Up, down or sideways? Debate has intensified about the future direction of Australia’s property market since the RBA announced a 25 basis point cut to the official cash rate this week. It’s not the first cut we have had. Australia has experienced five downward adjustments in monetary policy since November last year as our economy starts to become increasingly sluggish.
What fuelled the debate this time was a cut when there is signs our housing market is starting to take off again – a problem when you have just one leaver to control and increasingly volatile and fragile economy.
On a global level, economies around the world are starting to slow after years of spending beyond their means and then finally propped up with stimulus. A rapid slowdown in Europe is having a knock on effect to China, who resorted to a fixed asset investment boom to bridge the gap of falling exports when the GFC first hit.
The end of the mining boom has seen super-heated commodity prices come out of the blast furnace and begin to cool causing a blow out in our trade deficit to $2.03 billion in August. But as commodity prices tanked, the perceived safety of Australia and high interest rates relative to the rest of the world caused the dollar to remain elevated. The high Aussie has kept relentless pressure on other sectors such as manufacturing, tourism and education. The rest of the economy is and will still be suffering the effects of Dutch disease for an extended period yet. There are now signs, unemployment has been trending up.
Interest rates were slashed to near GFC levels for a reason. But like sheep being herded through the open gate to the slaughter house, new entrants and speculators in the housing market has no idea what is ahead, and no reason to be cautious. The shepherd says rates are low – it’s never a better time to buy, and when one sheep enters, the herd follows.
This week there was some talk of the mining boom finishing, and the housing boom starting. Reality is, Australia already has a large housing bubble. It didn’t start recently, but a decade or two ago. It has almost single handily sent household debt sky-rocking to about 150 per cent of household disposable income. This has seen growth in housing finance to plunge to 35 year lows and new housing starts to 15 year lows. Construction activity fell last month at the sharpest rate in 12 months.
In Melbourne, what some consider the epicenter of the boom, data from the Department of Sustainability & Environment show housing transfers for the 12 months to September is at the lowest pace in the 10 year history of the series and more mortgages are now being discharged than created.
Unfortunately, the housing market for the past decade has not operated on fundamentals (or affordability), but on confidence. When interest rates are close to record lows, Shepherds announce to the herd, “activity is on the rise” (but avoid mentioning the scary levels of debt being locked in for 30 years) and you have the property lobbyist recipe for short term success.
While Australia is fixated on their housing achievements and strive to make it bigger, other governments and central banks with the knowledge – the bigger the bubble, the bigger the bust, are trying to cushion the blast of an inevitable housing blow up.
Singapore’s new measures
This week, Singapore’s central bank, the Monetary Authority of Singapore (MAS) has taken such action to help prevent its citizens over extending themselves. Effective from the 6th October 2012, Singapore will limit all new residential loans to 35 years. Any loan over 30 years in duration or with a period that will extend beyond the retirement age of 65 will have tighter loan to value ratios. For this group, the maximum LVR will be 60 per cent for a borrower with no other residential property loans or 40 per cent for borrowers with one or more residential property loans.
MAS Chairman and Finance Minister, Mr Tharman Shanmugaratnam said “Monetary conditions worldwide are far from normal. QE3 and low interest rates have made credit easy, but this will eventually change. We are taking this step now to require more prudent lending, and will continue to watch the property market carefully. We will do what it takes to cool the market, and avoid a bubble that will eventually hurt borrowers and destabilise our financial system.”
Boomer to bust
While Singapore was taking action, CPA Australia was releasing an alarming report titled “Household savings and retirement. Where has all my super gone?”
The report shows Australians “approaching 65 have sharply increased their debt levels. Their average mortgage balance and other property debt has more than doubled since 2002 and credit card debt is up 70 per cent.”
In the 8 years to 2010, those approaching retirement in the 50 to 64 age bracket had household super nest eggs grow by 48 per cent and property assets growing by 58 per cent. But over the same period, property debt increased by 123 per cent.
Once retired, this age group is being forced to take lump sum payments to pay down their debts, leaving practically nothing left and then opting to go on a pension.
This speculation by the boomer generation has not only undermined the superannuation system but is set to leave tax payers with a growing hole from burdening pension costs.
Alex Malley, CEO of CPA Australia said “Lump sum superannuation benefits are being treated as a windfall and being used to pay for the lifestyle that’s been lived now instead of being put aside to provide income in retirement.”
This has opened debate on should our superannuation scheme allow lump sum payments in retirement? And with reports off younger generations halting mortgage repayments to trigger access to super under hardship arrangements, addressing the actual problem of property speculation would be fixing the root cause of the problem.
Dead Cat Bounce?
Will lower interest rates fuel a new housing boom? Or is there simply too many head winds?
On many metrics, the Australian economy is in a worst state now than during the GFC and the government has not (yet) come to the party with a new housing boost/grant.
» Household savings and retirement Where has all my super gone? – CPA Australia, October 2012.
» MAS imposes cap on housing loan tenures – Business Times, Singapore, October 6th 2012.