We’ve written quite extensively on property recently. But just when we think all the arguments have been made by those trying to deny the existence of a property bubble, another surfaces.
Last Wednesday Luci Ellis, head of the Reserve Bank of Australia’s (RBA) Financial Stability Department gave a speech to a conference at Victoria University in Melbourne. It covered the usual topics to do with the recent market turmoil: what happened, why it happened, what’s going to happen next, and… why Australia is different and won’t be affected.
You know, the usual stuff.
You can read the full details of the presentation here. But one thing strikes us yet again about this speech. It is that apparently, the Australian housing market seems to be the only asset class in the world ever that is capable of a continual upward movement.
Take this comment from Ms. Ellis:
“The housing market in Australia also wasn’t so over-extended, and in any case it had already had its boom. As the left panel of Graph 14 shows, the truly rapid growth rates in national housing prices had ceased around the end of 2003, especially for apartments. The Australian market was going through a period of consolidation when the US market melted down.”
So, what does “Graph 14″ show? Perhaps it shows the “truly rapid growth” leading to the end of 2003 and then a significant pullback. That’s typically what you expect from a “boom.”
Well, let’s take a look. Here’s Graph 14:
It’s the blue and pink lines in the left hand box that we’re looking at – I’ll address the right hand box shortly.
Dwelling prices did indeed have a significant rally for the seven years leading up to 2004. Then they’ve tailed off and the rally has continued again. To us it looks like the longer-term version of the ‘sucker’s rally’ with the addition of demand-side distortions – first home-buyers bribes.
For the RBA to suggest that the property market will consolidate at or near the pick without a big drop first, defies belief. It also defies the price action of every other price bubble in history.
The only thing that has prevented a house crash so far has been the addition of further distortions in the market at timely intervals. However, this cannot and will not last. In fact, it just bottles the consequences up further and makes it worse when the bubble does eventually burst.
And what about the chart in the right-hand box? Clearly the RBA have included this to suggest that housing is already affordable now that it is down to just over four-times disposable income.
However, we’d say this statistic is being disingenuous on two fronts. First of all, recent numbers from Australian Property Monitors have claimed that the house price crash has already happened at the top end of the market, based on average auction clearance rates and prices.
But here’s the problem. So far it’s been limited to the higher priced homes. Low to mid price homes are still being artificially inflated by the first home-buyers bribe. Naturally the collapse in the price of higher priced homes is going to have an exaggerated impact on average prices for homes.
This will in part explain the downturn in the “Dwelling prices to income” numbers. In contrast, average incomes will be less impacted by the loss of higher income salaries from the statistics.
It doesn’t escape the fact that those who are benefiting from the first home-buyers bribe are more likely to be younger. They are more likely to be less secure in their employment. And they are more likely to borrow nearer to the amount they are able to borrow rather than the amount they believe they can afford to service comfortably.
The recent numbers from the Australian Bureau of Statistics (ABS) were proof that loans taken out by FHBs increased in recent months whereas all other loans decreased slightly.
But amazingly there is an even more dubious statistic the RBA is trotting out as proof that Australian borrowers have not over-extended themselves.
The data the RBA relies on is… wait, let Ms. Ellis explain:
“Timely data are hard to come by, but we can look at current loan-to-valuation ratios based on households’ own assessments of their mortgage balance and the current value of their home, using the HILDA survey. The distribution of these loan-to-valuation ratios, as seen in Graph 15, saw an increase in the proportion of households with high ratios between 2003 and 2007.”
And here’s the chart…
Does anything standout on the chart? Apart from the colours. How about the title – “Self-reported Loan-to-valuation Ratios.”
In other words, “what do you think your house is worth and how much have you borrowed against it?” How many people, when you ask them will admit that their house is worth much less than what they have borrowed against it?
How many people list their house on the market for a price significantly lower than someone is prepared to pay? How many home sellers receive a phone call from their real estate agent telling them a buyer wants to pay more than the advertised price?
With the exception of an auction which is obviously starts off at a low point anyway, this never happens.
And guess what, thanks to the first home-buyers bribe those with an LVR greater than 80-90% are likely to have increased during the past six months especially. And when you take into account falling home prices even those that assessed themselves in the 60-80 bracket will find the equity in their home less than they thought.
For the RBA to use data that is two years old, let alone data which relies on home-owners providing their own valuation of their house is extraordinary.
If this is the best the RBA can come up with as a reason against a housing crash, then it does little more than confirm to your editor that the coming of a house price crash is even more inevitable than we previously thought.
Other Stuff on the Markets
The S&P/ASX200 failed to close above an important resistance level of 3800 points on Friday. That’s according to our Swarm Trading technical analyst Gabriel Andre. Without a strong lead from Wall Street on Friday it’s possible the market may have found the top of the recent trading range.
We’re still dumbfounded by the willingness of investors to accept the sudden turnaround in fortunes by US banks. Can they really have emerged so quickly while the rest of the economy continues to falter? Can their revenues and earnings really have recovered to pre-credit crunch levels so quickly?
Or are they merely getting up to their old tricks in order to boost revenues and earnings as quickly as possible before they lose the underwriting from the taxpayer? We’ll take a full look at this later in the week.
Comments on this entry are closed.