or not sold or put up for rent because they weren’t sold at auction. So the 83.7 per cent clearance rates you are hearing the agents report is nothing of the sort.
It is widely believed Real Estate Professionals are massaging statistics to help portray the market as being significantly stronger than it actually is – in a bid to encourage buyers into what otherwise would be a weak market.
The recent exuberant reporting even had the banking regulator’s chairman, Dr John Laker, joking to an economic’s lecture, “Consumer confidence is picking up and certainly if you open the newspapers on a Saturday, if you’re not at an auction you must have no life because that’s where everybody is,” as he warned banks to maintain lending standards reminding them of previous housing corrections – “We don’t want the memories of the earlier correction in housing prices in Australia a decade ago, or the memories of what’s happened in housing markets in Spain, Ireland, the US, we don’t want those memories to be short, we don’t want those memories to be selective.”
Earlier this month the Australian Bureau of Statistics (ABS) reported the number of first home buyers in the Australian property market has fallen again – this time to levels not seen in almost ten years. In September, first home buyers made up only 12.5 per cent of the market. The cause – affordability.
The Reserve Bank of Australia shows growth in Housing Finance is at close to record lows and significantly lower than the levels recorded in 2003 due to rising household leverage potentially hitting a ceiling.
So it came as quite a surprise when the HIA-Commonwealth Bank housing affordability index today suggested Australian Housing is now at the most affordable level in a decade. Many smelt a rat.
HIA senior economist Shane Garrett said “Despite widely publicised dwelling price increases in some markets in recent months, affordability has continued to improve as a result of reduced interest rates”
It appears the index provides a potentially misleading indication on affordability, skewed by record low interest rates. Can interest rates stay at record lows forever?
For some time now I have maintained House Price to Income and House Price to Rent ratios indexed to 1995 – a flat period of fair value prior to the current housing boom. The Economist Magazine, OECD and IMF have used similar ratios to compare housing bubbles around the world and to provide an approximate gauge of under/over valuation.
Interest rates aside, it would appear there is some substance to the claim housing affordability is close to being the most affordable in a decade, after house prices stagnated allowing accelerating rents and wage growth to catch up. However, on a house price to rent metric, rising house prices is starting to impact affordability again and the index has turned.
If anything, the statement that house prices are the most affordable in a decade just goes to demonstrate how long this bubble has remained inflated with continuous support from the government and the help of the resources boom. Assuming house prices were fairly priced in 1995, on a house price to rent basis, Australian housing is still 42.8% overvalued in Australia. This places Australia in the top tier of worldwide housing bubbles.
After Australia’s longest period of continued economic growth, ever – there is no room for complacency.
» Affordability at decade high – The Domain, 27th November 2013.
» Bogus affordability index shows improvement – Macrobusiness, 27th November 2013.
» APRA chairman John Laker says regulator ‘working assertively’ with banks on lending standards – The ABC, 27th November 2013.
Posted in Australian economy, Australian Housing | 17 Comments »
Getting reforms in the public interest of all Australians can be difficult when vested interests have too much to lose.
The Sydney Morning Herald has today reported on figures published by the NSW Office of State Revenue showing a record $356.8 million was made from Stamp Duty receipts last month as the Sydney property market goes gang-busters. This is the highest monthly figure since records began in 2005-06.
The booming property market has done wonders for the NSW State Government’s September quarterly budget. The June budget had forecast a $374 million deficit, but a surplus of $239 million was actually achieved.
But booms can quickly turn into busts as then NSW Treasurer, Eric Roozendaal found out in 2008.
In November 2008, we reported the NSW government was forced to join the Federal government and give first home buyers free money to help plug a collapse in revenue:
With plunging house sales and dwindling prices in NSW, the NSW Government today announced it will throw in another $3,000 to first home owners building new dwellings under $750,000, effective next Tuesday. While this is better than the Federal Government’s increased grants across the board, it’s hard to see what $3,000 will do in a market with falling prices. Quite possibly that $3,000 will evaporate in less than a month.
But is the governments really concerned so much about construction workers? Why not prop up the ailing automotive or retails sectors as well? Why is there such a vested interest in housing?
The answer may be in the NSW’s mini budget. NSW had a projected surplus in the June  budget of $268 million. However in the mini budget to be revealed on Tuesday, it will show a deficit of between $900 million and $1 billion. This will be the first deficit since 1997 and the biggest since 1992.
So how can this position change so fast? NSW Treasurer Eric Roozendaal said “The impact (of the global economic slowdown) on us is huge, in terms of a reduction in revenue from duties generated by land transfers”. It’s been reported stamp duty receipts were down by $270 million alone in the first three months of this financial year.
Looks like NSW Government income was as “safe as houses”.
Maybe removing stamp duty and introducing a broad based land tax could help the NSW state government with a more predictable and dependable revenue source? But why would you do that in a booming market?
» Sydney property boom delivers record stamp duty receipts to NSW’s coffers – The Sydney Morning Herald, 23rd November 2013.
» NSW Government to join Federal in encouraging young first home owners to take on large debts. – Who crashed the economy? 8th November 2008.
Posted in Australian economy, Australian Housing | 22 Comments »
As the saying goes, the Real Estate fraternity is using statistics as a drunken man uses lamp-posts — for support rather than illumination.
Australia’s unprecedented housing bubble has few fundamentals left, and this has seen the Real Estate industry turn to dodgy statistics to help sell and support the cause that one must leverage into the bubble now – before it is too late.
This has lead to warnings by the Australian Financial Review last week that misleading numbers are putting potential buyers at risk.
Mark Bayley explains record number of Auction results are going missing, leading to a big divergence between the real clearance rate which has been trending down and the reported auction clearance rate used to sell the concept that the property market is extremely strong.
More of Mark’s analysis can be found here.
The practice is by no means new. It was considered rife in Sydney & Melbourne in the years after the Global Financial Crisis (2011) corresponding with periods where markets deteriorated and property prices were falling, hence the requirement to fudge the numbers.
One has to wonder, is the same circumstances occurring now?
» Misleading property auction figures ‘put buyers at risk’ – The Australian Financial Review, 15th November 2013.
» Lies, damned lies and auction clearance rates – The Australian Financial Review, 18th November 2013.
» Sydney Agents cooking Auction Clearance Rates – Who Crashed the Economy?, 6th March 2011.
» Auction rates fudged by failed campaigns – News Limited, March 6th 2011.
Posted in Australian Housing | 10 Comments »
On Monday, ABS Housing Finance data revealed another deterioration of the number of first home owners’ participating in the owner-occupier segment of the market.
The decline has renewed calls for a national housing affordability debate.
Last week the Abbott government abolished the National Housing Supply Council (NHSC) citing their “activities are no longer needed.”
Economist Saul Eslake, a member of the NHSC told Fairfax, “I suspect the only way that Australia’s housing affordability problem will be solved, if it ever is, is the way the Americans solved theirs. And that is not something that I would wish for.”
Eslake is on the money. Any Government lead affordability action normally props up the market (i.e. First Home Owners’ Boost). Broken aspects of our tax system such as Negative Gearing would never be abolished or quarantined to new properties only, and the country is slow to act on Macro-prudent controls. The problem has been continuously ignored to the point it is now simply too big for any other potential solution.
» First-home crisis triggers call for action – The Sydney Morning Herald, 16th November 2013.
Posted in Australian Housing | 16 Comments »
Record low interest rates have put a rocket under the Sydney property market, propelling yearly growth to an unsustainable double-digit 11.4 per cent according to official figures released from the Australian Bureau of Statistics (ABS). The size of the Sydney market has helped prop up the rest of Australia, with the weighted average of the eight capital cities returning a frothy 7.6 per cent gain for the 12 months to September.
Canberra and Adelaide is still in the doldrums going backwards 1.2 and 0.6 per cent for the quarter. Perth (0.2%), Darwin (0.4%), Brisbane (1.2%), Hobart (1.4%) and Melbourne (1.9%) reported modest gains, while the red hot exuberant Sydney market fired up a 3.6 percent result and fears of a new bigger property bubble.
Record low interest rates have seen interest payments on dwellings plunge in recent times, creating a false economy as the uneducated leverage back into the property bubble. Few consider the prospect, interest rates could ever rise again.
This has seen an up-tick in the growth of housing finance, after scraping lows not seen since records existed 37 years ago.
All eyes will now be on the Reserve Bank of Australia to see how it intends to react. Will it be forced to follow in the footsteps of the RBNZ and implement macroprudent controls?
» 6416.0 – House Price Indexes: Eight Capital Cities, Sep 2013 – The Australian Bureau of Statistics, 4th November 2013.
Posted in ABS House Price Indices, Australian Housing | 45 Comments »
If you have landed on this page searching for information on the Australia Housing Bubble, then you are not alone.
According to a new CommSec Housing Bubble Index, there were 194 mentions of “housing bubble” in Australian Newspapers in September this year. This is just shy of 201 mentions last recorded in January 2003 when Australia’s housing market first entered bubble territory.
Renewed talk of the housing bubble in mainstream media has seen a remarked increase of individuals doing some homework on the topic. Google Trends reveals a significant increase in September of savvy participants searching the term “Housing Bubble” on Google: (The last data point consists of incomplete data for the month.)
To date, confidence has kept the market a float. Could this be a leading indicator that the tide is changing?
» Approaching peak bubble: new index to track housing bubble hype – BRW, 30th October 2013.
» CommSec Economic Insight: Bubble trouble: Measuring housing market hype – CommSecTV/YouTube, 24th October 2013.
Posted in Australian Housing | 30 Comments »
The overwhelming fear of his five year old son being priced out of the property market – forever, has forced a Sydney property lawyer to act. He has moved to secure his son’s future by purchasing a one bedroom $710,000 Potts Point apartment.
Reserve Bank Governor, Glenn Stevens said today “lenders and borrowers alike would be well advised to take due care,” and “that decisions be based on sensible assumptions about future returns”
While it is his opinion there is no bubble and overall credit growth is still subdue, he warns “borrowing is increasing quite quickly in some pockets” citing finance approvals for Sydney housing have surged 40 per cent in the past year. “So this is an area to which we will, naturally, pay close attention.”
» Lawyer buys $710,000 city unit to set up son, 5, on ground floor of property market – The Sydney Morning Herald, 29th October 2013.
» Remarks to Citi’s 5th Annual Australian & New Zealand Investment Conference – The Reserve Bank of Australia, 29th October 2013.
Posted in Australian Housing | 16 Comments »
Fund Manager can’t understand why people [Joe Hockey] feel the need to say a market is not in a bubble.Written by admin on October 27, 2013 – 7:00 pm
In our last post, we quoted Australia’s Treasurer, Joe Hockey when interviewed on CNBC in New York denying a bubble exists in Australia’s overheated property market.
Last fortnight, The Australian Financial Review’s Christopher Joye interviewed First Eagle portfolio manager Matthew McLennan.
Q: You are clearly very knowledgeable on the Australian economy – what are your views on the resurgent Aussie housing market?
It is interesting to me when you hear a politician saying this is not a housing bubble – that is just a supply-constrained market.
At the end of the day, I think the Australian housing market is instinctively on the full side of fair value in a situation where the natural constituency, the marginal buyer, is already quite levered.
I don’t understand why people feel the need to say a market is not in a bubble. I don’t think that’s a prudent approach when you see large levels of leverage and fairly low rental yields. While I get it that you want to support confidence, I don’t know what the upside is in talking down legitimate risks.
We’ve always made money by not losing money. Ultimately you feel far more confident when a management team tells you what it is worried about than when it displays complacency.
Mr McLennan said he wouldn’t invest in our banks “because the raw equity-to-asset ratios . . . are lower than our comfort zone.”
“I have a few question marks over the Australian economy and think the outlook could be potentially quite challenging,”
» Why this $80bn fund manager won’t touch Australian banks – The Australian Financial Review, 19th October 2013.
» Interview transcript: First Eagle portfolio manager Matthew McLennan – The Australian Financial Review, 19th October 2013.
Posted in Australian economy, Australian Housing | 7 Comments »
Australia’s Treasurer, Joe Hockey, has been caught in an interview on CNBC in New York shamelessly spruiking the Australian Real Estate market.
The interviewer asked Hockey, “Let’s talk about the Australia housing, a very favourite topic on my own, close to my heart as I have a home in Sydney I don’t want to see it go under. We have record high prices in Australia, record low interest rates and some worry about a bubble – do you think it is a bubble about to burst and cause a housing crash like America’s experience.
Hockey replied with “Not at all. A lot of commentators, particularly over here, don’t understand the Australian housing market. The fact is, we have a very generous immigration program. And we have very slow supply coming in to the market. Now rising house prices in Australia help to make some of the more marginal new housing developments affordable and realistic and deliverable. And in turn, that increase in supply helps to manage the market. So, Australia is a long way from a housing bubble.”
“And the second thing is many Australians are heading toward personal superannuation that in value exceeds the equity they in their house and that’s part of the balance in the equation.”
“A lot of Australians put a lot of new capital into their homes – renovate their homes, upgrade their homes – and we have the largest homes on average perhaps in the Western World, and the world more generally in size. So it’s a very different asset class in Australia than in other jurisdictions”.
Nobel Prize winner warns on Australian housing bubble.
On Monday, Yale Professor Robert Shiller picked up a Nobel prize in economics for his research into housing asset bubbles. He needs no introduction to frequent readers here – we often publish his Real House Price Index. His research lead to warnings in 2005 that the United State housing market was in a bubble.
He used his prize to warn of the rise of global house price bubbles, singling out China, Brazil, India, Australia, Norway and Belgium.
Shiller said “There are so many countries that are looking bubbly.”
» Australian Treasurer: US shutdown has taught us a lesson – CNBC, 14th Oct 2013.
» Nobel Prize winner Robert Shiller warns of ‘bubbly’ global home prices – The Sydney Morning Herald, 15th October 2013.
» Nobel Prize U.S. winner warns of “bubbly” global home prices – Reuters, 14th October 2013.
» Shiller’s Nobel win is a nod to the asset bubbles we lived through – Market Watch, 14th October 2014.
Posted in Australian economy, Australian Housing | 37 Comments »
In an interview with Neil Mitchell’s 3AW on Friday, Prime Minister Abbott said “Don’t forget Neil that if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset.”
His comment prompted Neil Mitchell to respond prudently with, “But interest rates can’t stay at this level, people are going to get burnt!”
Abbott shunned any responsibility, lumping it on the central bank by saying, “I am sure the Reserve Bank is very conscious of the fact that there are a whole range of things that need to be managed here and I would be confident that the Reserve has got its eye on housing prices and will appropriately manage the level of interest rates.”
His ignorance is likely to have heads shaking at the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and even the International Monetary Fund (IMF) who have all been sounding alarm bells in recent weeks.
Australia’s housing bubble and associated household debt is acting as a leech, sucking blood out of the economy. In the low interest rate environment, The RBA is struggling to keep the housing market under control, while supporting the faltering broader economy and attempting to cool the strong Australian dollar.
One of the causes of euphoria in the housing market is a broken taxation system, severely distorting the economy and something clearly the responsibility of the Federal Government, not the Reserve Bank. Two Howard Era tax concessions instantly spring to mind.
The 50% capital gains discount introduced in 1999 – when coupled with negative gearing introduced decades earlier, accelerated the accumulated loses of residential property investor making the playground much more geared towards speculative capital gains and not rental yield.
And the hot topic in the recent months – Allowing Self Managed Super Funds (SMSFs) the ability to borrow and leverage up into the property bubble, introduced by Liberal’s in September 2007. This not only creates a risk for the residential property market, but has severe implications for our superannuation system as well.
Abbott is hoping renewed confidence in the housing market will result in more homes being built – alleviating some of the supply side constraints. However, this could be flawed thinking as there is little evidence to date to suggest this will happen as most speculators play in the established residential housing market. If Abbott wanted to show some leadership and create a tangible outcome, he could quarantine negative gearing and make it only available for new dwellings.
Australia’s housing bubble is a significant issue that needs the concerted effort of the Federal Government, the RBA and APRA. Setting the Reserve Bank up to fail shows both poor leadership and poor form.
» Interview with Neil Mitchell, Radio 3AW, Melbourne – The Prime Minister of Australia, 27th September 2013.
Posted in Australian economy, Australian Housing, Negative Gearing | 38 Comments »
I never thought I would see the day. In fact, in 2008 I joked with some Journalists on who was going to be the first to get Australia’s Real Home Price Index into a mainstream paper. None of us thought it could ever happen.
So you still need to pinch me today when I stumbled across News Limited’s Tabloids and The Australian publishing this graphic:
In the original article published in the Australian Conservative, it was called “The most important graph in Australia’s history.”
Bob Day AO, Managing Director of Homestead Homes and Federal Chairman of Family First writes for News Limited:
FOR more than 100 years the average Australian family was able to buy its first home on one wage. The median house price was around three times the median income, allowing young homebuyers easy entry into the housing market. As can be seen from the accompanying graph, the median house price is now – in real terms that is – relative to income, more than nine times what it was between 1900 and 2000.
It’s a story we have told for many years.
That’s $600,000 they are not able to spend on other things – clothes, cars, furniture, appliances, travel, movies, restaurants, the theatre, children’s education, charities and many other discretionary purchase options.
The economic consequences of this change have been devastating. The capital structure of our economy has been distorted to the tune of hundreds of billions of dollars, and for those on middle and
low incomes the prospect of ever becoming homeowners has now all but vanished.
And while the slump in business conditions over the past years have been blamed on everything from the GFC to the high Australian dollar, the real culprit has been the massive redirection of capital into high mortgages.
Oh shit, is this for real.
It did stop short of a comparison with United States subprime bubble, so readers could easily comprehend the scale – but it’s a fantastic start.
Meanwhile, in other news, The Australian Financial Review reports today the International Monetary Fund will investigate Australia’s Housing Bubble and the risks it poses when it sends a team to Australia later this year. The AFR writes :
News of the visit comes after the IMF this month urged regulators around the world to consider using so-called macroprudential tools, such as limits on loan-to-valuation ratios or increased bank capital requirements, to prevent banks fuelling house price bubbles.
It will be interesting if the visit puts more pressure on Australian regulators to step up to the plate and act.
» Bob Day: Current Australian house prices more than nine times median household income – The Advertiser, 23rd September 2013.
» Bob Day: Current Australian house prices more than nine times median household income – The Australian, 23rd September 2013.
» Massive supply-demand imbalance puts home prices out of reach of many – Australian Conservative, 19th August 2013.
» IMF turns spotlight on Australia’s housing market – The Australian Financial Review, 24th September 2013.
Posted in Australian economy, Australian Housing | 22 Comments »
If you can believe the real estate spruiker, emergency low interest rates have put a fire under Australia’s housing market. And as Australia already suffers the side effects of a large housing bubble developed over the past decade, investors will need to use extreme caution as signs emerge Australia’s central bank has just lost control of monetary policy.
Housing bubbles around the world were created early last decade by an abundance of cheap credit, the very same conditions present today. Government policy from both sides prevented a long overdue correction in our overheated housing market (‘PM appeals in vain to the shafted generation’), but the effects of an unsustainable domestic economy persist and have forced the RBA to drop the official cash rate to an emergency low of 2.50%, a level not seen in 60 years.
A change to the official cash rate has, to date, had little stimulatory effect. In the years leading up to the global financial crisis, Australian households had consumed more than they earned and accumulated debt at alarming rates. The collapse of Lehman Brothers five years ago – last week, signalled a new age in Australia where prudent households used falling interest rates to pay down their debts at a faster pace.
Data from the RBA last week suggests between 50 and 90 per cent of the 2.25 percentage point savings on interest rates have been used to make prepayments on mortgages around the country and goes some way in explaining why retail spending remains in the doldrums. But not everyone has mortgages. The falling cash rate has also had a significant impact to savers with money in the bank, especially retirees who now have less income and have been forced to cut back on spending putting more pressure on a deteriorating domestic economy.
Investors’ lead Mortgage Credit Growth
In recent months there has been an up-tick in credit growth for residential mortgages. According to AFG, Australia’s largest mortgage broker, investors comprise of 36.7 per cent of new home loans in August. In contrast, first time buyers now make up only 11.3 per cent of the market.
In NSW last month, investor loans made up a unprecedented 49.5 per cent of mortgages processed – the highest level of investor activity ever recorded for any state according to AFG.
AFG’s General Manager of Sales and Operations, Mark Hewitt says “With property prices starting to rise, and rates set to remain low for a while yet, a lot of investors are anticipating the next property cycle.”
For some investors, the tiny returns on cash have ‘forced’ them to seek greater yields in the property market. It is believed a reasonable portion of the investor activity is the Self-Managed Superannuation Fund (SMSF) sector. In September 2007, legislation came into effect allowing SMSF the ability to leverage up to purchase property in the fund.
Led by endless number of “super” spruikers (‘The stampede into property by self managed super funds is a risky business’), Mum & Dad SMSF investors are being coaxed into investment structures they don’t understand and this has led many experts including the regulators to worry about this growing trend. For those that know what they are doing, they have worked out there is only one thing more tax effective than negative gearing, and that’s investing in property through their SMSFs.
Loans in SMSF must be non-recourse, but depending upon the diversification of the fund, some super funds could lose substantial wealth if Australia’s property bubble were to correct. This no doubt would anger younger generations who are not only locked out of housing, but will be paying increased taxes to fund the pensions of those who will have recklessly lost their superannuation.
Currency Wars: USA 1, AUST 0
Capital inflows from the mining boom and the perception Australia has a miracle economy has seen the Australia dollar surge in recent years. The persistently high Australian dollar along with high energy and labour costs have made Australia uncompetitive on a global stage and have been slowly hollowing out the Australian economy. According to the ABS, jobs in the manufacturing sector are now at its lowest level since records started in 1984. The story is not much better in retail and tourism. Rising unemployment could be a real challenge for a housing bubble built upon perceived perpetual growth.
A decision by the US Fed this week not to scale back their 85 billion a month stimulus program sent the Australian dollar back over 95 cents. The RBA has a target to bring the Australia dollar down to 85 US cents and this may force the hand of the RBA to further slash interest rates in the coming months to bring the Australian cash rate closer in-line with world interest rates, and prevent a greater inflow of capital into Australia, causing rise of the Aussie.
“It’s a disaster”
If the residential property market is “hot” now, can you imagine what another rate cut or two will do to it?
Robert Mead, Pimco’s head of portfolio management in Australia calls it a disaster. He told the AFR, “If the only impact from stimulatory policy elsewhere in the world is to inflate our residential prices, it’s a disaster,”
And how far will the RBA go to hit their target of 85 cents?
Tony Adams, Colonial First State’s head of global fixed interest rates and credit told the AFR, “The RBA is after 85c but I don’t think they are going to get there.”
So, it was quite timely for the International Monetary Fund (IMF) on Monday to release its report titled “Key Aspects of Macroprudential Policy.”
In announcing the report, José Viñals remarked “Policymakers learned the hard way that systemic risks could not be addressed through the traditional mix of macroeconomic policies”
“A new approach was needed to fill the policy gap and ensure financial stability in both advanced economies and emerging markets.”
Following the move by New Zealand’s central bank in August to clamp down on risky lending (‘RBNZ takes action to limit damage from housing bubble’), there has been some discussion if the same policies should be applied here. The Australian Prudential Regulation Authority (APRA) has written to banks warning about relaxing lending standards (‘With record low rates and pent up demand fuelling prices, APRA’s putting lenders on notice’), while it works out how to best proceed.
The banking lobby has naturally fired back, suggesting any tightening of lending will push first home buyers out of the market, not that there are many left! Applying Loan-Value-Ratio (LVR) limits on mortgages may also have little effect with SMSFs who are only able to borrow up to 80 per cent. Maybe the correct course of action is to reverse legislation allowing super funds to leverage into the property bubble? But if negative gearing is a sacred cow, one wonders if allowing super funds to leverage into asset bubbles will also be untouchable?
Who is going to act first? Time is ticking.
» The stampede into property by self managed super funds is a risky business – The Business (ABC), 17th June 2013.
» Mortgage Index September 2013 – AFG, 2nd September 2013.
» With record low rates and pent up demand fuelling prices, APRA’s putting lenders on notice – The Business (ABC), 11th September 2013.
» IMF takes aim at housing bubbles – Australian Financial Review, 17th September 2013.
» RBA watchful as cheap money heats housing market – The Australian, 18th September 2013.
» Regulators should target loan serviceability to head off trouble – The Australian, 19th September 2013.
» Australian dollar climbs to three-month high and shares jump after US Fed maintains stimulus – The ABC, 19th September 2013.
» Home owners use interest rate cuts to pay down mortgages – The Age, 20th September 2013.
» IMF Executive Board Discusses Key Aspects of Macroprudential Policy – International Monetary Fund, 16th September 2013.
» Making Macroprudential Policy Work – International Monetary Fund, 16th September 2013.
Posted in Australian economy, Australian Housing | 14 Comments »