We were going to relay part of a conversation and a few subsequent thoughts following a lunch we had with three old broking pals yesterday.
The US dollar, US healthcare costs, US debt, and China were on the menu.
But, I’ll hold that over until tomorrow. Mainly because your editor is still thinking about it. So look out for that in tomorrow’s Money Morning where we’ll cover at least one of those topics.
But for today…
Well, that has to be the shortest lived reason for a housing bull run in history.
As little as a week ago property spruikers were telling us that rising immigration would underpin the Australian housing market for the next thousand years.
And as per usual the mainstream press fell into line. At times we feel as though the newspapers are as easily influenced by the spruikers as the Stormtroopers were in Star Wars…
Jedi Spruiker: Property prices always go up.
Mainstream Journo: Yes, property prices always go up.
Jedi Spruiker: And rising immigration will push them up further.
Mainstream Journo: Rising immigration will push them up further.
Jedi Spruiker: You should write about that in today’s newspaper.
Mainstream Journo: I’ll write about that in today’s newspaper. Thank you.
Jedi Spruiker: No, thank you. <Chump>
Junior Spruiker: I can’t believe you can still convince the press to write that rubbish.
Jedi Spruiker: The real estate industry can have a strong influence on the weak minded.
Yet today it seems that the mainstream press may have broken the spell of the Jedi Spruiker. Although not completely.
Page 60 of the Australian Financial Review announces, “Foreign buyers now on full currency alert.”
And the Sydney Morning Herald says, “Migrants, expats priced out of property market.”
Well, that’s no surprise to us. As we pointed out the other day, all those Chinese buyers are paying nearly 40% more for an Australian house today than they were nine months ago.
And those poor Poms and Yanks are being stiffed for a similar increase.
Of course if we believe Ross Savas from real estate agency Kay & Burton, “Australia’s advantage is that we are still seen as a safe country, still good value.”
I’ll spell this one out, D-E-S-P-E-R-A-T-E.
So now Australia’s house price will rise forever because… it’s a ’safe’ country.
What next we wonder? It’s an island? It’s got trees? People like trees. The stuff they come out with is amazing.
We continue to say it, we don’t underestimate the skill of these property guys. They’re like Weebles, they wobble but they just won’t fall down.
Or they haven’t yet anyway. The spruikers bash away on the rising property bandwagon. All the while the day of reckoning gets closer and closer. When will it be?
Who knows. Like I’ve said before, I’m not dumb enough to put a date and time on it. But what I do know is that the property spruikers are quickly running out of ammunition.
But still they roll on. And they’ve got the banks riding shotgun. The Sydney Morning Herald quotes one of their property patsy economists, Julie Toth:
“With interest rates expected to rise, no big increase in household income projected and no tax cuts on the cards, housing affordability is set to worsen… Official interest rates rose earlier this month, starting a series of increases which may last at least a year, markets predict. That means now might offer the most affordable prices for several years.”
Wrong!
Another bit of mainstream led claptrap. Contrary to popular belief housing isn’t affordable.
“Yes it is, even the RBA says it is” some may shout.
“No it isn’t” we retort, pantomime style.
House prices are still at record highs. That’s something your editor and the property spruikers can agree on. House prices may have had a little dip, but they certainly didn’t crash.
And again, to disappoint the property bulls, it wasn’t that we missed the housing fallout, it’s just that it hasn’t happened yet.
But back to the ANZ Bank’s misguided analysis.
Housing isn’t affordable at all. But what about the low interest rates, that makes it affordable doesn’t it? Doesn’t it?
Nope.
The low interest rates merely give borrowers a false impression of good value. But it’s the bank created money that’s cheap, not the properties.
Borrowers are borrowing more than they’ve ever borrowed. How can something be cheap or affordable when you’re paying more than ever?
And they are doing so out of fear that they’ll miss out on further price rises, and they are also doing so based on the lies from the property spruikers who claim house prices always go up.
House prices aren’t affordable at all.
But Ms. Toth does get something right, although I’m sure she doesn’t mean it this way. She says that “housing affordability is set to worsen.”
We’ll agree with that too. You see, when this housing market crashes, people won’t be able to rush out and buy houses on the cheap. Don’t think – like some of the rabid bulls do – that a housing crash will be a good thing and that you’ll grab a bargain.
Because you won’t. Or most people won’t anyway.
That’s because by then the banks will be so up to their neck in defaulted loans they’ll be incapable of lending out dollars for anything less than double-digit interest rates.
The banks will be more interested in making sure they aren’t victims of a bank run. Rather than lending money out they’ll be more interested in keeping the deposits they’ve got and getting even more in the door – that means even higher interest rates.
So you might see a house priced at half of today’s price, but unless you’ve got cash sitting around in the bank you won’t be able to buy it.
And of course you won’t be able to sell your existing house because that will have slumped in value as well.
That’s why we laugh when we see the property bulls and spruikers blindly say “If there is a crash then that’s good, I can buy a few properties.”
Sure, there will be some that can and good luck to them. But for the 99% of property investors who have learnt to leverage up as much as possible and then withdraw equity to buy more properties, they’ll be too worried trying to keep what they’ve got, let alone having the time to look for a few bargains.
Of course, if you think we’re wrong, and you believe Ross Savas and Julie Troth are right, then there’s never been a better time to leverage yourself up with the biggest loan possible to buy some of the most expensive real estate in the world.
Good luck!
Other Stuff on the Markets
The S&P/ASX200 closed at 4,838.60 down by 7 points, while overnight on Wall Street the Dow Jones Industrial Average was down by 92 points to 9,949.36. In Europe the FTSE100 finished at 5,257.85, up by 0.28% and the CAC40 was up 3,873.22 by 0.05%.
The price of gold in Australian dollars is trading at $1,144.08, while in US Dollars it is trading at $1,059.48. And the price of silver in Aussie dollars is $19.08 and in US Dollars it is $17.68.
The Aussie dollar gained a little versus the US dollar, trading at USD$0.9259, and improved against the Japanese Yen JPY84.52.
Crude oil closed overnight at USD$81.37
For the biggest movers on the market yesterday click here…
{ 57 comments… read them below or add one }
boom,boom,boom,boom,boom ,boom…………………bang
Ok you are obviously speaking the truth and many readers agree, but when – what will be the trigger? Was it the winding down/end of the FHBG boost? The fact that is stimulated such demand suggests that its withdrawal could have an equal effect going the other way.
But in response to a housing crisis, is there a chance the Oz Gov might reverse the laws around the default of a mortgage loan, putting the loss back on the banks and then nationalising the whole residential mortgage market? The idea of that structure is to put the emphasis on the bank to be weary of making poor loans – too late for that now and it didn’t work in the US anyway (maybe they saw the bailout coming a mile away, if needed!)
Or maybe the Government and Banks will join together to form some kind of extended payment plan, where mortgages are extended for 10-20 more years, but the monthly payments are reduced. Being debt slave for life would be more appealing to some, than being kicked out of their dream home!! Man this thing is going to be a nightmare.
The deleveraging that will occur could bring the Oz economy to a standstill. Look for immigration to become a bigger political issue (the biggest political issue – Coalition are saving it for the election, you can just tell!)
But Kris, in light of your denouncement of all competition law, are you honestly in favour of just letting the cards fall where they may?
I just think it would add so much credibility to your case for non-intervention, if you specified a few more details. Maybe you could say you don’t know what will happen and that’s the point of a free market…to let things just flow and let people sort things out themselves (obviously your not in favour of anarchy, just as minimal regulation as possible)
… but not knowing what will happen is the point/justification of regulation and intervention. Not knowing what will happen can be more scary to some people than knowing that what is happening is crappy and inefficient, but at least we know(we think) the worst it could get.
I think you are best to point out who have benefited from the housing boom and suggest ways in which those same people, institutions and industries, can be made to endure the losses. That is the only way this thing can be dealt with fairly.
Been in Australia (Melbourne) for the last few weeks visiting. We have been based in the UK & Europe for the last 18 years. Originally from NZ. Put simply the “value add” of living in an Australian city at the current prices does not add up. Frankly there is no comparison to the lifestyle I can afford in central Paris & London (factoring in my income in Europe & Australia) and other parts of Europe to some depressing suburban nightmare here in Australia. Australians are honestly deluding themselves if they believe the “lifestyle” here warrants the costs. As a tourist I see serious infrastructure & delusional housing costs (relative to income) and poorly designed cities. Australia is frankly to isolated and “out of the world loop” to justify the costs. However each to there own.
Don’t apologise Kris, we’re a patient lot. In fact I agree that a crash will come, I just don’t know when and neither do you. Still the faithfull come to the alter to worship and don’t they just soak up all of this rubbish.
By the way the ratio of First Time Homebuyers has fallen significantly since May 2009, and the number of investors has risen. Not what was predicted is it. Yet property prices increased even though no longer driven by FTB’ for the last 5 months.
Now when I see some evidence that prices are falling I’ll agree with the writer, because I know that prices can fall. But wishing on the tooth fairy isn’t convincing enough, I want to see evidence and hear some honest reasons why it would be so.
Sayce is a funny man. Given that a crash has not happened, should he not be feeling sorry for himself and Co., instead? It is a pity in a way. So much wasted drivel, and still no results.
PF, did you see last night’s question time in the House of Reps? It was reported and projected there by the minister that commercial construction has been and will continue to fall below trend by about 8% per annum for a few more years going forward. If there is some truth to it, that might in fact succeed in providing a cushion for a soft landing for the commercial property sector.
Are you guys kidding – the housing bears have predicted all this down to a tee.
Remember, its only 3 weeks since the meddling ended, market forces are just kicking in. Check out this article for some perspective, not even a jedi property spruiker could paint a rosy picture on Sydney Auction results last weekend (200 auctions at 60% clearance rate – more like 40% in reality, but anyway)…
http://www.smh.com.au/business/migrants-expats-priced-out-of-property-market-20091021-h8of.html?autostart=1
PF – where is the evidence to support your claim that FHBG werent driving the market for the past 5 months. I know they peaked in April/June, but surely they have had a role to play since then too
What was the % of first home buyers in August/Septeber 2009 compared to same time in 2008 or 2007 to be more accurate.
Maybe FHBs are starting to click that it’s not a good time to be getting into a mountain of debt regardless of how much money the Gov is throwing at you.
A collapse in house pricing is unlikely as Kevin will do all he can to prop up the house of cards (scary, but true). It’s not all his fault, Little John started it.
It seems this discussion is a revolving door. Interest rate increases, job security and oil prices will likely become defining factors. I remember reading that every 25 basis point lift in rates now equals approximately 1% increase in cost of debt financing because of the significantly increased loan capital required to purchase. If so, and rates continue to rise (as could be reasonably anticipated judging by the Reserve Bank most recent position) with increasing oil prices that will naturally translate to higher prices (inflationary) for every commodity produced or transported using fossil fuels, which will inevitably lead to – you guessed it – higher interest rates by the Reserve to curb inflation! 2010 is certainly shaping up as probably the far more influential year that may impact on the Australian housing price bubble.
I know people think the market will be propped up by Government, therefore avoiding a crash…but dont you guys think that other Governments around the world would have done this if, it could be done so easily?
Surely Obama or Brown would have waved their wand if they could maintain house prices. Its clearly a market so large that Governments can only tinker at the edges, they cant stop the process altogether.
cb – I didn’t catch that last night. I do agree with the bears on commercial property though. I do expect commercial property to struggle for a few years. Anyone with good long term tenants will survive ok, but anyone who loses a tenant will struggle to get a replacement tenant. I own commercial , so you can see I am being very realistic. Still there will be great bargians in commercial for canny buyers.
PuntPal – I’m using the AFG figures which represent a sample of 20% of the home loan market, so it is indicative. The percentage of FTB’s hit a high of around 28% in Feb and March, and the receded to around 20% in May, and has remained there since. In roughly the same period investors rose from about 24.5% to a fraction below 30%.
It will be a while before ABS confirm that because they have slower methods of in compiling data.
That result was not what was predicted by anyone really. We all thought that FTB’s would escalate until 30/09/09. Instead they dropped back to lower levels well before then, yet the market did not fall.
I should reiterate that I don’t want big property gains, and prefer a flat or slow rise. But regardless of what we want, the stats are what they are.
Your hero Mr Sayce seems to be taking a very personal interest in Aussie property..
I’m with PF – there will be a crash eventually, but it’s impossible to predict the timing with any certainty. So many variables. The government can’t let this housing bubble go easily – our national prosperity depends on it continuing. We all know that the government will spend as much as is politically feasible on holding up house prices.
I think we’re getting closer to crash point by the day. FHOG boost is waning, interest rates are increasing, lending criteria are supposedly tightening. My thinking now is that the major determinant of future house prices is availability and willingness to take on increasing credit. The combination of lower grants, higher interest rates and tighter credit suggest that credit overall is going to be harder to come by. If people can’t get increased credit to pay increased prices, who is going to buy the houses? I can’t see that it matters that we have a gazillion migrants if no one is able to obtain credit to buy in an booming market. Demand will have to be satisfied at a lower price. Or people just choose not to buy because they can’t afford it.
So unless something changes soon to boost credit, I think stagnant to falling prices is the only possibility. Will Kevvie extend or even increase the grants? Will he send out more cheques? Will he legislate that banks can’t foreclose? Perhaps the government will be a direct mortgage provider. Will banks relax their lending criteria again so that every kiddie gets a loan? Who knows – it’s impossible to predict. But short of more market intervention, house prices are surely approaching their upper limits. And the only way it can go from there is down.
As much as this site loves to bag our banks – lending criteria is surely tougher here than it has been in the US – plus it’s harder to simply walk away when you get into mortgage trouble. When the US bubble started to burst, there was no way their administration could stop it.
Also the fact that China has/had lots of cash to artificially stimulate demand for our resources meant that we didn’t get hit as hard as UK & Europe.
Property prices here need a correction – but it’s not a fait accompli.
I forgot about wages. The other way to maintain high house prices would be for wages to accelerate. But that doesn’t seem likely right now either. So we currently have house price growth galloping ahead of wages growth. But we are also seeing credit markets tighten. That’s two key inputs going in different directions.
I can smell another real estate bailout coming to keep the credit flowing. If not, where’s the next boom coming from?
PuntPal – Sorry, I didn’t answer all of your question. The percentage of FTB’s at this time last year was around 15% but it shot up to 22% in October when rates fell. You have to allow for the high interest rates that stifled affordability prior to that, which kept the FTB’s out of the market.
It was a great time to buy then.
PuntPal – I agree, governments can only do so much. But the longer this goes, the more money the government has to spend to keep it going. The more prices rise, the more they have to spend to keep them rising even higher. As soon as government support stops, the demand is going to fall away because without it houses would be seriously unaffordable.
I mentioned in another thread that I’m reading Ross Garnaut’s book “Great Crash of 2008″. I haven’t read other crash books, so I don’t know how it compares. But it is an excellent read with plenty of references to the Australian context. Anyway, he writes about the first home owners grants and their role in keeping the banks afloat. He also says that the government has guarranteed the banks’ foreign borrowings, not just deposits. I didn’t realise that. Our banks are effectively insolvent without government support.
So all our banks are supported by a government guarrantee. We now see government buying another $8b in RMBS to keep the smaller banks going. Perhaps the next step will be for the government to nationalise the small banks into a 5th competitor to the Big 4 – so that the government is lending directly to the public. That could certainly keep the party going for a bit longer.
Ralph _ Garnaut is correct, the government guaranteed both deposits and borrowings. That gave our banks access to funds at “AAA” rated interest rates. Note that the banks did pay a fee to the government for that, and are moving away from using that facility.
Really guys you need to understand that at any time regardless of economic conditions, all banks are technically insolvent. Virtually all deposits held with banks are “short” and almost every loan is “long”
That however does not mean that they are not financially strong. But managing cashflows and debt obligations is crucial to there survival. Many of the bears will point their fingers and tut tut, but that is more out of ignorance than real understanding of the nature of banking. All gearing multiples carry a risk, but we need banks.
If we rebuilt our banks so that they had no risk, our economies would grind to a standstill. Shakespeare said “neither a borrower or a lender be” but banks are both. (Merchant of Venice I believe)
PuntPal – you said that the bears have predicted this to a tee. Can you tell me what prediction of theirs that has come true? They don’t know what time lunch is.
Ralph – the solution’s obvious. We simply triple the minimum wage!
Ralph – you said:
“The combination of lower grants, higher interest rates and tighter credit suggest that credit overall is going to be harder to come by. If people can’t get increased credit to pay increased prices, who is going to buy the houses? I can’t see that it matters that we have a gazillion migrants if no one is able to obtain credit to buy in an booming market. Demand will have to be satisfied at a lower price. Or people just choose not to buy because they can’t afford it.
So unless something changes soon to boost credit, I think stagnant to falling prices is the only possibility.”
My comment:
We can grant all the premises in your argument, including the additional point about wage growth stagnation, and the conclusion still does not follow. Why? Because those who have been priced out, will simply rent, and the more people who remain priced out and forced to rent, the better the position of the investors become. This might be unfortunate, but a clear possibility, and the point is that the outcome need not at all be drastically lower prices.
A weak version of the conclusion might still eventuate at the margins, but the argument as it stands does not support the seemingly implied stronger conclusion that lower prices will result in actual sales in great volumes.
The first response of the market to tighter credit is the drying up of sales volume, and in the face of relentless money printing in a fiat system, people will hunker down and will try to survive the downturn, instead of selling and taking big losses, unless they are absolutely forced to. This point has been born out by experience many times over, and it needs to be factored into any predictions of doom and gloom, something I cannot see any of our resident bears doing in the course of their arguments.
A further dimension to this is also the fact that a bank, whose security might have lost value and has slipped into negative territory, is not forced to acknowledge any sort of loss unless, and until, the borrower defaults and the bank has to foreclose, and take whatever loss it must when the property is sold. This is one place where repayment amnesties kick in, etc., so the meddlers will be all over such a situation like a rash, seeking to contain a deteriorating situation to prevent collapse.
A few issues to discuss.
PF – thanks for the figues and the response. I dont have time to look around myself, but I was under the impression that % of FHBers in the market were still well above average in April/June 2008…my understanding would be that this would cause a flow on effect in the market and August etc… would have seen people who had sold their overpriced homes to FHBrs, buying upgraded houses themselves.
But I admit, I thought every investor would have waited to see what happened for the rest of 2009…clearly some havent. But I am not yet sold on the resilience of OZ housing market. The stories I read and am told by agents is that its slowing down big time.
Ralph makes some very good points about the financial health of our banks. Although PF is right that banks are always technically insolvent, he downplays the risk when he argues that this is just how banks operate. Just because other banks do it, doesnt mean its good practise…look at how it turned out for those other banks. The argument by people like myself is that I agree with you, banks have just acted like all banks do…reckless and short-sighted.
But where I differ from so many bears, is my belief that this party cant keep going any longer, because its not simply a matter of finding some more fuel ($) for the fire. The Government needs people to keep buying houses and I just dont see that happening with the current factors at play.
PF – the bears predicted that the bubble would start winding down here in 2008…it did.
The Government stepped in with FHBG boost and market kicked into gear again…with the end approaching, bears predicted another slow down….signs were there, so the Gov extended it (as many of us predcited they would).
Now that its finally gone and interest rates are rising, the bears are finally getting their time to show what they have been arguing. That is, leave the housing market alone and the price will settle down to a more sustainable level.
Now maybe we wont get all meddlers out of the way, but if they let things just happen, I think the bears will be proven to be right about this whole thing.
ah, yes, agent 86. The assumption that people cannot borrow more, or that banks cannot responsibly lend more, has a fatal flaw, an assumtion that, while not in your face, is, and must be, countenanced:
That assumption is that the value of money, or should I say currency, of cash and credit, is absolute and constant. It is not, and those who fail to see this, miscalculate.
On average, you must factor in anywhere between, at least 6-8% annual inflation, and at times more. This is what in fact accounts for the most part of why house prices are where they are today, relative to where they were 20, 30, or 50 years ago. The so-called price rises and the capital gains are largely a mirage, they are not real, but an indication of inflation, the opporntunity it presents to the state to take real money out of people’s pockets as it taxes this phantom money.
Remember: in a fiat monetary system, prices and debts, can, and will, keep climbing higher and higher in nominal terms, while they do not change all that much in real, inflation adjusted terms.
PuntPal – they predicted a CRASH – and it didn’t.
Gotta work. have a great day.
But don’t give up just yet, PuntPal: There is always next year.
Mate, let us know when you finally decide to buy. I will take that as a signal that it might be time to sell.
I like Trees…
Keep an eye on that price of Oil It should be back around a $100 a barrel by Christmas.
cb and PF – in the interest of fairness, please let the FHBG boost be fully removed and interest rates rise to above emergency levels before we start to hear fat ladies singing.
Those who predicted a crash have not been proven wrong…if I am still banging on about this in Oct 2010, then I will conceed I was wrong, but dont think you can end this debtate now…its finally just getting interesting
cb – surely your not trying to claim house prices in Oz have risen in line with inflation over the past 20 year boom?
CB – yes, people may be reluctant to sell their homes in a deflationary environment. People can hang onto their houses until they are forced to sell, banks can resist foreclosing and/or offer mortgage holidays to avoid booking losses, and so on. All of that is true. Of course those who are priced out will rent. But the point is that they are not buying houses and therefore not contributing to further increase in house prices.
But that also sucks activity out of the economy. Real estate agents won’t be making sales (will they take this on the chin?). Banks won’t be making loans. People won’t be able to access their declining equity to fund more consumption. Retailers won’t be selling expensive furniture and televisions. Removalists won’t be moving people from one house to another. Builders aren’t building new houses or doing renovations. And on it goes.
In our economy, reduced credit will lead to reduced consumption (of all sorts). Who or what keeps these things afloat if there is not a continual turnover of expensive real estate in order to maintain confidence in the monetary system and keep credit expanding? If we don’t have ever expanding credit, we go back to saving to consume and that means that consumption will by necessity have to decline.
So I come back to my original statement. If wages growth doesn’t keep up with house price growth (and it’s not) and credit remains tight, people cannot afford to continue to bid up prices. Unless the government keeps increasing the amount of stimulus.
Mick – I hear you. There is a little thing called peak oil that is going to throw a spanner in the works. Houses out in the burbs with no public transport and no shops/schools/services within walking distance are not going to be very attractive when the price of oil gets back to $150 a barrel. What’s it going to be like when it goes to $200? Or when we pay $2 – $3 per litre at the bowser?
CB – yes, it’s true that fiat money system is inflationary. House prices have increased considerably, in nominal and real terms. Wages have also increased, but not by as much. So we have a divergence. To the extent that wage inflation is not keeping up with house price inflation, the difference has to be taken up by debt.
The problem is that banks are not as willing to lend as they used to be. We hear that you now need a 10% deposit to get a housing loan. In boom times, they were giving money away. Interest rates are going up, so people have to pay more to get access to debt. And the FHOG is reducing, so borrowers are going to the bank with a smaller deposit and therefore able to borrow less.
All of those factors tell me that it’s more difficult to borrow money for housing at the moment. So unless wages shoot up or credit suddenly becomes more freely available, how can vendors ask more for their houses?
Yes, Ralph, your revised prediction is more realistic. Prices are most unlikely to keep climbing in the near term while current conditions persist, but that is quite different from the much stronger claim the bears tend to slip into – in some cases, no dubt, quite innocently and inadvertently, but the difference between dried up volume at stagnating and even moderately lower prices at the margin on the one hand, and the imminent and massive, US-like crash predicted by many bears on the other, is nothing if not fantastic. And if so, any thoughtful discussion, let alone prediction, should take care to distinguish between the two.
Ralph, again to your lates:
All of that is true. Banks are nothing if not shy, and I can attest to that from personal and very frustrating recent experience. I finally managed to scure a decent loan against a house, but at only 80%LVR, and even then I will have to take out LMI if I want to go through and take up the offer. Commercial borrowing is even worse.
Today’s MM is slow at being posted, but here is a little excerpt for a comment:
“But we try to forget about that when we think we’re getting a bargain – a bit like how property investors forget the costs of borrowing when they calculate their ‘profits.’”
What this comment belies is the author’s total disregard for the effects of inflation in the system. He fails to understand that inflation effectively REDISTRIBUTES wealth from SAVERS who keep their money in cash and CDs, to BORROWERS who invest real assets.
The system is rigged, and if you do not take the time and trouble to understand what is happening, you are swimming against the current that will see you, at best, standing still or making very little progress in spite of all your hard work.
CB – and you have enough cash to get an 80% LVR loan. That’s great. I hope you get yourself a fantastic place. But what about all those with little or no savings?
Assuming an 80% LVR, someone with $10,000 in savings (+$14,000 FHOG boost = $24,000) can only borrow $120,000. Even with $20,000 plus the grant only increases the amount that can be borrowed to $170,000. With $50k savings plus $14 grant, that’s a loan of $320,000. Even at 90% LVR, it’s not much better. I hope I’ve got my maths right.
With the FHOG boost having brought forward most of the FHB that are ready to buy now, I can’t imagine that there are too many FHBs out there with a lazy $50,000 sitting in the bank. These are not amounts that are going to keep the housing market ticking over. The next wave of buyers are a couple of years off.
So access to credit is a very real factor. If banks don’t loosen their lending criteria and the government doesn’t step in with more free money, I can’t see where the boom is coming from.
So cb – if you have such a good understanding of how credit is tougher to come by now, then how come you dont see the residential crash that is coming.
As Ralph said, this whole thing was made possible through loose credit, so it is only logical and that tighter credit will have the reverse effect.
Ralph’s 3 posts in a row provide an excellent summary of the reasons why house market in Oz is in for BIG trouble.
As to whether there will be a massive crash, well you know my opinion. The only missing piece of the bubble puzzle that we still dont know is the Government’s response when the crash starts…but that will only determine how quickly prices collapse, not whether they crash..I am with Kris, IT WILL HAPPEN
Please cb – if you really think a crash cant happen, address Ralph’s specific reasoning:
- Wages have increased, but not by as much as house prices.
- Banks are not as willing to lend money as mch they used to be
- Interest rates are going up, so people pay more to get access to debt.
- The FHOG is reducing, so borrowers are going to the bank with a smaller deposit and therefore able to borrow less.
As Ralph also points out, the residential market is so massive and all the leach industries that have fed off it will also suffer quick and dramtic drops in business once people batten down the hatches and start paying off debt. All those home renovation stores and businesses will drop off and so will the obvious candidates (RE Agents, Mortage brokers)…this will have a spiral affect.
Then you start getting people like tutors, or piano teachers or baby sitters laid off by people who are struggling with debt. These people will stop spending at JB and Harvey Moron
This is debt-deflation and we will have ti worse than anywhere (the bigger they are, the harder they fall was what my old footy coach taught me).
When people last did this (showed some prudence) Rudd came with a truck load of money and made everyone forget we were heading for a depression.
But who is coming this time? Where is this saviour that you seem to believe exists, but never explain in detail? Is it China still…hope not, read the DR today and see what Denning things of China’s need for resources over next few years
Expats with $200K savings are staying away from Oz residential market because of the lunacy of it all. What chance does your average ‘working family’ have?
My only hope is that the people who have benefited from the boom are made to suffer the pain of the bust, however I fear the pain will be spread on all of us by a Government with no faith in the justice provided by free markets.
Puntpal, I think I may have found a trigger for the next downward spiral as far as the GFC is concerned. Should be between December and the first reporting quarter in the US when the financial institutions start to reveal numbers.
This article will most certainly make the toes curl towards ones knees.
http://www.counterpunch.org/martens10212009.html
I must admit, I have no real idea how it’s going to play out. The government could try anything next. There’s an election coming up – they could get desperate. Lenders may decide to go for broke and give loans to anyone who walks in the door. People may decide that buying a house is more important than anything else and be prepared to live on bread and water so that they can make the mortgage repayments. Anything is possible.
We’re all just waving our d!cks in the wind to some extent. I just know that what is going on right now is not sustainable.
Mick – that’s interesting. This whole GFC certainly isn’t over yet. Surely there will be appeals and it could get dragged out for years in the courts.
I can imagine that Australian banks could well have an exposure to some of that. But that’s where the gov’t guarrantee will help. The gov’t might well have to make good on their guarrantee.
Ralph,
This could very well be the trigger as per say black Monday in 1987 when the stock market flushed itself down the toilet.
I was in London at the time and prior to that day money had been cheap the city was quite literally awash with the stuff, then the banks panicked.
Over exposed they were caught with the collective trousers well and truly around the proverbial ankles.
When I say panic I really mean panic, house loan 2 weeks over-due in went the legal teams smashing down the doors and evicting hapless families.
Multi million pound companies, 50 a day on average reasonably solvent quite capable of continuing to trade were would up by freaked out loan officers and associated needle necks with no regard for those who lost jobs and subsequently their houses.
Blind fear, no regard for looking at the situation around them the banks went on an out of control rampage clawing back money like the drowning man clamouring for a piece of flotsom.
I would say it was around then that London went from being a busy but still seemingly pleasant place to live to the really unpleasant dog eat dog mentality it has now.
I knew six couples who walked away from their dream of owning their own home all of them ended up divorced.
The final closing curtain was the massive lay offs at the banks as branches were rationalised so most of the needle necks that caused so much misery those who were told from on high to make the money from issuing all those loans then told to claw back any money at all costs finally had a taste of it themselves.
The company I was working at turnover 12 million a year healthy client base etc closed because the management had a go at doing a company buy out. So another 36 people hit the streets unemployed.
Everything I see today seems just so similar. Once that trigger happens the ship will sink regardless of who is at the helm.
Dead on, Mick. The more leveraged the system, the more prone to collapse in response to a shock, and should we add, the system has never seen leverage like we have at the moment. Worse, those who are behind it all, are also able to place massive bets that will pay off in the event of a collapse, and guess what: They can also pull the trigger for a collapse. The bottom line is this: if you are not an insider, you are exposed, and cannot tell what, or when, or from where, you are going to be king hit.
PuntPal, if you read above, Ralph and I have come to an understanding that his premises did not by themselves imply the sort of massive crash you are anticipating, but only that while current conditions persist, prices cannot be pushed much higher.
I agree with you, however, that in current conditions it would make absolutely no sense betting on prices increases going forward. But I suck at market timing of any and all sorts, so my approach is entirely different. I have found a decent enough place in a quiet and modest country town in regional NSW, and seeing how mean banks are becoming, and the ongoing grip of the GFC, I can see myself being quickly locked out from buying, even if prices will come back somewhat. So, my approach is that if I get a chance to get in, then I will take it, and then hunker down and try to weather the storm for as long as I can, and not worry about where prices are going to go in the near term, as I will not be looking to sell in any case.
In other words, I have waited long enough for a crash. In spite of all the prognosticators, it just refuses to materialise, so I am not going to wait any longer, if I can help it, because I can literally feel the door shutting in my face, and I simply cannot hope to save up to buy with cash. I will always have to rely on borrowing, and the banks are slowly but surely closing their doors in my face, giving absolutely no indication as to when they will reopen.
Well guys – here is the Treasurers take on the situation. Doesn’t sound like they will back off the stimulus to me.
http://www.businessspectator.com.au/bs.nsf/Article/More-homes-needed-to-boost-economy-Swan-X45SH?OpenDocument
Mick I understand what you are saying, but you can’t just assume that the 1987 British Experience will land in Australia in 2009. It could, but it needn’t.
Time for some vino guys.
For bureaucrats and politicians, meddling forever, has been, is, and always going to be, the name of the game, even if to their own benefit. Nothing surprising in that.
interesting article
“”"”"”Trillions of dollars of bundled home mortgage loans and derivative side bets tied to those loans were being manufactured by Wall Street without any one asking the basic question: why is all this capital being invested in a dormant structure? Houses don’t think and innovate. Houses don’t spawn new technologies, patents, new industries. Houses don’t create the jobs of tomorrow.
Also, by acting as wholesale lenders to the unscrupulous mortgage firms (some in house at Wall Street firms), Wall Street was not responding to legitimate consumer demand, it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself. Now we see the aftermath of that inefficient allocation of capital: a massive glut of condos and homes pulling down asset prices in neighborhoods as well as in those ill-conceived securitizations whose triple-A ratings have been downgraded to junk.
There’s no doubt that one of the contributing factors to the depression of the 30s and the intractable unemployment today stem from a massive misallocation of capital to both bad ideas and fraud. Today’s Wall Street, it turns out, is just another straw man for a rigged wealth transfer system.”"”
Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
Mr_Clean — That is interesting and valuable feedback. I have only just notice it – must have been help up in transit for a while.
So, what do you make of it all then, in terms of causation, that is. We can safely assume that people do not shell out all this money for housing out of spite, so the problem of making sense of it all remains. Would you care to offer some suggestions or insights?
Re. cb 10.24.09 at 10:04 am
I can only comment from the side lines. I believe that in general Australians are very naive and have been spoon fed an idea that the easiest way to “riches” is via housing, certainly not productive activity. Coupled with a virtual media monopoly with the banks & real estate industry all working together its no wonder the “average” oz is in debt up to their eyeballs for very basic accommodation, in very mediocre suburbs. Like anything it self perpetuates until all sense is thrown out and the inevitable happens. My concern is the plane naivety of Australians allows the government to directly interfere in the free market (in this case housing to such an extent with tax payers dollars. All the while pushing up housing further in price. Insane – anywhere else there would have been riots. There is a good reason why housing markets in other countries are adjusting ! In anycase I think the obsession with housing in Australia is directing energy and money away from more beneficial economic areas. My impression is that Australians in general seem to have an overinflated view of their self importance in the world, which justifies the price one is willing to pay to live in Sydney & Melbourne (i.e belief they are connected world cities), but the truth in this view is false. Following this is the belief (encouraged via the media and govt) that everyone wants to immigrate here. Not true ! Yes poorer immigrants, and third world most definitely want to, but “world citizens” (i.e highly skilled mobile), would not necessarily rank Aus as a destination due to cultural and distance isolation. Personally I prefer to NZ !
Mr_Clean, I appreciate sharing your thoughts. Alas, the question of what, when, and why might and might not send the populace into rebellion is a tough one. I thought that, by comparison to us here Downunder, Amecicans who have been losing their homes have been treated worse, much worse. And yet, they do not rebel.
Part of the difficulty, I would guess, for any country where housing prices crash would be that a lot of other sectionas of the economy will go down and go bust with it. For example, if prices all of a sudden crashed by 20 or 30 percent, building new homes would just about grind to a halt, because no developer or builder would be able to work profitably when prices have just crashed, but the input costs of the materials and fees and taxes that go into building a house remain high. Deleveraging and seeing the price of all input costs also coming down and adjusting to make house building profitable again at lower prices will take a very long time.
Very difficult, so lots of people would lose livelihoods, including a whole raft of self-employed tradesmen, apprentices, ah, too many to even think of them all. An economy can much more readily adjust to higher prices, I would say, than it can to lower prices, because the many parts of it are not even linked together tight like the carriages of a freight train, but more like hundreds and thousands of cars and trucks following each other very close up down the autobahn, so that if there is a crash ahead, a great many of those following just behind will end up in a terrible pile up.
This is why I sometimes think that those who are hoping and wishing for house prices to crash, might not in fact know what the implications are going to be for them and those dear to them. They can only think in terms of them being able to buy a house at a cheaper price, but following a sudden crash like that, they might be among the ones who might find themselves, not only unable to buy a house, but losing their job and possibly even their rented accommodation as a result. As they say, you must alway be very careful what you wish for, as it might just come true, and there is no guarantee that you will like it.
I think its sad that Australians feel pride in having high property prices or you could say – Australians feel pride in having huge debt !! Wouldn’t Australia be better off if only a small portion of our wages went to interest payments so we could spend more on entertainment, holidays….
I sold my property last year because i believed property was going to take a beating, however Rudd stepped in and propped it back up. I still stick with my decision because last year before the RBA dropped rates by 4.25% mortgage stress was at record levels. I personally know people who was at the end of their tether.
Since then more people have gone into debt and a lot more people have had their hours cut and now the rate rises begin….
It will be interesting to see what happens when (or if) China removes it extraodinary stimulus and our rates are returned to neutral
“”"This is why I sometimes think that those who are hoping and wishing for house prices to crash, might not in fact know what the implications are going to be for them and those dear to them. They can only think in terms of them being able to buy a house at a cheaper price”"”"
cb: there are people that for example in last even 5 years ,8 years have seen houses leap & bound beyond comprehension & their affordability . a house worth 100K is now 500k , maybe more .
now that has caused a lot of people (understandibly )regret ,frustration,anger,fear etc etc & alot of industries ,wages have simply not gone up in proportionate to the house prices & that is sad .
someone once said ” they missed the boat ”
imagine visually standing at the pier & missing the boat & that is wats happened .
now the goverment is expecting melbourne to accelerate immigrants from current 1800 per week ,to even much,much more to a pop. of 7-8 million .
infrastructure in alot of areas is terrible ,eg.jobs are further away ,roads are extremely congested,no BROADBAND in new areas ,where younger families will most obviously connect on etc etc .
its like “pack em in “mentality,
worry bout the consequences later
who ,what,when & where has got the answer to these drastically needed soloutions?
rents ,loan repayments will start increasing way too high unaffordably , houses in the end have to be a whole lot more affordable
any way interesting article below
http://www.elliottwave.com/freeupdates/archives/2009/10/23/15-Forecasts-That-Came-True—-and-More-to-Come.aspx
Re: etch 10.26.09 at 9:57 am
Very simple really – a declining standard of living in Australia for ALL citizens. Rapid house price inflation eventually affects everyone in a negative way. Increased cost of living, increased taxes etc etc. No one stops to think that just because ones home has increased in “value” by X that the potential trade up property has also. Nothing wrong with house price inflation, as long as tracks to wages growth & broad inflation. Clearly to date, not the case in Oz. Every other country is adjusting back to mean as we speak…………..
PF – that article you linked to is subscription only. Could you possibly put up an edited summary?
But from the sounds of it, Goose has flagged more stimulus if required. I find that deeply worrying but I’m not surprised. It seems that there is almost no level of debt that they are willing to tolerate if it means they can put off the crash for a bit longer. I can’t blame any government for trying put the pain off for a bit longer and not wanting to take the medicine.
It’ll be interesting what happens come budget time. K Rudd and Goose have shown us they are reluctant to take tough budgetary decisions. But with the debt piling up, surely they’ll have to show a bit of restraint. But I think that the current government is completely gutless we’ll have continuing debt and deficits into the forseable future. Rudd’s claims of fiscal conservatism have been obliterated. I don’t have any confidence in these turkeys – this will be left to the next coalition government to clean up (at leat 3 1/2 years away). It’s just a pity that the current opposition are too weak to mount a coherent argment for any more then 5 minutes.
Overall, now is a tough time for property bears. All the surface indicators point to increasing prices – primarily I would say to confidence that we’ve willed the recession away and the resilience of the notion that house prices only ever go up. But I would argue that confidence only gets you so far. Our economy is living on government stimulus and little else. And that is winding down. Personally, I think the appetite for further stimulus in the community is not great. The government has been talking up Australia as the most resilient in the world. They would have to start talking about doom and gloom and the need for more bailouts in order for more stimulus to be credible. For mine, if the government doesn’t launch another another round of stimulus, things will get very interesting. So until then, we wait and see.
Etch – you raise some interesting points. Sustainability is a very real issue. We can’t manage sustainability issues very well with the population at 22 million – look at the Murray Darling situation for instance. Not to mention outer suburban areas being without good public transport in an era where we have peak oil on the horizon and the price of petrol about to climb.
Governments have shown they are incapable of managing these sort of intergenerational issues well. They are trying to manage a slow deflation of the property bubble as well. They introduced the first home buyers grant boost to stem house price falls and support the banks. But they’ve only succeeded in blowing the bubble even bigger. And now it’s all so big that even moderate adjustments would devastate the banks. Every bit of tinkering only makes the problem worse.
Also, I see elsewhere that APRA is looking to increase liquidity requirements for deposit-taking institutions from 5 business days to 20 business days. The SMH is also reporting that banks are resisting this, saying that they really are very well managed and very well capitalised (oh please!). And that any increase to liquidity requirements would reduce their ability to write loans and would therefore harm their profitability. And of course, there is squabbling over exactly what constitutes a liquid asset.
http://www.smh.com.au/business/banks-to-fight-against-push-by-regulators-to-raise-liquidity-levels-20091025-henj.html
So we have a crisis that exposed the leverage of the banks and they respond that their very future depends on continued massive leverage. Actually remaining more liquid directly impacts their ability to further expose themselves to the real estate bubble. So their plea to APRA – please let us remain highly leveraged so that we can continue to make bets on the property market. I reckon the banks are going to go all out here and then claim they are too big to fail and wait for the government to bail them out. Moral hazard, anyone?
Mr_Clean
You make a lot of sense! This country is in for a big reality check, upon which time it will become evident that our economy and banks are NOT as strong as we’re being lied to about.
In the meantime Simple Stevens will ocntinue to perpetuate this lie by pumping up the interest rates, and so inadvertently help to set up the impending collapse of the Australian residential property ponzi scheme.
Say Mr_Clean, you sure you’re not really Sayce?? lol
Agree, well said, Mr Clean.
The situation will eventually correct itself. With or without government intervention. As you do, I believe it fundamentally comes down to house price inflation running ahead of wage inflation. This can continue for a time, but there comes a point where wages aren’t able to service increased debts.
From that point, house prices can’t increase unless credit becomes more available or wages increase. Alternatively, we’ve got things like shared equity mortgages and siblings/friends going into debt together. Taken to it’s logical conclusion, people won’t be able to buy a house unless their parents use their own house as collateral for their children’s mortgages. Perhaps expectations will change such that that is the accepted way to do things.
Sandra,
Your points about Stevens and the RBA raising rates is an interesting one. Raising rates could well pop the real estate bubble. Or it might not – people might just go on believeing the spruikers and house prices rise anyway. In the event that it does pop dramatically, our entire economy will collapse and the RBA will have to slash rates again.
Actually, Ralph, I fear that that is precisely the plan.
You raise rates until the bubble pops, then the economy collapses with it, which in turn will allow the RBA to cut rates to the bone, enabling the banks to have lots of free money to speculate with, without even having to bother with writing any more loans.
Isn’t that precisely what happened in the US and Europe?
Ralph – Sorry I overlooked your question at 50.
An excerpt is “More houses are needed to help boost economic recovery and to create a lasting legacy of affordable homes, treasurer Wayne Swan says.
Speaking after meeting state and territory treasurers in Canberra on Friday, Mr Swan said Australia wasn’t building enough houses in terms of population growth.
Mr Swan said the treasurers had discussed social housing, development approval processes and the need for more to be done to improve rental affordability as well as what could be done to get private sector investment.
He said all of these issues stemmed from a lack of housing.
“The Commonwealth has this view that we have got to get ahead of the curve here,” he told reporters.
“We have not been building enough houses. We do have strong population growth so it will be very important we move through to economic recovery to ensure that we don’t have capacity constraints that flow from a shortage of housing.
“That is why we put significant resources into social housing as part of our stimulus plan, not just to create jobs for now, not just to support small business for now but also to leave a lasting legacy of more affordable housing.”
Business Spectator is free at the moment (well it was when I joined) but you have to register. It is a good online newspaper.
The reason why house prices have been allowed to rise so dramatically is because they are not included in the RBA’s inflation basket of goods and services which contains food, energy, clothing, utility bills, etc . And the big reason why we have been able afford high house prices is due to the masking effects of cheap Asian goods, which in effect means that Australia has been importing deflation for the last 12 or so years. The falling costs of living has enabled us to throw more money into lifestyle sectors such as holidays, larger homes, expensive SUVs, etc.
Falling prices for cameras, TVs, clothing, DVD players, furniture, computers, white goods, kitchen utensils, workshop/farm tools and equipment, etc, have been the trigger of keeping interest rates well below the necessary levels for far too long. And because we can afford to buy these items with much ease then we are more tolerable to rising costs for fuel, food, medical treatment and general services. As the rates have been so low the banks have been comfortable in lending more as the repayments were easily serviced even by the lowest paid workers. Of course the more buying activity occurred the higher house prices went. And the higher they went the more confident the borrowers and lenders became. Why worry about lending someone a half a million dollars when the house they’re buying will be 1 million dollars in 7 years time? Everyone joining in on the gang bang was a winner and no-one caught an STD. The bankers won (and most have left with nice packages thank you very much), house buyers won, the tax man won, the politicians won, tradesmen won, the developers won, furniture shops won. In fact the whole show was so perfect only a numbskull would want to stop it.
And yes I agree in the perfect world we have right now it will continue indefinitely. But the world is not perfect and it is run by humans and the world’s financial dynamics are changing daily! So now we have borrowed as much as we can while the times have been good. The negative side to all this is that as imported goods have been so cheap we have allowed local manufacturing businesses to fold or go offshore. We cannot take on any more debt – we are full to choking point!
What happens when interest rates rise to 8%? Does that mean home repayments will rise? No! Home repayments will rise along with petrol, food, clothing, medical, education, TVs, cameras, etc. You see, we think of rising interest rates as nothing but higher loan repayments. But the rate rises are implemented as a reaction to rising costs of everyday items, not house prices! So when we are having to pay higher monthly mortgage bills we will also be requiring more money for everyday items to get by. That is my concern. Once consumers are hit with double whammy fees for home repayments and rising prices for everyday things then there will be very little money left to feed into the economy. Will our economy be able to sustain long term home mortgage rates at 8% plus?What if the rates go beyond 8% and petrol is over 2 dollars a litre? Would our wages keep rising even though the rising cost of fuel is killing businesses?
If/when this scenario becomes reality then the outcome would be the exact opposite to what we have endured over the last 10 years. We would see money become scarce once again. We will see people fight tooth and nail to refrain from spending because getting money via credit will be very hard and expensive. Once that cancerous action filters through the economy it will then feed on itself. As I said, we have been importing deflation. And with that we have had full control over our economy with the RBA playing with interest rates like a chess game with the subsequent moves being reactive and very successful. But when we start importing inflation (and we will) what happens when the rising rates cannot slow inflation? They then have to be risen more. Eventually inflation will be reined in, but for that to occur sacrifices in our economy must be made. Will we cut back on our food? Will we cut back on our petrol use and heater use? Will we choose to stop buying clothes that we don’t need? Will we forgo to go on that interstate holiday? Will it be all of these? There the problems start. From there the economy will go backwards as business activity will be hit hard. But the sad part would be that core inflation will remain high forcing the RBA to keep rates above the safe level. Falling business activity, rising unemployment and high interest rates. And the longer it goes on the worst the outcome would be.
We know China’s currency is at a great discount to western currencies giving the Chinese the advantage to out-price and to outsell all western manufacturers. This has given them consistent and reliable money flow during the hard times as their cheap goods had remained in demand during the GFC. Whereas America was hit hard as customers were shying away from ordering the latest Boeing Jet Airliners or Caterpillar’s earth moving equipment the China juggernaut kept on rolling as consumers had no problem buying 20 dollar Chinese jeans or 40 dollar Chinese DVD players. But eventually China will no longer be able to keep its currency suppressed due to the damaging effects of extreme inflation. So they will have to lift its currency closer to western levels, which will hurt their exports but will reduce their costs for fuel, commodities, gold, dairy, wheat, etc. So China will then have cheaper access to these items to begin a self sustaining economy. At the other end the western world would be left speechless as the discounted Chinese goods are suddenly expensive. Not only that but fuel and food costs would be soaring due to China’s consumption. Would we be strong enough to do it alone and manufacture our own goods as a result?
It must be said that near the end of a boom 95% of opinions are always bullish, with only a few idiots countering public sentiment. Of course when markets are at their bottom and the news is bleak 95% of the public remain bearish and only a few idiots would gamble on getting in then. I was one of these idiots. I got out of the share market last year in June missing the collapse of Bear Stearns and the almost complete global financial meltdown as AIG had to be given an emergency bailout package by the US tax payer. Then I had the foresight to gradually feed myself back into the share market last December, accumulating good company stocks at great discounts every month since. And as most know the market has rallied some 50% since March! That does not make me right with my forecasts. But it shows that with a little for sight and with some strength within to go against public sentiment one could beat the herd at their own game. No one wanted houses in the 90s. They were cheap but not cheap enough so to speak. Now we acknowledge house prices are dear but not too dear. Time will tell if the housing market bears are wrong.
What I don’t like to hear is hearing the public wishing first home buyers to default on their mortgages with their homes being repossessed. Why would that be good? Why should they be punished? It’s not their fault for living the dream of owning their own home. It’s the fault of the banks for authorising these excessively big mortgages for the young buyers. It’s also the fault of our government for taxing savings but rewarding debt with negative gearing. Hence the crap we find ourselves in now. Who decided it is now okay to give out loans based on a couple’s income rather than the sole bread winner? Did they never consider that times get tough and that unemployment levels can run high. As a result we have no safety net in our economy for high unemployment or high interest rates. If people were encouraged to save, such as with zero tax payments on bank interests earned then the economy would just trickle along at a more sombre, but reliable rate avoiding booms and the following busts. If only!
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