This is one finding presented in the International Monetary Fund, World Economic Outlook April 2012, titled Growth Resuming, Dangers Remain.

Australia is not absence from the list of advanced economies who have witnessed a rapid rise in household debt. Down under, we have almost quadrupled our household debt as a percentage of household disposable income over the past thirty years causing many to question if this level of debt burden is sustainable.

Most of this debt has been piled into our residential property market, which has now experienced price declines for five consecutive quarters while the growth of housing finance falls to levels not seen since records started some 35 years ago.

According to the IMF report, in the five years preceding the Great Recession (GFC) of 2007, advanced economies recorded an average household debt to income increase of 39 percentage points. A quick look at the Reserve Bank of Australia figures suggest Australia’s household debt to income ratio increased by a bit more than 37 percentage points.

Chapter 3 of the IMF report sets out to determine the relationship between household debt and the depth of economic downturns.

It found the declines in economic activity after a housing bust are not simply reflective of the decline in the asset price and the associated destruction of household wealth. It is a combination of the former and pre-bust leverage that ultimately explains the depth of the contraction. Simply put, the more household debt, the bigger the bust and this holds true regardless of a banking crisis or not. Economic downturns following high debt housing busts are also more protracted, with declining consumption lasting for at least five years.

According to the report, in economies with high household debt, household consumption can fall by more than four times the amount that can be reasonably explained by falling house prices alone. This is caused, in part, by more pronounced de-leveraging, as households try to repair their weak balance sheets. In low debt housing busts, as could be expected, there is no discernible decline in household debt to income ratios.

De-leveraging can result from a number of factors including a realisation that house prices were overvalued, a tightening of credit standards, a sharp revision in income expectations and an increase in economic uncertainty. Uncertainty can also lead to an increase in household savings, at the expense of consumption.

High debt busts typically cause greater falls in real GDP and larger increases in unemployment.

As unemployment rises due to falling consumption, the ability of households to service their large debts diminish causing defaults and foreclosures starting what the IMF call a ‘self-reinforcing contractionary spiral’. Estimates presented in the report suggest a single foreclosure can lower neighbouring house prices by 1 per cent, but a wave of foreclosures could wipe as much as 30 per cent off local prices.

Negative equity can also have a role to play, with a U.S. study finding homeowners with negative equity spend 30 per cent less on maintenance and home improvements, than those that don’t. Maintenance and home improvements either retain or increase the relative value of the home.

Similarly, as supply exceeds demand or as foreclosed homes sit vacant on the market, months of neglect and deterioration further reduce values. Vacant homes and unemployment can also result with social issues such as high crime rates making areas less desirable to purchase in.

» World Economic Outlook, Growth Resuming, Dangers Remain – International Monetary Fund, April 2012.

Kohler told viewers around the country, “disturbingly, according to this chart it’s the same decline from peak at the same point of the big Japanese and American housing crashes of the early 1990′s in Japan, and 2006 to now, in the US.”

» Kohler Report – ABC News, 2nd May 2012.
» Australian House Prices down 10% from Peak – Steve Keen’s Debtwatch, 1st May 2012.

After a bad CPI figure last week, the RBA has slashed the official cash rate today by 50 basis points to 3.75%. Even if the majority of Australian banks choose to pass the cut onto mortgage holders, this cut, like cuts in November and December is expected to provide little to no support to Australia’s housing market buckling under the pressure of high household debt. Just yesterday, the RBA released housing credit statistics showing housing credit growth is at the lowest rate since records started 35 years ago. With housing credit growth this low, Australia’s housing bubble could be on borrowed time.

» 6416.0 – House Price Indexes: Eight Capital Cities, Mar 2012, Australian Bureau of Statistics – 1st May 2012.
» Australian House Prices down 10% from Peak – Steve Keen’s Debtwatch, 1st May 2012.
» Confidence the missing ingredient – The Sydney Morning Herald, 1st May 2012.

Housing credit growth had been running at double digits until the Global Financial Crisis, but excessively high household debt levels have caused household’s to re-adjust their appetite for debt in a more uncertain climate.

This reluctance to take on debt is also observed in housing finance commitments that is currently hovering around levels last seen in the late 1990s.

The housing industry is feeling the full effects of low housing credit growth. Figures released from the Housing Industry Association today show new home sales are at 1994 levels, falling 9.4 percent seasonally adjusted, in March 2012.

After annual CPI came in at only 1.6 percent last week, the Reserve Bank of Australia is almost certain to cut the official cash rate tomorrow. But with housing credit growth at levels not seen in decades, it is hard to see any resulting housing recovery.

» New home sales crater – Macrobusiness, 30th April 2012.
» Home sales sink to lowest since 1994 – The Age, 30th April 2012.

In December 2008, the Rudd Government announced a change to legislation, it claimed, was designed to ‘streamline’ some of the administrative requirements for the Foreign Investment Review Board (FIRB). As part of these changes, temporary residents could purchase Real Estate in Australia without having to report or gain approval from the FIRB and would allow the FIRB to concentrate on larger issues in the ‘National Interest’.

As you can see from Chart 2.1 extracted from the Foreign Investment Review Board Annual Report 2010-11, Real Estate transactions do make up the majority of the applications considered by the FIRB, but many questioned the timing of the announcement. It was at the height of the GFC, and two months after the announcement of the First Home Owners’ Boost, designed to help prop up Australia’s Real Estate sector. House prices had fallen 4.7 percent. Opening up the floodgates to foreign temporary residents could be seen as a further measure to help provide extra demand and keep the housing market afloat.

By March 2010, the media was flooded with articles on 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 temporary 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 had grown so intense, that on the 24th April 2010 the government buckled and 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 went to lengths to set up a 1800 hot-line for residents to report suspicious property buyers and help calm a heated public.

The press release by the former Assistant Treasurer, Senator the Hon Nick Sherry said “The Rudd Government is acting to make sure that investment in Australian real estate by temporary residents and foreign non-residents, is within the law, meets community expectations and doesn’t place pressure on housing availability for Australians.”

According to the FIRB Annual Report 2010-11, “As of 24 April 2010, temporary residents residing in Australia are no longer exempted from notification of proposed acquisitions of established residential real estate for their own residence, established residential real estate for the purposes of redevelopment, new residential real estate and vacant residential land. Temporary residents were previously exempt from April 2009 under the changes announced in December 2008. ”

The Financial Year 2010/11 is the first full year temporary residents must apply to the FIRB and where records have been kept. It may never be known just how many temporary residents purchased Australian Real Estate in the years 2008/09 and 2009/10.

» Foreign Investment Review Board Annual Report 2010-11 – Foreign Investment Review Board, 20th April 2012.
» Government Tightens Foreign Investment Rules for Residential Housing – Assistant Treasurer Nick Sherry, 24th April 2010.
» Australian Federal Government gets tough on foreign ownership rules – News Limited, 24th April 2010
» Real Estate Investment by Foreign Residents : Top Secret – Who Crashed the Economy, 4th January 2012.
» Australia for Sale – Who Crashed the Economy, 27th March 2010.
» Foreign investment is overheating our property market – The Punch, 10th April 2010.
» Secret government business – The Age, 30th December 2011.

The update features a graph showing Monthly Transaction Volumes and gives the following commentary, “Our estimate of transaction volumes have been updated to January, however with the seasonally slowdown in market conditions over both January and December, it’s difficult to gauge how market demand has changed this year.”

While RD Data is correct in suggesting the months of December and January are historically slow due to Christmas, it is interesting to note January 2012 transaction volumes are down significantly from January 2011. It will be interesting to watch this space to see what volumes do in the coming months. RP data said leading up to December it was clear buyer activity had stabilised, and “we would expect the number of sales to increase on the back of lower interest rates.”

The Housing Industry Association (HIA) and RP Data yesterday jointly released its April update to the HIA-RP Data Residential Land Report. Over the year to December 2011, the number of residential land transactions have fallen 27 percent, and according to the report has hit a fresh low. HIA Chief Economist, Harley Dale was quoted in the report saying “The volume of residential land sales has been below the previous trough set during the GFC for five consecutive quarters now.”

“Over the five quarters to December last year land sales ran at a volume 40 per cent lower than their long term average.”

Tim Lawless added his belief that the vacant land market conditions are the weakest in more than decade.

Switching back to the RP Data’s April update, Tim Lawless flicks up the following chart on Housing Finance Commitments, but I fail to hear any mention on it in his commentary.

It is the same graph we presented in our last post and shows mortgage approvals are at levels similar to the mid 1990′s. As the majority of buyers need to get a loan for their property purchases, the downwards trend correlates with transactions.

The expansion of credit contributed to stellar house price growth throughout much of the last decade and quickly ground to a halt during the GFC as consumers became more debt and risk adverse. The peak in January 2010 was due to Rudd’s First Home Buyers’ Boost, a short-term stimulus according to Treasury that 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.

This federal stimulus ended in December 2009. Some state based stamp duty exemptions ended in December last year. House prices have been falling for over a year and it’s hard to see any driver outside of more stimulus or potentially a significant cut in lending rates that would contribute to a recovery. Near zero interest rates in many other countries have failed to halt the decline in house prices as the burden of high household debt scars potential borrowers.

Based on data from housing corrections in other countries, falling transaction volumes is the canary in a coal mine and leads a decline in prices.

» Australian Housing Market Update – April 2012 – RP Data, 12th April 2012.
» Vacant land market weakest in more than a decade – RP research blog, 20th April 2012.

This is the statement Luci Ellis, Head of the RBA’s Financial Stability Department made last week in her address to the Federal Reserve Bank of Atlanta 2012 Financial Markets Conference about the US housing ‘meltdown’. According to a graph shown during her address, the number of Australian households ahead with their mortgage repayments greatly exceed that of America over the last decade. But, it wasn’t shown by how much.

Back home, Australian’s appear to be heeding this advice. Household’s had a poor record of savings for most of the last decade, in some cases spending more than earned in the quest for the great Australian dream. The twelve months immediately following the collapse of Lehman Brothers saw witness to a surge in the household net savings ratio to around the 10 percent mark, and has remained at this level ever since. It is considered a reasonable portion of these savings have been ploughed into mortgage repayments as the attitudes towards debt change following the GFC and the US housing bust.

But with housing prices falling for over a year now, it would appear another group of Australian’s have found an even more effective measure to avoid getting into negative equity. They have decided not to leverage up into an asset bubble in the first place.

Home loan approvals for owner occupied dwellings in February is down another 2.5 percent, seasonally adjusted, according to the Australian Bureau of Statistics. This comes after a little rise last year as some first home buyers’ locked in state based stamp duty exemptions before they expired at the end of the year.

A look at home loan approvals excluding refinancing show the market is still the doldrums with approvals hovering at levels experienced during the late 1990′s. A sharp roll-off started in 2008 as the GFC took hold and reached its trough as the Rudd Government announced the First Home Owners’ Boost and the RBA started slashing interest rates. This buoyed the market until the grant ceased at the end of 2009.

With the debt adverse consumer who chooses to sit sensibly on the sidelines or with others who simply cannot access a mortgage at today’s home prices, it is unclear what, if anything, will plug the decline in house prices. Housing grants and stimulus appear to work, but they are not sustainable or in the the best interests of a healthy market.

» Moderator’s Opening Remarks for Panel Discussion on Mortgage Finance – Luci Ellis, RBA, 11th April 2012.
» 5609.0 – Housing Finance, Australia, Feb 2012 – Australian Bureau of Statistics, 11th April 2012.

China has just reported the slowest economic growth in three years with GDP falling to an annualised growth of 8.1 percent for the first three months of this calendar year.

Late last year, under the headline “Chinese prop up property market,” the Australian Financial Review suggested the Chinese were the only thing keeping Harry Triguboff’s “cement mixers turning”.

This week at the opening of Meriton’s Vantage apartment block in Rhodes NSW, Mr Triguboff said interest rates where too high, demanding the RBA’s governor Glenn Stevens to drop rates, “He has to drop. I can’t believe it’s that high.”

He told the Australian Financial Review, “It got to a stage [last year] where I had 85% of purchasers who were Chinese, and now it’s down to 65%.”

“We’re very happy with Chinese coming here, but we must have our own.”

If we assume there hasn’t been a surge in domestic buyers as interest rates are apparently too high (not the price and leverage required to purchase one), then the figures can only mean one thing. Fewer Chinese are buying Harry’s apartments. Could falling house prices back in mainland China, have the Chinese questioning if property always goes up?

In late 2008, the Rudd Government made administrative changes to Foreign Investment Review Board (FIRB) legislation which could be seen as one measure to encourage foreign buyers to purchase our property and help keep demand up for our ailing property market.

If this is the case, it could be another lifeline gone in the who wants to be a property millionaire game show.

» China Property-Sales Drop Shows Risk of Hard Landing – Bloomberg, 14th April 2012.
» Home prices in most cities stop growing in Feb – China Daily, 18th March 2012.
» Beijing housing prices 21% down in Q1 – China Daily, 9th March 2012.
» Real Estate Investment by Foreign Residents : Top Secret – Who crashed the economy?, 4th January 2012.

A report released last week from the McKell Institute showed seventy precent of under 35s can no longer afford to buy a home.

He told Sky News he has yet to discuss the idea with the Gillard government, but we believe further support should be welcome. This time last year, reports surfaced that the Gillard government was in talks with Senior Federal Labor figures and unions about winding back negative gearing as one way to tackle housing affordability.

A two day tax forum in October last year re-ignited the debate where Saul Eslake, an economist for the Grattan Institute said our tax system was “riddled” with loopholes, taking aim at negative gearing. “There is no country in the world that allows negative gearing as generously as the Australian tax system does” said Eslake.

Negative gearing is thought to be one aspect of Australia’s flawed tax system which has caused a large mis-allocation of capital to be directed towards the unproductive residential property sector. On many metrics, Australia’s house prices today are more unaffordable than at the peak of the American housing bubble.

The much ignored Ken Henry tax review in 2009 warned elements of our tax could affect macroeconomic stability. It stated “The existing tax system is also likely to encourage excessive leveraging in pursuit of tax-preferred income. Where capital inflow is used to finance less productive assets, this can also affect long term macroeconomic stability. In this regard, recommendations to provide a more neutral tax treatment of savings, to reduce the benefits from negative gearing and eventually abolish stamp duties on housing would also help improve macroeconomic stability.”

The report recommended a more uniform savings income discount be applied across most asset classes to prevent tax distortions created from negative gearing.

Figures from the Australian Taxation Office show Australia had 1.7 million loss making property investors in 2008-09, losing collectively $6.5 billion.

9th April : Wayne Swan has quickly entered the debate, ruling out any changes to negative gearing.

» NSW leader John Robertson calls for debate on changes to negative gearing – The Australian, 8th April 2012.
» Wayne Swan stands by negative gearing – The Australian, 9th April 2012.
» Negative gearing still on the chopping block agenda – Who crashed the economy?, 5th October 2011.
» Negative gearing rort added to endangered species list – Who crashed the economy?, 21st April 2011

But for the 27 percent of the first home buyer cohort who followed this advice the year before last, their homes are worth less than they paid for them, potentially leading to a situation known as negative equity.

According to RP Data, negative equity is on the rise around the country as we settle into our second year of house price falls. In the December 2011 quarter, 6.4 percent of homes were worth less than the purchase price, up from 4.9 percent in the preceding quarter.

Last month, RBA Head of Financial Stability, Luci Ellis briefed the Australian Mortgage Conference on prudent mortgage lending standards. Highlighting why some households default on their mortgages, she told the conference unemployment, especially during a recession was one cause. “So the really large upswings in mortgage arrears rates have, perhaps not surprisingly, tended to occur at the same time as large increases in unemployment.”

Additionally, falling home prices was cited as another factor for rising arrears, something she believes we need to be “alert” of. “If something bad happens to you and you can no longer afford your repayments, it is better to sell and have a bit left over after discharging the mortgage. If the property value has fallen below the loan balance, though, you are in a much worse situation. You can’t easily sell if you are in trouble or even if you just want to move to a cheaper area or a more appropriate home, or to where the jobs are.”

In conclusion, Ellis stresses Australia does not have the “ingredients” ripe for a US style housing crash, but warned mortgage lenders needed to remain prudent. ” It must be hard to resist the disappointed customers who just want to borrow that bit extra to purchase their dream home, especially when the loan officer is also trying to make budget on new loan approvals. But in the experience of the United States, we have seen what can happen when lenders yield to that temptation.”

Earlier this year we wrote on NSW repossessions rising 22.5% in 2011, including a link to a story on channel 7′s current affairs program Today Tonight called mansion repossessions..

On Friday night, it was Channel 9′s A Current Affairs turn with a story titled “Home Buy Bargain.” According to the story, repossessions are rising sharply around Australia in recent years. The story features Paul Flynn, who specialises in mortgagee properties saying he’s never seen anything like it. Read the transcript or watch the video here.

With house prices continuing to fall, mortgage repossessions on the rise and RBA Head of Financial Stability, Luci Ellis stressing mortgage lenders need to be prudent, just the opposite is happening. In a News Limited article, published last week titled “HOME OR BUST: Default fears as Australian banks return to high-risk loans”, it reports on RateCity data suggesting almost 70 percent of mortgage lenders are now writing home loans with deposits as small as 5 percent. This compares to 50 percent, two years ago. With little to no growth in mortgage lending, banks are resorting to higher LVR to try to encourage growth. But this comes at a very risky time in our economy.

Just yesterday, The Australian published an article, “Australian housing market just a jobs crisis away from collapse.” It paints the picture of weak housing market with sales turnover at 16 year lows, listings up 23 percent over the past year and construction of new homes down 25 percent since the stimulus ending in June 2010. But, as the article states, the best leading indicator is mortgage approvals. Most people require a loan to purchase a property. Mortgage approvals have plunged 25 percent since the first home buyers boost ceased.

According to the article, despite a very weak market, falls have been somewhat benign as arrears remain low. The Australian writes “People losing their jobs or running into trouble with their own small business is the main cause of people falling behind on their mortgage. Forced loss of employment has been very low until now.”

“Rising unemployment could unleash a wave of distressed sales in the housing market. With the fundamentals of housing supply and demand already so weak, the price movement could be much larger than the present downward drift, with which the Reserve Bank appears comfortable.”

Last month we reported on Roy Morgan’s private unemployment gauge – ABS unemployment figures ‘defy belief as job losses mount’- Roy Morgan. Historically, both the ABS and Roy Morgan indexes have tracked each other, but in recent months Roy Morgan’s index has taken a turn for the worst. The separation is thought to be attributable to the different measures used to create each index, and suggestions the ABS figures are likely to be lagging.

Rising unemployment is consistent with expectations. Falling house prices are hammering consumer confidence through the negative wealth effect, causing consumers to tighten their purse strings. With jobs underpinned by discretionary spending, and you don’t have to look to deep at the retail sector to see the consequences unfolding.

Do you expect house price falls to start accelerating this year with increases of unemployment? If so, by how much?

» Homes with negative equity on the increase – The Sydney Morning Herald, 20th March 2012.
» Property price falls lock homeowners into loans – Adelaide Now, 20th March 2012.
» Prudent Mortgage Lending Standards Help Ensure Financial Stability – Reserve Bank of Australia, 23rd February 2012.
» HOME OR BUST: Default fears as Australian banks return to high-risk loans – News Limited, 15th March 2012.
» Australian housing market just a jobs crisis away from collapse – The Australian, 19th March 2012.
» Home buy bargains – A Current Affair, 16th March 2012.