As widely feared, Chinese appetite for Sydney and Melbourne real estate has caused house prices to surge in Australia at the fastest pace since records started 18 years ago.
According to data released today from RP Data, Sydney house prices have increased at an unsustainable 15.6 per cent year on year, followed by Melbourne at 11.6 per cent. Both Sydney and Melbourne left the rest of the country for dead and together, helped push up the combined capitals by 10.6 per cent.
On the weekend, under the headline House prices enter danger zone, the Australia Financial Review warned “House price growth picked up again this month and expected further increases risk pushing prices into the danger zone that previously has led to a market correction.”
The AFR warned, “Australia has now overtaken Canada as the most stretched housing market among English-speaking countries.”
With such a large bubble at hand, both the Australian Government and the Reserve Bank are now sitting on their hands – like a stunned mullet. Neither want to be blamed for doing something that will tip an increasingly unstable system, plunging Australia into a significant recession. Both would rather let surging unemployment or a China hard landing do the unpopular dirty work for them.
Canada is one of three countries in the world with negative gearing and until recently held the record for the largest housing bubble in English speaking countries, dethroned now by Australia. It has recently axed an immigration visa allowing Chinese to snap up its real estate citing it posed significant economic stability risks. Prior to making the decision, the Canadian Government opted to prudently freeze the visas while it carried out the 2 year inquiry.
The Abbott Government last month has asked the House Standing Committee on Economics to carry out a similar inquiry, widely seen as window dressing – demonstrating to the increasingly concerned Australian public that it is actually doing something, while allowing foreign investors to continue to flood the market. Many believe it is simply delaying tactics, with a final report due on the 10th October 2014. Any recommendations could take months to implement, if a decision is made at all.
Documents from the Reserve Bank of Australia, released under FOI, indicate the central bank was looking at macroprudent controls, similar to what New Zealand has implemented – the other country with negative gearing and a sizeable overheating housing market. But has now decided to do nothing. RBA Deputy Governor, Dr Philip Lowe transparently told a Housing Standing Committee on economics:
More generally, there is a lot of activity going on in different countries around the world in the macroprudential space and that is going to give us an opportunity to observe how those things work out. My tentative conclusion must be that it can work but it creates distortions, and in the end the distortions are quite costly and people work out how to get round the distortions. Macroprudential tools are very much like the tools we used in the 1970s and we ended up deciding we did not like those very much because you restrict one class of lenders, and the financial system is very flexible and another class of lenders comes up to fill.
But the Reserve Bank Governor does have a similar warning to that of the Australian Financial Review. In the same grilling from the House Standing Committee, RBA Governor Mr Glenn Stevens expressed the following concerns:
Credit to households for investment in housing is eight or nine per cent a year. I would say that is probably fast enough. I repeat what I have said before that in Sydney in particular—but not just Sydney now—there has been a very big run up in investor activity. That is okay, but people need to keep in mind that prices do not just rise; they can fall and have fallen. We need to be careful that we do not take on too much leverage on the expectation that ever-rising prices for the asset make that work out, because I think that would be a dangerous assumption
Blame Games
Both parties are sure to blame each other when the inevitable occurs.
In an interview with Neil Mitchell’s 3AW in September last year, Prime Minister Abbott shunned any responsibility for the Housing Bubble, saying it is up to the Reserve Bank to manage. “I am sure the Reserve Bank is very conscious of the fact that there are a whole range of things that need to be managed here and I would be confident that the Reserve has got its eye on housing prices and will appropriately manage the level of interest rates.”
When the House Standing Committee asked Mr Stevens about Foreign Investment underpinning Australian house prices, Mr Stevens quite rightly reminded the committee, “With all due respect, that is a matter for our parliament to manage.”
Monetary Policy Decision
The Reserve Bank of Australia decided to leave the cash rate unchanged at a record low of 2.5 per cent today.
In September last year, under the title, “Housing bubble has RBA backed into the corner” I expressed my concerns the RBA had just lost control of momentary policy:
If you can believe the real estate spruiker, emergency low interest rates have put a fire under Australia’s housing market. And as Australia already suffers the side effects of a large housing bubble developed over the past decade, investors will need to use extreme caution as signs emerge Australia’s central bank has just lost control of monetary policy.
We live in interesting times.
» Capital city home prices surge most on record according to RP Data – Rismark index – The ABC, 1st April 2014.
» House prices enter danger zone – Australian Financial Review, 29th March 2014.
» Report into foreign investment in residential real estate could come too late – Who Crashed the Economy, 19th March 2014.
» Housing bubble has RBA backed into the corner – Who Crashed the Economy, 22nd September 2013.
Question-
When all of this investor speculation ends, and it will end, who will be the ones stepping in to buy at these idiotic prices?
The banks will end up with a lot of it through foreclosure.
Now that’s something they like.
They can then sell for cents in the dollar. This is good for the bank because they didn’t lend the foreclosed anything.
They created digits on a screen through a process called rehypothecation and put them into an account with the owners name on it. This allowed the owner to buy the house.
The bank didn’t lend out any money.
http://www.youtube.com/watch?v=ti9_SSwvaes&feature=youtube_gdata
prepper
Here is another sign of desperation and ‘one-sidedness’of the AUS property market. I recall there was a similar article to this 12 months ago in The Advertiser. The RE agents for Llyeton Hewitt have now decided to ‘to take away’ previous price guides, and meet the market. You would think after 6 years on the market they might have realised this earlier ??
http://www.adelaidenow.com.au/news/lleyton-hewitt-places-west-lakes-mansion-on-market/story-e6frea6u-1226871337785
*falling* \ deaf ears.
When the whole thing comes crashing down we can expect a lot of finger point and no substantial reform.
My suggestion is this:
1. We insist on being able to vote via the internet. This is the thin edge of the wedge for point 2.
2. We insist on being able to vote on issues, not on politicians.
3. We can veto any legislation by popular vote.
4. We float interest rates, Hong Kong style.
5. Bye bye NG
A day in the life of Australia.
* Bigger housing bubble to push up costs and threaten more jobs.
* BP to close Bulwer Island refinery. 355 Jobs go. Australia’s oil security threatened.
* Goodman Fielder brings forward 300 job cuts.
* Philip Morris cuts 180 jobs and cease manufacturing in Australia.
* Bevilles enter voluntary administration. 477 employees facing redundancy.
* “BHP Billiton coal president Dean Dalle Valle has revealed that some of his Australian workers cost 50 per cent more than their American equivalents, underlining the high cost nature of the local industry.”
Wonder what tomorrow will bring….
@Pete
Good point, and I too learned of the job losses you have mentioned today on the radio.
And this is what I can’t make any sense out of these crazy property prices.If property prices keep going up, then those of us still lucky enough to have a full time job, are going to justifiably ask for wage increases. Employers can only pay so much wages, and if businesses (especially small businesses and retail) are doing it tough (as there are too many people mortgaged to the eyeballs therefore they have less discretionary spending to spend on other things), then employers will either will not be able to increase wages, go bust or move offshore to low cost nations, especially China.
It would be fair to say that both the federal government and the reserve bank are playing Russian Roulette with the Australian economy.
@ Chockolate
Point 1, 2 and 3.
Do you think it is interesting to vote for EVERYTHING on parliamentary debate? I mention this somewhere before (not on this site).
Some foods for thought:
1) What happen when there is not enough quorum?
2) How do you determine legitimacy when one have majority of non-participating constituents or even worse abstain-on-issue constituents?
3) How do you keep the integrity of the system? (Remember the BitCoin issue recently?).
It is an avenue that require much more thinking, planning and work. First of all, one might want to resolve the issue(s) underlying the NBN before even going with anything more esoteric than that like online voting.
Point 4, can you be more specific? There are LIBOR, SIBOR etc that are “floating” in a sense.
Point 5, I already commented on that previously.
Before anyone respond (if any), please refer to this reading:
“Cities @ Crossroads: Digital Technology and Local Democracy in America”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1781484
Working paper is as of 2011 by Jennifer Shkabatur. Nothing new.
Boeing announces 300 jobs to go at Port Melbourne.
http://www.smh.com.au/federal-politics/political-news/gst-must-rise-as-deficit-decade-looms-for-budget-says-treasury-boss-martin-parkinson-20140402-35yqy.html
“Treasury boss Martin Parkinson says the goods and services tax will have to be boosted or broadened if the budget is to have any hope of returning to surplus.”
Real incomes unlikely to grow in the next decade, “That meant that by 2024, real income per head would be $69,000, much less than the $82,000 per head Australians would have come to expect”
And that assumes best case that we don’t go into recession, but rather has 33 years of continuous economic growth!!
“Healthy addiction.”
https://www.youtube.com/watch?v=K_nkAv1oFXo
@Yusuf,
These details that, while important, are not reasons enough for maintaining a system that hasn’t changed significantly since the days of horse and cart.
1. Not enough quorum, I’d say no veto.
2. Then the proposal should be at a constituency level. No need for a national referendum to decide if SE Queensland gets daylight savings.
3. One vote per person, this is democracy, not a virtual currency. Multiple votes is fraud, just as it is now. Moreover, voting would be anonymous only in the same way your tax return is. Known, but protected by legislation.
4. I’m not suggesting a particular model, there isn’t a ‘correct’ one. What we do know is what happens when a group of central bankers decide these things. The rates need to be determined by the usual market factors of supply and demand to reduce the risk of bubbles occurring.
Now that I’ve said all that, I’d be the last person to want to dictate any of these particular changes either. The decisions should be evidence-based and peer reviewed, something political decisions most certainly are not.
After so many articles on the indifference, corruption, incompetence etc. etc. of government, I am at awe at voter apathy of it all, considering the Liberal/Labor Parties monopoly still continues to govern after decades in power of proving themselves unworthy. Therefore, the voter is 80% to blame for Australia’s economic woes, considering that is the percentage that votes for the dominant parties.
@ Chockolate
Thank you for your opinions on point 1 and 2.
On point 3, I am referring to the security and integrity of the supposedly “Online Voting” system.
http://www.forbes.com/sites/andygreenberg/2014/02/25/bitcoins-price-plummets-as-mt-gox-goes-dark-with-massive-hack-rumored/
On your point 4 supply and demand thingy, I would invite you to read “Debunking Economics” by Steve Keen. Part I will do to gain further insights.
“evidence-based and peer reviewed”? I used to think that way too but if you have gone through hell (twice) and see ghosts in the supposed-to-be angel group, one would be quite sceptical with that comment ….
Oh well, it must be just me.
@THEO, perhaps everyone is too busy paying down their debt to do anything about it.
The Banks will keep lending till it all falls apart and why not?…the difference here is that they don’t care if it crashes unlike the rest of the world because all the idiots they lend to have been forced to take out mortgage insurance…so when it falls, and it will, they just are able to hit any “best bid” to be covered by the loss difference by insurance companies…the biggest companies at risk when it crashes aren’t just banks but insurance companies..that’s why they are happy to be lax about their lending standards and that’s why its going to fall hard…..the buyers who have got this sorta exposure with high debt will be ruined….
@Hypergoldie. If there was a crash, the whining would be intolerable. All of those who thought they had million dollar investments, all of those who lost their equity, all of those who were under water, all of the real estate agents, all of the property developers. This is why politicians are desperate to make sure it doesn’t happen.
@David.C
Good post, and I agree with what you say, but with unemployment rising rapidly and no job security, how are people going to be able to commit to a 25 year mortgage to be able to even buy a property? Also with those people lucky enough to have a full time job, if a large chunk of their income is going into servicing their mortgage, it leaves less money for discretionary spending, which in turns hurts other industries, which leads to more job losses.
This whole propety bubble is just one big vicious circle.
What what WHAT IS THIS!?!?!
http://www.macrobusiness.com.au/2014/04/report-negative-gearing-is-on-the-chopping-block/
Hmm I’d be surprised if Sloppy and Tone allow this to burst the bubble on their watch.
update from N Ireland – after 7 years of falling prices, and 60% losses across the board. We seem to have turned a corner and seeing modest and sustainable rises (5% pa).
Though 40% of people are still in negative equity, with many people holding 200k mortgages on houses worth 90k.
I still can’t believe the Australian market is holding up. Now that mining is waining, it appears you have an Irish style property bubble.
Agree with you David C, but in the end of the day the Govt is now broke as well so they can’t afford to prop up the mkt and now the RBA is starting to get worried, I mean they all want and need the property sector to take off and that’s why the Govt is reluctant and probably won’t do anything….but in the end of the day water finds its own level and nothing can stop the impeding sell off, once punters panick then it over. No one will want to work their whole life to pay of a mortgage…people are actually sacrificing their collective dreams and future for just the dream of owning a home…with prices like now that dream is a nightmare, they think their house will double or perhaps triple, I say to mate, great, if your looking to cash in and move out of the country, cause you think your next property you want to swap into hasn’t also done the same?…so net net your still behind the 8 ball…
The economy has been undermined by outside forces trying to drive labour costs down.
We only have to cast our memories back to see comparisons to increased costs of labour, by greedy fat cats who earn more and expect others to earn less.
The liberals have either been duped by the business elite or are complicit in the economies condition.
Depending on which side of the fence you are on liberal or labour the excuses are rife.
I am dept free because I have watched the economy with suspicion.
Let’s see who was right when house prices correct Inspite of dodgy property schemes trying to keep the biulding industry ticking over.
Good to hear that there are some sharp “pair” of eyes out there. Keep a good stamina, ppl!