Possibly driving an already weak economy into recession.
By Mark Hansen, Australia, MarketCap:
Every day, we have investment banks and others telling us that the Australian housing party is over. Estimates for price declines over the next year or so vary from 7.5% to a plunge of 25%.
Even the Reserve Bank of Australia is in on the act. But it is trying to put a positive spin on any downturn after having for years encouraged new house and apartment construction as being “good for the economy.”
The full impact of new housing supply will not be felt for a year or so. It is almost certain that there will be a major surplus when everything now under construction is complete. This is a bad omen for the Australian economy, where building and selling of houses and apartments has been playing an outsized role.
Macquarie Bank has estimated that new supply will be greater than 200,000 dwellings, whereas demand will be 170,000 to 180,000.
The effect: downward pressure on both house prices and rents; and possibly, an already weak economy driven into recession. There are many signs of a coming downturn:
- For Sale signs are springing up everywhere.
- Auction clearance rates continue to decline. In parts of Sydney it is down to 40%.
- More properties are now being bought by investors, mostly domestic, than by owner-occupiers.
- Household debt has soared, it is now around 140% of income.
- The house-price-to-income ratio is a stratospheric 6.4 times.
- Rental yield is now around 1% after costs.
- Some banks have raised mortgage rates in an attempt to calm the market and are charging investors more than owner-occupiers.
- The big four banks have recently raised $18 billion to help cover potential losses from the housing market.
- Some sell-side analysts now have the big four banks as a sell because of housing exposure.
The situation could quickly become very grim. As prices decline, people start to move into a negative equity position. If the bank takes possession of the house and sells it, any outstanding debt still has to be repaid. The alternative is bankruptcy. A downturn is accelerated by those who are forced sellers. Job losses too put further stress on mortgagees’ ability to pay.
Read more about the Australian housing market here and here, and about banks here.
This is not a good time to buy a house in Australia, particularly in Sydney and Melbourne; the cities that have seen the biggest gains. In fact, I know people who have sold and are now renting. They expect to buy back in at lower levels.
The financial sector makes up around 50% of the Australia stock market. In turn, the big four banks make up around half of the financial sector. Most of their income comes from mortgages on residential and commercial real estate. They have had a great year in earnings, but share prices are well off the March 2015 highs. They currently look like a risky investment, especially with potentially lower future dividends. By Mark Hansen, Australia, MarketCap
Ominous signs for one of the few bright spots in the weakening economy. Read… What a Million Dollars Buys in Australia’s Housing Market
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Housing booms and busts are taking place around the world, with the low interest rate policies of Central Bankers fanning the flames.
“Killing the Host” by Michael Hudson is a must read book for anyone who wants to understand the dire consequences of unleashing the powers of finance.
The power of finance is the power of debt.
Debt is jam today and penury tomorrow.
Tomorrow is here, the repayments are due and the world has reached max. debt.
The power of debt can give the illusion of wealth as can be seen from the housing booms and busts in progress around the world:
Same houses, higher prices, higher mortgages and rents, less disposable income
Bankers have a ready market for their debt products during the boom, but from all other aspects the housing boom is bad news.
Fictitious wealth is generated during the boom that disappears during the bust.
All that is left are the interest payments to the bankers, draining the economy.
Pretty much the same as every other asset bubble.
A chance for bankers to shift their debt products and little else.
Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.
After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.
When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were occurring.
The end result 2008.
With this total failure of monetary policy to control an economy and a clear demonstration of the broad brush effect behind us, everyone decided to use the same idea after 2008.
Interest rates are at rock bottom around the globe, with trillions of QE pumped into the global economy.
The broad brush effect has blown bubbles everywhere.
We know what comes next.
It’s almost unbelievable that the banking sector is half the stock market. The Aus banking sector is a backwater in terms of international finance. So what we’re really saying is that the stock market is the mortgage market.
Can anyone think of of an economy with so many eggs in one basket?
3 of the big 4 banks in Australia are well in the top 20 of the world banks in terms of market capitalization.
That doesn’t surprise me. There are only four and someone has to lend the money to result in a shabby town house outside Sydney selling for a million AUS.
The problem is 70 % of the Aus banks assets are Aus mortgages.
They are big but not diversified.
No doubt Aus is a nice place on the coast- but you have a banking bubble built on a housing bubble built on a mining bubble.
We know what comes next, now it is just a matter of when….this has already gone on longer than it should have.
The madness always lasts longer than any rational mind can comprehend and along the way those who point out the obvious are ridiculed and often forced out of the picture before the crash finally comes.
The people that pointed out the problems with sub-prime had been dismissed years before the crash in sub-prime finally came and big profits and bonuses were made before that crash eventually came.
With reward structures as they are, i.e. salaries and bonuses with no mechanisms for personal losses, you make money riding the bubble, its other peoples money you are gambling with.
Even with the post 2008 changes, with part of the bonus deferred, you might as well still ride the bubble to maximise your gain and this is what they are doing.
Commercial property is getting smashed in Perth at the moment, housing is holding up quite well. I am obviously talking about Perth itself,property in mining towns has been smashed with more pain to come.
Australian property feels like the moment the coyote sprints off the cliff, loses momentum and is levitating in mid-air!
This is going to be a bust for the ages.
After the biggest real estate boom ever in Japan, that burst in 1989 and has left the economy stagnant ever since, we might have learned our lesson about real estate booms.
After Tulip Mania in 1600s Holland, we might have learned our lesson about financial bubbles.
Well I guess it was about time for another one of those “the sky is falling” articles about real estate in Australia.
A few comments:
•For Sale signs are springing up everywhere.
Not in my local area. There are only a few properties for sale. There have been a good number of properties for sale during the spring sale season. Not more than usual and most of them have sold.
As I have posted before only one house in the area didn’t sell and that had previously not sold.
The current situation is mixed. A house sold for 6% more than the asking price after a few weeks on the market. Is that a ‘crisis’? Another house just sold after only a few weeks on the market and I’m waiting to see the price.
Some weakness is being shown in the A$1 million plus range which is about 1.5 times the normal price for the entire suburb where I live.
One house about 500 meters from us just reduced the price from A$1.05 million to A$995,000. Another one in the ‘village’ failed to sell at auction (Probably wanted around A$1.1 million+/- – a re-development type opportunity) and then listed for “Buyers over A$950,000”. It sold within a week.
As for houses for rent in the area I can only see one house and one unit for lease.
•The house-price-to-income ratio is a stratospheric 6.4 times.
Guess that depends on where you buy. In there areas where the Chinese have bought the ratio would even be higher, but then when you pay cash, it doesn’t matter.
In our suburb the average price of a house is around the median price for Melbourne, but the suburb is huge and takes into account the large number of new houses being built and sold in ‘the sticks’.
The wife and I drove down to the coast last week and on the way there you could see nothing but huge tracts of former farmland being turned into housing. Stinky little blocks of land in the 500 – 600 square meter range.
These houses are not priced at even the median price. People are buying them like crazy. Melbourne needs housing for over 100,000 new residents a year.
•Some banks have raised mortgage rates in an attempt to calm the market and are charging investors more than owner-occupiers.
•The big four banks have recently raised $18 billion to help cover potential losses from the housing market.
Ah yes, the banks. If you ever want to see how the lack of competition works in a mature economy come to Australia.
The banks here are some of the profitable in the world with ROE’s in the 15% area.
Yes, the regulators are concerned with the amount of capital the banks have tied up in mortgages and have guidelines for banks to increase the amount of capital to be held against these types of assets.
The banks have not raised ‘rates to calm the market’, but to increase their profits. Why? Because they can. They have a captive customer base that has few places to turn to obtain mortgage financing.
Are you going to refinance and go through the entire process just because the monthly mortgage payment went up A$30 a month on your loan? I doubt it. Where are you going to go when ALL the big banks increased rates and many of the regional ones along with CU’s as well?
The recent out of cycle rate rise by the commercial banks will increase the profits of the big four banks by some A$2.5 billion a year. One bank that started the out of cycle rate increase is even planning on INCREASING the amount of their loan book. They increased their dividend as well.
The margin between the discount rate at the time of the GFC and current date has expanded by about 163 basis points. That is the amount of additional profit banks are currently taking in on variable rate mortgages that was never passed on to their customers.
Where Australian big banks are in trouble is the usual problem areas: international activities and loans to companies. But, no worry there, folks. Just increase the rates on the variable rate mortgage holders to cover the losses.
•Auction clearance rates continue to decline. In parts of Sydney it is down to 40%.
Yes, and those areas are most likely units or as yanks call them, condos. Oversupply and falling prices are the story there and as I have posted before, they are not the entire market.
With huge numbers of these types of properties coming on the markets in the Sydney and Melbourne CBD you’d have to be a fool to buy one: it is a guaranteed way to decrease your wealth.
The things that are most worrisome for the RE as far as I am concerned are:
1. Lack of demand
By this I mean if the population falls as a result of fewer people moving to an area as result of falls in immigration or birth rates.
2. Cost of living
Yes, when it comes to the nuts and bolts the cost of living is one of the concerns.
Everyday costs continue to go up. Water, electricity, gasoline, RE taxes, car registration, food………..
Got the water bill the other day: A$444 for three months. Less than 1/4 of that was actual water use.
Gasoline. Yep, we had our usual price increase the other day. When, you ask? A couple of days before the state holiday. It went from A$1.14 a litre to A$1.399 a litre. Funny, but I don’t remember seeing the price of oil jumping by 25%.
RE taxes or as they call them here in Oz: rates. The have more than doubled in the past 8 years. It used to be one of the few areas that was much, much cheaper than the USA.
Electricity. The next price is probably coming in January. Again it has more than doubled in the past five years.
If there is one main problem with grasping the bearish case for any of the scenarios unfolding it may be this: even a train wreck takes time. From the ‘point of view’ of a computer chip operating at several million operations per second, it takes months.
The real crash in iron ore from 100 a ton to 45 is less than a year old.
The iron majors have reserves and incredibly Glencore sold a few billion in stock ( a bad buy) but the actual effect of all this won’t be felt for another year.
No one expects real estate prices to crash as fast as a stock or a stock market.
For a pure example of how one can be dragged out see Spain. Banks have kept empty condos on the books for years rather than admit the hit.
Yeah, well you know the old saying about a clock and time…………….
Eventually prices will remain steady or fall.
Most of Australia never had anything to do with the mining boom other than negative pressure in the form of increasing interest rates and a higher A$ which never flowed through in the form of cheaper prices for imports.
The price of iron ore is largely irrelevant to most and Australia is not Spain.
“Popularity of house and land packages has exploded to levels not seen in recent years and has included buyers camping overnight for properties and pre-registration for new developments being swallowed up in seconds.
LJ Hooker Werribee and Hoppers Crossing director Adrian McEvoy said his agency had seen a definite rise of first home buyers in the Wyndham market over the past six months.
They have been buying house and land packages, he said, and some bought established properties as investments to break into the market.
He said the higher activity could be driven by the first home owners grant for new builds and record-low interest rates.
“We’re seeing more first home buyers come into the market,” he said. “A lot of them are getting help from their parents, so they’re leveraging off the parents’ house or investment.”
On the other side of the city, Barry Plant Pakenham director Matt Ketteringham said there was a massive increase in first home buyer numbers since the rate cuts in February and May this year.
“Rents have increased and the rates have dropped, so it’s becoming more affordable to pay the mortgage than rent,” he said.
Rising house prices were also pushing buyers further from the CBD, he said.
Pre-registration for Woodlea, a master-planned development just outside Melton, reached its expression of interest capacity of 250 within 45 seconds in July. The 75 available lots, priced from $161,400, sold out the following weekend.”
“Chinese buyers have disappeared from the Sydney trophy home market and Melbourne could be to blame.
As Sydney’s prestige agents scratch their heads at a baffling lack of inquiry among offshore buyers this Spring, data shows China’s cashed-up house hunters are increasingly showing a predilection for a Toorak mansion over a Point Piper waterfront.”
165K for a lot doesn’t sound bad- the really crappy townhouse for 1.2 million A near Sydney looked unbelievable by Vancouver standards, one of the most expensive cities in the world.
The comment that most people had nothing to do with iron ore is a bit funny- most Russians had nothing to do with oil.
Re: ‘in recent years…’ or even ‘six months ago…’
Come up to speed. The Chinese market hadn’t crashed six months ago, nor had Glencore. There is a reason Ben Bernanke on his book tour in Canada, broke protocol and all but told Janet Yellen to hold off on her lousy quarter of a PERCENT rate hike. He thinks China and Brazil are too weak for it. ( They have probably lobbied behind the scenes)
The downturn is accelerating.
If you’e spent any time on this site you know that some very credible people think the credit fueled binge is over. As Marc Faber puts it: all asset classes are over valued.
John and Mary salivating over property does not alter fundamentals. They will the last people left on the chain letter.
Re: Australia is not Spain- the same for different reasons could have been said in favor of Spain before its crash.
Maybe more so now- but that would be a question of what the buyer is looking for.
As I have posted here numerous times: DEMAND.
People outside Australia just don’t get it: Australia’s population is INCREASING by over 1% a year. Much of that is as a result of immigration. Rich immigrants that bring lots of money with them.
The price of iron ore has nothing to do with it.
People need houses to live in.
Melbourne needs to house over 100,000 new residents a year. (2015 estimates are about 110,000). That works out to around 30,000 or more houses a year.
Some of the estimates are already way out of date. One of the smaller areas we drove through on the way to the coast last week had 1100 or so people in 2011. Estimates were for about 2000 in 2021. They’ll hit that 2000 sometime next year……….houses going up everywhere.
Melbourne is expected to continue its population growth and overtake Sydney as the biggest city in Australia.
Reduce demand or increase the supply to such an extent that it more than meets the demand and you’ll see old fashioned economic theory at work.
And by the way Spain’s population fell in 2013 and 2014………