ANZ plans to slash 1000 jobs. Qantas announces 500 jobs to go. Billibong will shed 80 local jobs. Air Australia enters administration with 300 staff stood down.

Jobs are going left, right and center. Above is a subset of higher profile jobs losses announced just this week.

Yet, despite all the doom and gloom on the jobs front, the ABS announced yesterday the unemployment rate has actually decreased 0.1 points to 5.1 percent in January.

This comes as a bit of a surprise as Roy Morgan has earlier announced unemployment had spiked 1.7 percent in January to 10.3 percent – (2.21 million Australians unemployed or underemployed – Highest ever recorded. Unemployment at 10.3% – A record 1.28 million Australian’s looking for work.)

Historically, the Roy Morgan and ABS unemployment figures have tracked each other. That is until recently.

Roy Morgan has just filed a press release comparing, from its point of view, the two sets of figures – Roy Morgan Unemployment Figures (10.3% in January) show situation ‘on the ground’ while ABS unemployment figures (5.1%) defy belief as job losses mount around Australia.

It states the methodology between the two surveys differ as the the ABS data may lag what is actually happening “on the ground.” To jump through the hoop and be classed as unemployed by the ABS, you must have been looking for work in the four weeks prior to the survey and be available for work when the survey takes place. Roy Morgan on the other hand simply classifies a person as unemployed if they are not employed and is looking for work. This would suggest the ABS figures will lag Roy Morgan’s by a month or two.

If this is the case, we can expect the ABS unemployment will start trending upwards. It should also be noted many of the job losses haven’t yet occurred, but have been announced. In the example of ANZ, it plans the cull 1000 workers from its workforce before September.

» 2.21 million Australians unemployed or underemployed – Highest ever recorded. Unemployment at 10.3% – A record 1.28 million Australian’s looking for work. – Roy Morgan, Friday 3rd February 2012.
» Roy Morgan Unemployment Figures (10.3% in January) show situation ‘on the ground’ while ABS unemployment figures (5.1%) defy belief as job losses mount around Australia. – Roy Morgan, Friday 17th February 2012.
» 6202.0 – Labour Force, Australia, Jan 2012 – The Australian Bureau of Statistics, Thursday 16th February 2012.

Last month we reported on the ANZ’s decision to break away from the RBA and start setting lending rates independently.

Today ANZ has decided to put interest rates up, raising the standard variable rate from 7.3 to 7.36 percent. While the 6bps move is a drop it the ocean, it could be a sign the ANZ is testing the waters to see what backlash raising rates will bring. Should we be expecting larger moves next month?

And when will the other banks follow suit?

The move follows UBS research released earlier this week suggesting banks could be losing money on new mortgages due to rising funding costs. This “dangerous situation” provides banks little incentive to offer mortgages and could cause them to simply stop lending.

[ Westpac has followed suit, raising its standard variable rate 10bps to 7.36 percent. ]

» First time buyers could be hit by lending drought – Mozo, 7th February 2012.

In a surprise move today, the Reserve Bank of Australia has decided to keep interest rates on hold for February. The ASX Target Rate Tracker had the chance of the official cash rate being decreased to 4.00 percent, at 100% yesterday. Even I was 100% certain rates would be cut today.

Yesterday, the Australian Bureau of Statistics (ABS) released data showing retail turnover in Australia continues to decline, even in December during the lead up to Christmas. Seasonally adjusted, retail turnover fell 0.1% in December with growth levels now at levels not seen since 1984. This isn’t a surprise to us, considering household net savings ratios are at levels not seen in 25 years as households continue to control the purse strings and concentrate on paying down household debt.

On Friday, Roy Morgan Research released data showing unemployment was up 1.7 percent in January to 10.3 percent. According to the research, it is the highest unemployment rate in a decade – since January 2002 when the unemployment rate sat at 10.9 percent. Roy Morgan’s unemployment data normally tracks the ABS data, just a little higher, but in recent months has started to deviate away from official ABS data.

Even if rates were cut today, it is unclear if the banks would have passed any of the cut on to mortgage holders. However, rest assured, deposit rates would have been cut. The big winners from today hold in rates is self funded retirees and other individuals with exposure to cash products. They can continue to spend as normal, without having to make any cutbacks, something often missed by the cries of the media.

On the flip side, the Aussie has surged today reaching $1.08 and a six month high against the greenback. This is likely to put further pressure on manufacturers, retailers and the tourism industry already suffering from the effects of dutch disease.

In the statement from the RBA on the monetary policy decision, it indicated the “acute financial pressures on banks in Europe were alleviated considerably late in 2011″ and while much still remains to be done, some progress has been made forward.

The central bank notes while unemployment has started to trend up in 2011, it has been “steady over recent months.”

Also steady or “stabilising” is the central bank’s view of residential housing after house prices had declined for “most” (not all) of the year. There has been a lot of debate in recent years about the central banks roles in asset bubbles, suggesting central banks should in fact be addressing the problem of bubbles and not sweeping them under the carpet. As residential property is a confidence game and with comments from the industry that we have hit bottom, maybe, just maybe, the RBA has err’ed on the side of caution and decided not to re-inflate the bubble by dropping interest rate at a time when everyone is still so confident Australia doesn’t have a debt fueled housing bubble. We can only dream!

» Statement by Glenn Stevens, Governor: Monetary Policy Decision – The Reserve Bank of Australia, Tuesday 7th of February 2012.
» Retail turnover falls 0.1% in December 2011 – The Australian Bureau of Statistics, 6th February 2012.
» 2.21 million Australians unemployed or underemployed – Highest ever record. Unemployment at 10.3% – Roy Morgan Research, Friday 3rd February 2012

The latest installment of the official House Price Index from the Australian Bureau of Statistics (ABS) was released today showing Australian house prices continued to fall in the December 2011 quarter. The weighted average of the eight capital cities fell 1.0 percent in December, ending a year where house prices fell in every quarter. For the year, 4.8 percent was wiped of the value of Australian homes.

Brisbane led the falls, slashing 6.7 percent from values. Adelaide, considered one of the more affordable capital cities racked up second place at 6.4 percent.

Assuming there is no further government interference in Australia’s housing market, this years falls is considered to be the start of many in a long period of painful deleveraging. The Economist Magazine reports Australia has one of the largest property bubbles in the world and is overvalued by 53 percent on a rent to price metric. It also believes Australia, Belgium, Canada and France have property markets that are more overvalued today than at the peak of the American housing bubble.

While housing lobby groups in the USA cried a chronic shortage of houses, and central bankers said not to worry – there is no bubble, thus there can’t be a crash, Yale Professor Robert Shiller was raising concern about America’s housing bubble. His real house price index is shown above in blue.

After 5 years and 5 months, the S&P/Case-Shiller Home Price Index for 10 composite cities show house prices have fallen 32.8%.

In Australia (red/orange line), some analysts believe house prices may have bottomed out. On a more serious note, Henry Blodget asked the same question to Robert Shiller about the United States property market while in Davos on the weekend.

Shiller answered, “When people phrase it that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now. We do have some good news. Permits are up. Notably, the National Association of Homebuilders Housing Market Index is up and that’s a forward-looking index. But it’s not up very much. If you look at the rate of change it looks dramatic but it’s still at a low level. ”

Blodget suggested property prices in the United States was starting to look like ‘fair’ value relative to long term historic trends (i.e. graph above of real house prices), but Shiller argues what does ‘fair’ value actually mean in an economy like this. Shiller is questioning if America will overshoot. “Now the question is whether we’ll overshoot, which is a common thing that happens after bubble burst.”

As Shiller has looked at bubbles going back hundreds of years, Blodget naturally asked if Shiller has ever seen a bubble where there wasn’t a major overshoot. His reply “Well, the problem is we’ve never had, in the United States, a bubble like this, of this magnitude before. That’s the problem. That’s the fundamental problem of economics.”

But this isn’t a problem limited to America. In Australia, Dr Nigel Stapledon from the University of NSW and former Westpac Bank Chief Economist has compiled real home prices for Australia. In a Morgan Stanley research paper written by Gerald Minack titled “Australian Strategy and Economics : Living in a bubble”, Minack provides the following graph of real median Melbourne house prices dating back further than our graph above.

As you can see, todays prices are unprecedented in Australia, eclipsing the speculative land boom in Melbourne after the gold rush era (we were digging up stuff then, too) and leading to the Australian Banking Crisis in 1893.

» 6416.0 – House Price Indexes: Eight Capital Cities, Dec 2011 – Australian Bureau of Statistics, 1st February 2012.
» Can’t happen! – cause it’s never happened before! – Who Crashed The Economy, 14th July 2010.
» Housing Bottom? What Are They Thinking? – Business Insider, 29th January 2012.

According to SQM research, Melbourne’s rental vacancy rate surged 1 percent in December to a 6 year high of 4.4 percent as the city deals with an oversupply of residental property. There is now 16,000 rental properties sitting empty.

A fortnight ago, the Herald Sun reported on a rental glut in West Melbourne where the vacancy rate had hit 22 percent in the month of November. December’s figures show further increases with West Melbourne now sitting at 26.4 percent. New four bedroom, two bathroom homes are reported to be renting for $275/week.

The increases are not limited to Melbourne. In the Sydney suburb of Rhode, the rental vacancy rate is now 13.6 percent. Gordon is 8 percent.

» Melbourne full of empty homes – The Age, 26th January 2012.
» Rental vacancy rate an ‘ominous development’, says SQM – News Limited, 26th January 2012.

More doom and gloom headlines circulate Australian media today with comments from an United States based property analyst suggesting Australian property could crash by more than 60 percent. At the same time, Australian experts counteract the argument saying it can’t happen in Australia, in fact – some say we have no bubble.

Is there any substance to the article?

Jordan Wirsz says “Right now is not a time to be buying real estate in Australia.”

“The market has slowed substantially but residential prices are likely to fall up to 60 per cent, possibly even more, within five years.”

We don’t believe the 60 percent figure has been simply pulled from the air. It is consistent with the Economist Magazine that calculates Australian housing is overvalued by 53 percent on a rent to price basis (sort of like the PE ratio for shares) and 38 percent on an income to price ratio. Such a large bubble can scar the indebted and cause markets to over correct. I would be cautious about the 5 year time frame, although. I would expect prices to deflate over a decade or two, although the large falls will occur in the first couple of years in this window.

“I’m bearish about world real estate but I couldn’t be more bearish about the Australian market, There have been corrections but they don’t hold up to the scale of what is coming, ” said Mr Wirsz.

This is also consistent with The Economist report that states house prices in Australia, Belgium, Canada and France is more overvalued today, than during the peak of the American housing bubble. Assuming house prices fall back to nominal levels, this would suggest we could potentially have a bigger housing downturn than America.

But experts in the thick of it here in Australia disagree.

Paul Bloxham, HSBC’s chief economist, said there would have to be sharp rises in interest rates, unemployment and housing stocks for property values to crash. As per our prevous post, unemployment in Australia looks shaky and is expected to be worst this year as the effects of high household debt take their toll.

SQM research shows there are now 48,586 Victorian homes on the market in December 2011, up 43 percent for the 12 months. Stock on the market is up 23 percent in Sydney, 26 percent in Adelaide, 52 percent in Hobart and 21 percent in Canberra.

Peter Green from Laing+Simmons in South Sydney told the Sydney Morning Herald in a different article today, “In the last three months, the number of people visiting open houses has been cut by half. And buyers may show up to auctions, but they don’t bid.”

This could suggest turnover of stock is falling and is likely to contribute to even more stock on the market this year.

The official cash rate is likely to go down this year, although banks may choose not to pass rate cuts on, especially the ANZ who now set their own mortgage rates independent of the Reserve Bank of Australia. But with the World Bank warning on Wednesday that we are on the brink of GFC 2 and it is expected to be deeper than GFC 1, the cost to access international credit markets is anyone’s guess.

Mr Bloxham reassures News Limited readers that the combination of rising interest rates, unemployment and housing stocks levels is not on the cards.

He also says “Surely if the market was going to collapse it would have happened in 2009 after the Lehman’s collapse when we had the biggest aversion to housing assets that you’ve seen.” Maybe he forgot the First Home Owners’ Boost was “designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.”

Ray White Inner West agent Charlie Bailey has the same thoughts, telling News Limited he believes the bubble can’t bust because there is no bubble. “People have been predicting house prices to fall every year and every year we have an increase in prices.”

The comment that there is no bubble because it would have burst by now is common. It’s a similar concept to boiling a frog, because the market is slow moving there is a perception the market hasn’t changed, just like the rising water temperature before the frog boils. This is also common among baby boomers who will tell Generation Y that they thought housing was expensive when they brought, but if they hadn’t taken the plunge, they would still be renting. While housing debt as a percentage of household income has quadrupled, it has done so over a period of three decades.

But the quote that a housing bubble can’t burst, because there is no bubble was first made famous by Alan Greenspan and Ben Bernanke. They both testified before Congress in 2005 that a bubble didn’t exist in the United States. Three months later, the America housing market started one of the biggest corrections in history (blue line):

» Bloodbath to hit Australian real estate, US property analyst Jordan Wirsz says – News Limited, 20th January 2012.
» World Bank’s crisis warning – The Sydney Morning Herald, 18th January 2012.
» How much property is on the market in your capital city? A state-by-state analysis – The Property Observer, 18th January 2012.
» Hammer falls on auctions – The Sydney Morning Herald, 20th January 2012.

Australian Bureau of Statistics figures released today show Australia lost 29,300 jobs in December. For the year, there was close to no new jobs created making job growth last year the worst since 1992.

Unfortunately this year is not expected be any better. Excessively high levels of household debt and house asset prices has seen growth in mortgage lending fall to levels not seen since world war II and left banks no choice but to start slashing staff numbers. UBS expects banks will slash 7,000 jobs over the next two years as banks align to a lower growth environment.

And pain is not limited to mortgage lending. Australian households are trying to deleverage after a decade of binge spending where households spent more than they earned for a number of consecutive years. Rising property prices and the wealth effect made spending beyond your means not only fashionable, it also appeared sustainable. It wasn’t as if you didn’t have the money, it just wouldn’t be realised until the sale of your home.

Household net savings have now sprung back to around 10 per cent to levels not seen in 25 years coincidently starting the same month than the collapse of Lehman Brothers. The paying down of debt and extra savings is thought to have wound back some discretionary spending, causing retail sales to decline and making it the worst period for retailing in a couple of decades.

IBIS World’s Ian MacGowan told the Sydney Morning Herald, “The period from 1998 to 2008 was a boom time, a golden era, for retailers, with well above average growth as Australians spent large sums on their credit cards and hire purchase”

This supported extra retail jobs that are no longer needed today with more prudent discretionary spending. Andrew McClennan, a retail analyst with the Commonwealth Bank said “there is no doubt there are going to be significant layoffs through further business failures.”

Some analysts are expecting a wave of retailers entering administration in March, while others will close stores and/or layoff staff.

» Thousands of bank jobs face axe: UBS – The Sydney Morning Herald, 16th January 2012.
» Retailers brace for job cuts – The Sydney Morning Herald, 18th January 2012.
» Debt Bubble Cripples Retail Spending – Who Crashed the Economy, June 8th 2011.

While the real estate lobby groups put on a brave face and shower us with news of a recovery (0.1% increase in property prices in November), surging rents, housing shortages, tight rental vacancy rates and that it is never a better time to buy – you will get in at the bottom of the market, there are signs something is not quite right in property land here in the lucky country.

The Herald Sun reported yesterday on a rental glut in Western Melbourne. This rental glut has left almost 1,000 new homes sitting empty (housing shortage) and has seen the rental vacancy rate surge to 22 percent (extremely tight rental market). New four bedroom, two bathroom homes are now renting for $275/week (surging rents) as landlords fight with each other to secure tenants and an income. If they can’t find tenants, holding costs are likely to send these investors to the wall very shortly.

The Weekend Australian Financial Review reported yesterday “The housing market on the edges of Australia’s major cities is showing signs of significant distress as banks increasingly refuse to lend against sale price valuations in a falling market.” Valuations in many new suburbs have fallen 15 percent last year. According to the article, the problem is most severe in Melbourne with Dennis Family Homes CEO Peter Levinge saying “Banks have tightened up on their finance requirements, part of which is valuation, and we are noticing a higher level or cancellations than 12 months ago due to finance issues.” Dennis Family Homes is one of the biggest developers in Melbourne’s west and says about 25 percent of buyers are walking away from contracts, up from about 10 percent a year ago.

Mirvac’s John Crasi has also reported a sharp rise in cancellations telling the AFR, “This is happening all over the country,”

Despite reassurances we don’t have subprime lending in Australia, The Age has reported today of a potential, but massive, class action against the banks for essentially lending struggling home owners’ too much money. An estimated 300,000 could join Roger Brown’s legal action with Mr Brown saying “The people we are talking about are experiencing severe financial hardship through no fault of their own because they shouldn’t have been given a home loan in the first place or they have been lent way too much money, I think the banks have a case to answer for the irresponsible way they have been lending.”

There must be problems in property land if mortgage holders now want to take legal action. Real Estate agents better watch out, they could be next for endlessly saying house prices always go up, in fact “if you look over the past 100 years, house prices double every 7 to 8 years.”

» Rental property glut means investors are feeling the pinch – Herald Sun, 14th January 2012.
» Banks pull financing rug on outer estates – The Australian Financial Review, 14th January 2012.
» Banks face home loan suit – The Age, 15th January 2012.

Just as house prices have outstripped wages in the past decade or two, the value of mortgages have outstripped domestic funding sources. This has seen Australian banks supplement lending from international credit markets. CLSA’s Brian Johnson told the Weekend AFR, “On a global basis the cost of funding for banks has gone up remarkably and continues to incrementally rise.”

The other problem facing banks is the premium they are paying domestic depositors. With international credit markets volatile and expensive since the GFC, banks have aggressively competed for domestic deposits and according to the ANZ now pay about 100 basis points more for deposits over the RBA’s official cash rate.

ANZ has broken away from the RBA and will now set home loan lending rates independently on the 2nd Friday of each month. Yesterday, it announced rates are on hold for this month with the standard variable home loan rate standing at 7.32 percent.

The rate decision comes on the same day of news up to 1,000 jobs could be slashed from the ANZ as mortgage lending slows. UBS analysts indicate mortgage growth in Australia is now at levels not seen since World War II. Australian households have effectively hit the debt ceiling. ANZ’s Australian CEO, Phil Chronican said “Obviously we need to get our cost growth to where our revenue is headed and revenues are under a lot of pressure.”

» As cost pressures grow, ANZ cuts jobs to protect profits – The Australian, 14th January 2012.
» BANKS PLAN STAFF PURGE: Thousands of jobs to be lost – The Daily Telegraph, 10th January 2012.

It’s the 64 thousand dollar question – With the housing market once again collapsing, just like in 2008, will the government re-introduce the first home buyers’ grant to prop it back up?

With a federal election due next year, Aussie Home Loans boss John Symond expects a new boost towards the end of the year.

He told the Property Observer, “Probably my cynical self says six to 12 months ahead of the next election, it would not surprise me that the government might stimulate housing by helping first-home buyers and they may possibly introduce a bonus or a boost to the first-home owner’s grant.”

According to Treasury, the government introduced the original first home owners’ boost in 2008 to encourage first timers who had been saving for a home to bring forward their purchase and prevent the collapse of the housing market. Bringing forward so much demand, has left a large void now that the free money is no longer available.

Figures out today show the first home buyers grants have also helped some 1,200 South Australian investors enter the market, or at least until they had to pay the grant back.

South Australian Minister for Finance, Michael O’Brien told the Advertiser, “This program is designed to help South Australians get a roof over their head, not to help them into an investment property.”

» First-home owner’s boost could return this year: John Symond Property Observer – Friday 6th January 2012.
» 1200 forced to repay home grants – The Advertiser, Tuesday 10th January 2012.

It was December 2008. Three months earlier Lehman Brothers had collapsed – credit markets have frozen over. Two months earlier, Prime Minister Kevin Rudd announces the First Home Owners’ Boost, designed to save the housing market, or at least temporary, by encouraging first home buyers to bring forward their purchases and help prop up ailing demand.

By now Australian houses prices had come off 4.7 percent. During all the panic, the Rudd Government announces legislation to ‘streamline’ some of the administrative requirements for the Foreign Investment Review Board (FIRB). According to the Government, the changes would enable the FIRB to concentrate on larger issues in the ‘National Interest’.

But as the Australian public would later learn, this streamlining of administrative requirements really translated into the opening up the floodgates to allow temporary foreign residents such as students to buy property of any value in Australia, effective from the 18th December 2008. Previously they could only spend up to $300,000 on their primary place of residence in Australia.

With the housing market oversupplied, and demand dwindling, many questioned the timing of the announcement. Was it just another measure to save our already highly inflated housing market? If it was, you have to admit it was a genius scheme. Domestically, mortgage approvals had fallen off a cliff. Why not enlist the help of foreigners? It was cheaper, a lot cheaper, than giving first home buyers free money.

By March 2010, the Australian media started asking for data on just how many foreign residents were buying houses in Australia. There were endless reports each weekend of Australian’s being outbid by an army of Chinese residents, effectively pricing Australian’s out of their own housing market. But the ‘streamlining of administrative requirements’ actually meant no records were kept, or more specifically it would seem that these foreign residents no longer needed to lodge applications with the FIRB. There was public outcry and no real data to support just how big or small this issue actually was.

The outcry was so intense, that on the 24th April 2010, a tightening of foreign investment rules relating to residential property was announced, complete with a package of new civil penalties, compliance, monitoring and enforcement measures. The government even set up a 1800 hot-line for residents to report suspicious property buyers and help calm a heated public. It was sold to the Australian public as a reversal of the changes made in December 2008. But some are not convinced.

The problem is, there is no longer any transparency in the sector.

Only on Friday, The Sunday Age’s Property Reporter Chris Vedelago vented his frustration on a Freedom of Information (FOI) request to access this information. He quote’s the government response in his article – ‘‘Around 19 documents have been identified as potentially falling within the scope of your request. Given the nature of the documents I envisage that most, if not all, of the documents will be exempt from release,’’

You must admit, it doesn’t portray a good image of the government. As Chris writes, the FOI wasn’t targeted at troop movements in Afghanistan, the prime minister’s private schedule or the names of ASIO’s anti-terrorism informants? “No, it was a request for some basic facts and figures about the state of foreign investment in Australia’s residential real estate market.”

What do they have to hide? Is there a loop hole in their legislation?

A day after Chris’s article, The Courier Mail reported under the headlines “Foreigners outspend locals on Queensland residential property in 2011″ that foreign buyers’ had spent $334.2 million on residential property in Queensland. Based on research by Colliers International, foreign Chinese increased their spending on Queensland real estate by 50 percent over the year prior, to $106.8 million.

While the figures presented in the article didn’t quite tally, about 70% of the sales were as investments with the other 30% for owner occupiers.

The Weekend Australian Financial Review printed a two page story in the December 17-18, 2011 edition under the headlines of “Chinese prop up property market”. It writes “While vast tracts of the Australian property market suffered the staggers this year, the Chinese kept Harry Triguboff’s cement mixers turning.” If you don’t know, well known billionaire Harry Triguboff AO is managing director of Meriton Apartments, regarded as Australia’s largest property developer. According to the article, 70% of Meriton’s sales are to Asians notably the Chinese.

Justin Wang, founder of Property Investors Alliance told the AFR, “If you sell to demand overseas, then you will find the settlement is not certain. I think the [Australia] government should kept a tight policy and not open the door to overseas investment. It’s very dangerous. The big danger is lots of speculators come here and if something goes wrong, it will crash.” According to figures from BIS Shrapnel and published by the AFR, Justin has 8 percent market share of new apartment sales in Sydney, selling 600 apartments a year, with 95% of them being Chinese.

Justin’s comments makes you wonder what happens when foreign Chinese residents find out that perpetual growth in real estate is not guaranteed and prices can and do fall? – just like what mainland China is experiencing now. Will this cause these investors to abandon Australia, or will it have the opposite effect and they flock here to a ‘strong and stable economy’. What ever the result, we can only have a guess at what the consequences will be without accurate and transparent data on foreign investment in Australia’s real estate market.

And has anyone noticed the Sydney Morning Herald is now reporting on Chinese house prices, down for the fourth month.

» Australia for Sale – Who Crashed the Economy, 27th March 2010.
» Foreign investment is overheating our property market – The Punch, 10th April 2010.
» Australian Federal Government gets tough on foreign ownership rules – News Limited, 24th April 2010
» Secret government business – The Age, 30th December 2011.
» Foreigners outspend locals on Queensland residential property in 2011 – The Courier Mail, 31st December 2011.
» China’s house prices fall for fourth month – The Sydney Morning Herald, 4th January 2012.

When the BBC last Thursday warned international markets about a 22.5 percent rise in mortgage repossessions down under in NSW, we thought the Australian media had swept this news under the carpet.

Under the headlines of “Fears mount over health of Australia’s housing market”, the BBC reported on what is considered a “worrying development” for observers of the Australian housing market, that is, repossessions and loans in arrears are rising. Australians for Affordable Housing told the BBC that over the past decade, house prices in Australia has surged 147 percent, yet incomes have only increased 57 percent. It shouldn’t take much to work out this is not sustainable.

Brendan Timmins who works in Auburn told the BBC, “People shouldn’t go too far into debt. They are trying to get the Australian dream but it is out of reach for a lot of people,”

“I used to have a house before, But it was no good, I couldn’t afford it, so I lost it”.

Figures show Australian’s have quadruped their household debt as a percentage of household disposable income in the last 20 years, trying to leverage themselves into the housing market.

Almost a week after the BBC story, the Sydney Morning Herald has today finally reported on these figures saying that the total annual figure is unlikely to reach the levels recorded during the GFC.

Campaign Manager for Australians for Affordable Housing, Sarah Toohey told the Herald the same figures regarding the rise in house prices verses income over the past decade, going on to say households were paying more of their income on mortgage interest payments today than when interest rates were at 17 percent.

Channel 7′s Today Tonight has jumped on the band wagon and dedicated an entire 5 minutes 43 to the topic following the even news tonight, showing what it calls is some of the ‘foreclosure ghettoes’ around the country. You could have mistaken some of the footage was from Spain with half built homes laying dormant on the Sovereign Island.

Watch the video here. (Mansion repossessions)

SQM Research’s Louis Christopher was interviewed saying “2011 was a bad year for many people who owned a home – no doubt about it. Many first home buyers who basically took out that First Homeowners’ Boost in 2009 got burnt in 2011. And that was as a result of the rising interest rates that we had in 2010,”

He blamed the Rudd Government’s First Home Buyers Boost – “it was all designed to actually save the housing market. Well they saved the housing market for a time, but at a major expense for their voters. Right now, many of them are facing bankruptcy.”

Treasury Executive Minutes show “This [FHOB] short-term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.”

Will repossessions continue to rise in 2012? Or is it, as buyer’s agent Tony Coughran says, never a better time to buy – “I think now is an opportune time, especially if you go to auction and buy it.”

» Fears mount over health of Australia’s housing market – The BBC, 29th December 2011.
» Foreclosures rise as more borrowers fail to repay – The Sydney Morning Herald, Tuesday 3rd January 2012.
» Mansion repossessions – Today Tonight, Tuesday 3rd January 2012.

Real Estate Agents and Property Lobbyists have opened their new years’ bottles of Champagne early today as figures from the RP Data-Rismark home value index show house prices rose just 0.1 percent (noise) in November after the worst year for Australian real estate in more than a decade.

Home price rises in Melbourne, Perth and Canberra helped push the November figure positive, while Brisbane, Adelaide and Hobart continued to notched up further falls. Values in Sydney recorded no change.

While experts believe this demonstrates the flattening and bottoming out of the market, and naturally, it is never a better time to buy, we are still very much cautious about 2012.

The pending problems in Europe will no doubt continue to take centre place and could cause credit markets to freeze over at any moment.

Problems unfolding with the bursting of China’s real estate bubble is likely to intensify next year with reports some local government financing vehicles are starting to deter debt payments. Other reports suggest some local governments that are having difficulty paying public servants such as teachers and police as they generated much of their revenue from land sales, and the developers are simply not buying land any more. If developer’s are not buying any land, they are not building further empty apartments and office towers, and hence not consuming copious amounts of our resources.

In Australia, cost of living pressures including sky-rocketing housing costs have contributed to one of the worst periods for retailers in two decades. This has seen economists predict Australia’s unemployment rate will rise next year with as many of 100,000 jobs being slashed in the months after Christmas.

Some experts believe government deficit spending (stimulus) will be able to bridge the gap while Australia households pay down mountains of debt and repair their balance sheets. While the unprecedented stimulus was “successful” in 2008 with the first home buyers’ boost, $900 spending handouts, the building of new school halls (BER) and the fitting of home insulation, the economy is once again going down the gurgler. It didn’t last very long and we don’t have much to show for the money. You could also argue schemes such as the first home owners boost, helped new households acquire more debt, than actually assist in repairing their balance sheets.

A new stimulus package next year could be difficult after Joe Hockey warned the opposition may oppose the raising of our debt ceiling from the current $250 billion dollars. According to the Australian, government debt now stands at $223 billion. The limit was raised from $70 billion to $200 billion at the height of the global financial crisis in February 2009 and by a further $50 billion in the middle of this year.

The focus next year will be on what rabbits the government can pull from its hat to keep our economy from falling into recession.

» China governments in hole as land sales plummet – Market Watch, Monday 19th December 2011.
» Aussie jobs to be slashed in new year – Ninemsn, Thursday 22nd December 2011.
» Default threat as Liberals issue debt warning – The Australian, Friday 23rd December 2011.
» ‘Tea Party tactics’ on debt limit: Wayne Swan – The Australian, 30th December 2011.
» Provincial borrowers defer loan payments – The China Daily, Monday 26th December 2011.
» Australia Home Prices Drop 3.7% as Banks Doubt 2012 Rebound on Rate Cuts – Bloomberg, Friday 30th December 2011.

The Australian Banking Regulator has given Australian banks one week to stress test their resilience to the unemployment rate rising sharply to 12 percent, a 30 percent decline in residential house prices, a 40 percent decline in commercial property values and a contraction of GDP.

It is believed APRA want to study what would happen to the Australian banking sector should we experience a debt crisis brought on by a deterioration of Europe.

This comes days after ratings agency Moody’s warned Australia’s housing prices are not sustainable and placed Australia’s mortgage insurance industry on a negative watch.

» Australia Banks Ordered To Run Stress Test – Report – Dow Jones Newswires, 16th December 2011.

Ratings agency Moodys has indicated Australia house prices are simply not sustainable based on simple metrics and has placed Australia’s mortgage insurance industry on negative watch.

Ilya Serov, lead analyst at Moody’s said “Capital city house prices have more than quadrupled and household debt has tripled since 1990. Simple metrics indicate that the current price levels are not sustainable,”. Moody’s believe the Eurozone crisis represents a material threat to Australia’s housing bubble which could lead to US style property crash.

The report from Moody’s follows similar concerns from the Economist magazine who indicate on a rent to price metric, Australian housing is 53 percent overvalued and 38 percent overvalued on a income to price metric. The economist warned the Australia, Belgium, Canada and France housing markets are now more overvalued than at the peak of the U.S. housing bubble.

» Australian house prices not sustainable, says Moody’s – Adelaide Now, 14th December 2011.

We have often warned that negative gearing is really only good when house prices are rising. Now the mainstream media is ringing the same bells.

The Sydney Morning Herald writes:

In a rising property market, negative gearing can be a good strategy to build wealth – but watch out when values fall.

There are plenty of reasons why Australians love to borrow money to invest in bricks and mortar.

Some people think the value of property never goes down; others like the fact you can see and touch it.

The article provides some good advice. Adrian Raftery, the founder of Mr Taxman is quoted saying:

“If a property market is stagnant – like we are experiencing in Australia – then you will be falling behind. If the property market falls like it has around the world, then you are in a dire situation.”

And Adam Zahra, a mortgage broker with Loan Market and a property investment consultant with NPA:

”It is pointless to purchase an investment for tax savings if it doesn’t provide you with a return,”

Read the entire article here.

» Negative gearing: time to rethink your approach – The Sydney Morning Herald, 4th December 2011.

Australia’s Central Bank has today cut the official cash rate by 25 basis points to 4.25 percent, effective tomorrow. This cut follows a 25 basis point cut last month and could suggest the economy is not as robust as initially thought, having been bash about by the Eurozone crisis.

The cuts are expected to be welcome relief to retailers and home owners this Christmas, but the jury remains out as to just how much relief it will actually offer.

Statistics show Australian’s have grown household debt levels four fold over the last 25 years. Most of this debt has been pumped into residential housing.

This increased indebtedness has, in recent years, seen household’s fork out mortgage repayments as a percentage of their household disposable income far exceeding levels incurred during 1989 when the bank standard lending rates hovered in the 17 percent range, despite official interest rates being some of the lowest in history (grey line).

The above graph doesn’t reflect the latest two rate cuts. Assuming household debt levels remained constant (as mortgage holders will know, its far easier to acquire debt, than it is to pay it off) and the banks past on the rate cut in fall, we estimate the past two rate cuts will reduce interest paid of mortgages (the blue line) to just over 9 percent of household disposable income. This would compare to a figure of 5.7 percent in 1989 at the peak of the interest rate cycle.

Will today’s rate cut save retail and/or housing?

» Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 6th December 2011.

Melbourne may need more than an endangered frog to stir up pent up demand if last months’ building approvals are anything to go by.

Home approvals fell 10.7 percent in the month of October contributing to a 29.8 percent fall for the year. Apartments and units have lead the falls, down 44.6 percent for the year while approvals to build houses is down 15.4 percent.

Queensland was the hardest hit with approvals to build new homes down 19.5%. Melbourne followed by just a whisker, recording a 18 percent fall.

The large falls in October follows similarly large falls September and has some analysts questioning the data. Brian Redican, senior economist at Macquarie Group said “Maybe some councils were late in getting their approvals through, but I suspect these figures contain more noise than signal.” For example, NSW recorded a 43% rise in approvals for the month of August, only to be followed by a 33% fall in September and a steady result in October. On the other hand, Victoria and Queensland falls appears to be accelerating, with Victoria recording falls of 14 percent for the month of September followed by 18 percent in October. Queensland similarly reported falls of 13.6 percent in September followed by 19.5 percent in October.

» 8731.0 – Building Approvals, Australia, October 2011 – Australian Bureau of Statistics, 1st December 2011.
» Building approvals continue to slump – The ABC, 1st December 2011.

Further doubt has been cast today, if Australia’s housing market is in fact different to the rest of the world.

The latest RP data update on Australia’s capital city market has shown house prices have fallen a seasonally adjusted 4 percent for the 12 months to October 2011. Prices fell 0.5 percent alone in the month of October suggesting the pace of the correction has accelerated.

On a monthly basis, Brisbane was the hardest hit recording a fall of 1.6 percent s.a., with Adelaide just behind with a 1.3 percent fall. On the other end of the scale, Hobart and Canberra did manage to record gains for the month, up 3.1 and 1.6 percent respectively.

This new data shows house prices in Australia have now clocked up 10 consecutive months of declines. Just last week, the Economist magazine released its yearly update on housing markets around the globe, reporting that Australia, Belgium, Canada and France are more overvalued today than at the peak of the American housing bubble. Data also shows Australian households now have more debt as a percentage of household disposable income than at the peak of the American subprime mortgage bubble.

Do you think Australia is different, or will the Australian housing bubble head in exactly the same direction than our oversea’s counterparts who had similar size bubbles? Where do you believe the market will be this time next year?

» Home price falls accelerate – The Age, 30th November 2011.
» House prices continue run of falls – The ABC, 30th November 2011.

With the super Saturday flop still in memory, Melbourne property lobbyists have turned to a frog in a last ditch effort to try to save the market.

The ABC’s PM reports “Developers say property prices in Melbourne’s urban growth corridors may skyrocket because of an endangered frog.”

According to Tony De Domenico, executive director of the Urban Development Institute, the endangered frog could add up to $10,000 per block of land in the years ahead.

» Melbourne property prices may skyrocket due to endangered frog – The ABC, 29th November 2011.
» Super slow sales on real estate market’s ‘Super Saturday’ – The Herald Sun, 28th November 2011.