Aussie Dream or Nightmare?

[sash]

Just saw this article...very D&G...but if unemployment rachets up to say 8%....there could be alot of repossessions.

http://www.news.com.au/business/money/story/0,28323,25235255-5013951,00.html

I too over the last 2 months am becoming increasingly cautious as I see FHB jump in with both feet....I think they know what they are in for particularly if they don't have a savings safety net.

The article talks about one family who buried their head in the sand when they lost their jobs.

Would be interested to see what other people think??

 

[sparky23]

I think 92% of people will still have their jobs and no-one knows of the remaining 8% what percentage of these will be renters.

 

[sash]

Good point...did not think of that.

For example we know that 65% of the population rents or is in pulbi housing. So if unemployment goes up another 3%....most probably only 1-2% are going to be owners?

I think 92% of people will still have their jobs and no-one knows of the remaining 8% what percentage of these will be renters.

 

[Artie70]

35% of the market is owner occuper - debt free
35% are owner occupiers with mortgages
29% are rentals

Assuming the 35% with mortgages are evenly proportioned over 25 years (ave loan term) so some have little debt and some have lots. It is really only those purchased in say the last 5 years that have little equity and are unable to weather unemployment for a period.....that amounts to 7% of the 70% owner occupier market that may be at risk of foreclosure.

A further assumption is that 35% of rental properties are owned outright with the remaining 65% also purchased proportionately over the past 25 years. Same calculation comes to 4% of the 29% at risk of foreclosure.

That means 11% of the entire market is at risk and only a relatively small proportion of those will become unemployed, assuming rising unemployment is evenly distributed amongs owner occupiers, mortgage holders and landlords.

A bit simplistic but that is the way I view it. It doesn't take into consideration the lengths that people will go to hang onto the family home, the measures they have in place and the assistance family may provide.

 

[Dazz]

Nice logical analysis there Artie70. Concise and unemotional.

You obviously won't get a job as a financial journalist.

 

[jackstar]

People who are unemployed find it difficult to meet rent payments, the higher the rent, the more difficult to meet.

 

[RumpledElf]

and the more unemployed you get jamming into a house to share the rent, which really increases the wear and tear, the neighbours get annoyed at all the noise and comings and goings and 10 cars parked on the lawn because there are 15 people living there ... etc etc.

I live next door to a crowded house, they come and go all night, revving their old cars outside our bedroom window. It drives us nuts. Can't they make all that racket during the day instead

 

[Aaron Sice]

....giddyup!

 

[Bill.L]

Hi all,

Excellent analysis Artie, you wont last 2 minutes on the G&D forum if you take that sort of reality there.

You sort of killed this thread with reality, well done.

bye

 

[GIDDO]

Yeah but yeah but yeah but
IF there are a lot more forced sales, or sales under stress, the RE prices will quickly come under pressure.

Fewer listings, fewer buyers, and then those stressed vendors needing to sell FAST.

Remember, even if you still have your own job, the value of your brick box will be equal to the brick boxes being sold under vendor stress. It doesn't takes too many of these stresssed sales and a trend is set. A downward trend.

Then vendor hold off listing even more, and buyers wait for prices to go even lower.

 

[sparky23]

Just thinking that young FHB have at least 3 safety nets. The first is simply to stop spending money on doodads, the second is to rent out rooms to their mates and the third is Mum & Dad!

 

[J Martin]

35% of the market is owner occuper - debt free
35% are owner occupiers with mortgages
29% are rentals

Assuming the 35% with mortgages are evenly proportioned over 25 years (ave loan term) so some have little debt and some have lots. It is really only those purchased in say the last 5 years that have little equity and are unable to weather unemployment for a period.....that amounts to 7% of the 70% owner occupier market that may be at risk of foreclosure.

A further assumption is that 35% of rental properties are owned outright with the remaining 65% also purchased proportionately over the past 25 years. Same calculation comes to 4% of the 29% at risk of foreclosure.

That means 11% of the entire market is at risk and only a relatively small proportion of those will become unemployed, assuming rising unemployment is evenly distributed amongs owner occupiers, mortgage holders and landlords.

A bit simplistic but that is the way I view it. It doesn't take into consideration the lengths that people will go to hang onto the family home, the measures they have in place and the assistance family may provide.

Fair analysis, but you fail to consider that it is the fringe who set the market. The buyers and sellers. It would take a LOT less than 11% forced sales to send the market into a tailspin, possibly less than 1-2% in some instances.

I'm not claiming it will happen, but 11% is very relevent.

Can I ask why you think the UK and US have come off 20%, with only a small increase in unemployment so far? You could have used your same argument a year ago in these countries, and that didn't stop them falling... it only takes a few forces sales.

 

[Artie70]

Yes, the 11% is relevant however it is reasonable to expect that unemployment will be broadly distributed across the entire workforce so the largest proportion of that will come from the other 89%. Unemployment is approx 5%, so if it goes to say 10% it may well be that only the 1-2% you mention is actually affected. That may possibly have an effect on the market. I suspect not due to the undersupply. In theory there are more buyers than sellers (or tenants than landlords for that matter).

The family home is almost sacrosanct, it is the last asset that goes and people will go to great lengths to hold on so that delays things somewhat. People can be pretty creative when forced into a corner. Sure foreclosures may rise however we are already at a very low base and last time I looked below the long term rate of loan defaults so there are no alarm bells ringing there (it just seems it is more prevalent because it has had so much press expsoure recently, particularly when interest rates peaked late last year).

Foreclosures may rise, they may not - at this stage it is speculation.

I am not suggesting prices will not fall in Australia in the preiod ahead because they will in some cities, just not necessarily due to rising unemployment. As an example, Perth's median house price has fallen nearly 12% in the last year which is no surprise after tripling in value over the previous 5 years. I can't see a link there to unemployment which to date has not increased significantly.

History is littered with periods of falling asset prices after a boom. What evidence is there to suggest that the fall in values in the US and UK are not just a normal cyclical correction in the market? Is it reasonable to entirely link those price falls to rising unemployment, or the GFC for that matter? If prices fall heavily with only a small increase in unemployment there must other reasons.

Sure there are areas in the US that have their own unique and major problems. Taking the basket cases out of the equation, the majority of price falls in the US have been in the 0-15% range and some cities have actually increased in value. It is not that unusual over the course of a property cycle. Is it being made out to be bigger than it really is?

 

[sash]

To put things further into perspective....whilst in previous recessions people who owned homes had to be pretty good credit risks. I thhink this time around the number of repossessions will exceed the number in the 1990s as the credit criteria has been a lot looser and people have very high indebtness. Having said that we are only talking about 1% and maybe 2% at a stretch of total loans in potential default as opposed to 6-10% in the USA. Our banking system whilst having looser credit over the years is still very conservative compared to the USA.

Again there a couple of factors which have a bearing on why housing fell so much. Firstly in the USA, you can walk away from the housing loan with norecourse other an a bad credit rating ....as opposed to being pursued to the ends of the earth. Two....the supply of land and housing development is was quite easy...though the GFC has tightened this up. Thirdly, there is an excess capacity in the USA in most locations of houses which will need to be soaked up. The funny thing is that there is likely to be another boom once it has been soaked up and as the population grows. And finally, OZ has only 5 major cities and in all of these cities the vacancy rate is under 2%....the USA has over 50 cities with over $1m people....so there is much more choice.

The family home is almost sacrosanct, it is the last asset that goes and people will go to great lengths to hold on so that delays things somewhat. People can be pretty creative when forced into a corner.
Foreclosures may rise, they may not - at this stage it is speculation.


Sure there are areas in the US that have their own unique and major problems. Taking the basket cases out of the equation, the majority of price falls in the US have been in the 0-15% range and some cities have actually increased in value. It is not that unusual over the course of a property cycle. Is it being made out to be bigger than it really is?

 

[keithj]

Can I ask why you think the UK and US have come off 20%, with only a small increase in unemployment so far? You could have used your same argument a year ago in these countries, and that didn't stop them falling... it only takes a few forces sales.

The US & UK didn't have any 'forced buyers'. The FHOG deadline has created extra 3 categories of people who have big incentives to buy now -

• some who haven't yet been able to save a full 10% deposit, but FHOG gets them over the line (pent up demand)
• some who would probably never be able to save a deposit, but with a little effort & FHOG it gets them over the line (new demand)
• some who were planning on buying sometime in the next few years, but have a big incentive to buy before the June deadline (brought forward demand).

There's a lot of forced buyers at the bottom of the market - so there is unlikely to be bargains around from mortgagee sales. The floor will be supported by FHB, and that floor will support the rest of the market.

It would take a LOT less than 11% forced sales to send the market into a tailspin, possibly less than 1-2% in some instances.

If you're talking about the upper quartile, then I think that's a given.

If you're talking about specific suburbs which are dependent on collapsed local industry, then I'd agree too.

But I don't see a broad based market collapse if unemployment rises to forecast levels.

 

[tubs]

I'm guessing there's about 8,000,000 dwellings in Australia.

30,000 repossessions (if that comes true ) is 0.375% of homes.

Or, 1 in every 300.

Its not a lot. Repossession rates in Australia are historically VERY low, so be careful of stats showing a big % increase because its coming of a very low base.

 

[Quasar217]

That means 11% of the entire market is at risk and only a relatively small proportion of those will become unemployed, assuming rising unemployment is evenly distributed amongs owner occupiers, mortgage holders and landlords.

Unfortunately that's not a valid assumption, because those who fully own their homes are strongly skewed to the older age groups and are retired. Those who are employed are far more likely to have a mortgage (or to a lesser extent, be renting), so unemployment will disproportionately hit those with housing costs to pay.