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.

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.

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

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.

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.

He told the Australian Associated Press, “If everything is as wonderful as they (miners) say, why is there a slowdown in the last two months in the volume of equipment coming into the country?”

“That’s what I can’t reconcile … the real underlying story is that there is a lot of concern about just what’s going on in the world”

Earlier this week the International Monetary Fund (IMF) predicted non-oil commodities will continue to fall in 2012. It expects prices will come off 14 percent this year as world growth weakens further.

Mr Skelton said “And if commodity prices fall, I don’t think Australia is immune to a pretty difficult 2012 economically.”

» Miners stop importing machinery – The Age, 25th January 2012.
» IMF: Most Commodity Prices To Fall In 2012 – Dow Jones Newswire, 24th January 2012.

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.

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.

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.

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.