Australian housing bubble 'yet to burst'

[keithj]

It is one of those strange things in debt deflation that the price of assets declines and debts remain the same. They eventually have to be written off or paid off with wages/earnings. That is why the income ratio is relevant.

I'd agree entirely that income ratio is important for FHB, because they have a small (20%) deposit.

However, it's a lot less important for upgraders because they have a big (50%?) deposit. And existing OOs is by far the majority of the market.

According to one survey the Sunshine Coast is the most unaffordable market in the world. It's unaffordable to FHB. However, it's affordable to the demographic that lives there - mostly retirees They don't need to borrow because they've got a 100% deposit that they've saved/invested over 40 yrs, so their income/mortgage servicability ratio is irrelevant.

Maybe studies should take mortgages/LVRs & demographic into account on a suburb basis to give a better picture of whether a suburb is affordable to the demographic it currently houses, rather than just income.


The RBAs measure of affordability uses the median income of the 25-39yo demographic and a 30th percentile house (ie well below median) & IRs. The RBA is well aware that the oft-quoted 3x income ratio no longer works for several reasons - big deposits, relatively low IRs & higher discretionary income being the main ones.

When expected capital return becomes zero or negative, people will have to repay their debt or try to write off the debt.

It's in no-ones interest for long term negative or zero capital return. The govt & RBA & banks & existing property owners will do all they can to avoid it. It will lead to the loss of retirement savings, the loss of the wealth effect, the possible failure of the banking system and a deflationary spiral (a la Japan). It's only in the interest of a v. few investors (like you) and FHB - both of which are in a minority.

The 3rd alternative is inflate the value of money (print more $$$), so the debt is inflated away over time. I can't see much debt being written off (except in a few big business basket cases), but I can see repayment of debt and higher inflation.

I can see some Commercial IP falling >50% as the economy stalls & businesses go broke - unlisted property has in the past followed listed property which has already fallen by 40-95%.
I can envisage falls of 50% in some specific circumstances - eg mining towns, top end property.
I can see the bottom end staying flattish - being supported by FHB with FHOG & low IRs.
I'd expect the huge majority of the rest to have lower turnover, and increased distressed sales as unemployment rises. A few sales will bring down the medians.
So I feel the market is likely to compress from the top - a good time to try to upgrade because the next suburb up will be relatively less expensive.

The lower turnover will mean less reliable stats, and the distressed sales will force the median down a little. How long this all goes on for is anyones guess . And anyone who thinks they do know is more likely to be wrong that right IMO.

 

[oracle]

It's in no-ones interest for long term negative or zero capital return. The govt & RBA & banks & existing property owners will do all they can to avoid it. It will lead to the loss of retirement savings, the loss of the wealth effect, the possible failure of the banking system and a deflationary spiral (a la Japan). It's only in the interest of a v. few investors (like you) and FHB - both of which are in a minority.
....

I agree. Good post keithj

Cheers
Oracle.

 

[attrill]

Looking at the chart of affordability that compares median price with houshold income for certain areas, the ones that do badly are the retirement areas where there is not a lot of income but they are nice beachside suburbs.

The Gold/Sunshine coasts and Mandurah in WA are prime examples of this, but these are used to demonstrate unaffordability when they are not indicative of a working population.

 

[evand]

Yes, something like that. Could be less outright but taking inflation into account its the same anyway.

so 10% pa drop at 5 years is a 50% drop??

or 5% drop at 7 years is 35% drop??

is this your predictions?

 

[sash]

I can see some Commercial IP falling >50% as the economy stalls & businesses go broke - unlisted property has in the past followed listed property which has already fallen by 40-95%.
I can envisage falls of 50% in some specific circumstances - eg mining towns, top end property.


I can see the bottom end staying flattish - being supported by FHB with FHOG & low IRs.

Keith, ditto! I have a friend in one of the majors and they are increasingly more worried about the quality of their Commercial Lending. Some of them did not even know what their Commercial Relationship Managers were lending on!! I see that Perth will be the most hit .....Dazzling will argue against this of course!! I don't like his chance if they value his holdings and decide to call in his loans as they are X-collateralised. I expect to get another smart email shortly...LOL!

Friend and I have had difficulty securing low end stock as FHBs are out bidding us. I see more activity in the lower end and the median in capitals will fall as a result. I been fairly disappointed of not seeing prices falll larger than 15%. Anything under 300k in any of the major cities are walking out the door. A lot of the buyers now are working in government and community jobs so they have a high level of security. They are typically earning 80k-150k pa as a couple. After next month...it will be cheaper to buy than rent even after factoring costs like rates.

 

[contrary]

It's in no-ones interest for long term negative or zero capital return. The govt & RBA & banks & existing property owners will do all they can to avoid it. It will lead to the loss of retirement savings, the loss of the wealth effect, the possible failure of the banking system and a deflationary spiral (a la Japan). It's only in the interest of a v. few investors (like you) and FHB - both of which are in a minority. .

It's not in anyones interest but it may well happen. Everyone is banking on these bailouts having some effect. Unfortunately due to privatisation government makes up 20% GDP so increasing government spending by 15% which would be mamoth, would not really make that much difference to negative GDP growth. Once real estate falls over 20% the cycle is self reinforcing as the banks become terminally impaired. Most homebuyers in the last 5 years would also be in negative equity (except in Perth and QLD, where it may fall more than that initially anyway). When the majority of people are in negative equity, I think expected capital returns will be negative, when they should be most positive.

When everyone expects something, I think about what the opposite may be, as this can strangely happen. Everyone is expecting stagnation and low nominal price falls and somehow inflation and things will bounce within 3 years. I am starting to look at the possibility that there maybe an extended decline and keeping powder dry.

This is an interesting study on the aftermath of major financial crisis due to a banking crisis. It includes : US 1929, Spain 1977, Japan 1992, Norway 1987, Phillipines 1997, HK/Korea/Malaysia/Thailand/Indonesia 1997, Finland 1991, Argentina 2001 :

http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

Average cumulative decline in housing peak to trough 36%. Finland which is a poster child for sucessful resolution had declines of 50-60%. The duration of house price declines is quite long lived with an average of 6 years peak to trough.

Equity market declines accompanying banking crisis tend to be steeper and shorter : average down phase lasting 3.4 years, average decline in equity prices 55.9%

Unemployment rises for average 5 years, with increase in unemployment rate of 7%.

The average increase in government debt rise of 86%.

Running the averages through Australia, Sydney.

Median House price at trough (2013) : 350k
ASX200 : trough (late 2010) : 2900
Unemployment peak (2013) : 11%

That's if Australia is average and this is an average banking crissis. Which is not that certain as the banking crissis has not even started here yet.

 

[contrary]

Hi Contrary

Is that plan A, what are your back up plans should this situation not eventuate?

What is your time line for this scenario?

Cheers Pete

I can't predict the future. I can only control risk. I am dollar cost averaging into exchange traded index ETF's eg ASX200, EURO index. In Australia I am buying in increments of roughly 15% and started buying at 4000. So I bought the same amount at 3400 and will buy the same amount at 2800, 2400, 2000, 1600, 1200, 800 (if the stockmarket declines as much as it did in the great depression then the bottom would be about 800). I do not believe in leveraging into a bear market. In property, I am holding my PPOR and anything where the CGT is going to take off 20%. I think the bottom is still a long way off in property. But of course that sentiment may change in which case I will get back on the bandwagon.

From my perspective, nothing has fundamentally changed with these guarantees or bailouts. They are doing what the Japanese did. When the bad debts are outed then that for me is a sign that things will be able to turn around. At the moment they are doing everything to hide bad debts so for me it's early in the story.

That is just my strategy and perspective and I am not of course a financial adviser, you have to get your own financial advice etc.

 

[keithj]

It's not in anyones interest but it may well happen.

Sure. No-one knows how the sentiment of the masses will be affected by the currently known & unknown left field events that will happen over the next part of the cycle. So far the signals are v. mixed with FHOG supporting the bottom of the market, low IRs reducing mortgage stress everywhere, impending potential job losses causing people to tighten belts (pay off more principle?), loss of wealth effect, the realisation that 17 yrs of uninterrupted growth has come to an end.

Everyone is banking on these bailouts having some effect. Unfortunately due to privatisation government makes up 20% GDP so increasing government spending by 15% which would be mamoth, would not really make that much difference to negative GDP growth.

Sure, but it doesn't need to spend all the $$$ itself, it needs to spend some of the $$$ on encouraging the majority (consumers & business) to spend.

Once real estate falls over 20% the cycle is self reinforcing as the banks become terminally impaired. Most homebuyers in the last 5 years would also be in negative equity (except in Perth and QLD, where it may fall more than that initially anyway). When the majority of people are in negative equity, I think expected capital returns will be negative, when they should be most positive.

I'd tend agree.

When everyone expects something, I think about what the opposite may be, as this can strangely happen. Everyone is expecting stagnation and low nominal price falls and somehow inflation and things will bounce within 3 years. I am starting to look at the possibility that there maybe an extended decline and keeping powder dry.

Some extremists are saying 10-15 yrs before there's any more growth (similar to 1930s). I've said elsewhere that in the current highly uncertain times anyone who thinks they know when growth will resume is more likely to be wrong than right. No-one knows, and IMO no-one needs to know either. For me the answer is 'Not Yet'. When growth actually does start & there are stronger signs that it is sustainable, my answer will change. So I too am keeping powder dry.

This is an interesting study on the aftermath of major financial crisis due to a banking crisis. It includes : US 1929, Spain 1977, Japan 1992, Norway 1987, Phillipines 1997, HK/Korea/Malaysia/Thailand/Indonesia 1997, Finland 1991, Argentina 2001 :

http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

Average cumulative decline in housing peak to trough 36%. Finland which is a poster child for sucessful resolution had declines of 50-60%. The duration of house price declines is quite long lived with an average of 6 years peak to trough.

Equity market declines accompanying banking crisis tend to be steeper and shorter : average down phase lasting 3.4 years, average decline in equity prices 55.9%

Unemployment rises for average 5 years, with increase in unemployment rate of 7%.

The average increase in government debt rise of 86%.

Running the averages through Australia, Sydney.

Median House price at trough (2013) : 350k
ASX200 : trough (late 2010) : 2900
Unemployment peak (2013) : 11%

That's if Australia is average and this is an average banking crissis. Which is not that certain as the banking crisis has not even started here yet.

I'm not sure that averages are particularly helpful. I think past events can be helpful is delimiting the likely worst case scenario. Policy makers are aware of what happened the last few times, they know what inputs & policies produced the events, and are attempting to avoid a repeat using different policies. The events in the study are the ones that actually got to become a crisis..... there must be a few crises that were averted by fortuitous policy that would never have got into the study (survivorship bias).

 

[tubs]

It's in no-ones interest for long term negative or zero capital return. The govt & RBA & banks & existing property owners will do all they can to avoid it.

The problem is that the govt dont really have anywhere else to turn. They've dropped rates right down and provided massive stimulus in terms of FHB grants. They can't do much more deregulation of the finance industry either.

Apart from stamp duty reductions, they may be running out of options.

But then the BIG problem. If they want to keep capital prices high, then it makes housing less affordable. But they also want to make housing more affordable, which means cheaper houses.

The only way to make it more affordable is to increase supply. But more supply will reduce overall prices, and affect people's house prices.

They can't have it both ways.

 

[keithj]

The problem is that the govt dont really have anywhere else to turn. They've dropped rates right down and provided massive stimulus in terms of FHB grants. They can't do much more deregulation of the finance industry either.

Apart from stamp duty reductions, they may be running out of options.

I think there's a few options left. Swan in talking about bringing forward tax cuts. Rates can fall a lot further - they've dropped 3% so far, there's another 4%+ they can drop before they get to current Japan or US levels.

But then the BIG problem. If they want to keep capital prices high, then it makes housing less affordable. But they also want to make housing more affordable, which means cheaper houses.

Affordability is dependent not just on prices & incomes, but also on IRs - affordability is currently high. Relatively high house prices & debt levels, along with relatively high disposable income, and relatively low IRs means that the RBA has a lot more leverage with small IR increases. I'd envisage relatively low IRs for at least the medium term.

The only way to make it more affordable is to increase supply. But more supply will reduce overall prices, and affect people's house prices.

They can't have it both ways.

I'd guess the RBA/govts dream scenario is a controlled increase of supply at the bottom end (to increase affordability for FBH) and maintain prices of existing houses (or increase at inflation) so retirement nest eggs aren't destroyed - I think it's possible to have it both ways.... dunno if they'll manage to achieve it though.

 

[MarkandTina]

In all of this there is one thing we know for sure: the reserve bank want to keep inflation within the 2-3% range.

To do that under current conditions they must keep IR's low.

If IR's stay low then its as affordable to buy as to rent.

That creates demand for housing at current prices until demand raises prices, people rent again and eventually it finds an equilibrium point.

Over time fears of unemployment will subside, more people will want to buy, demand will increase and people will have more disposable income again, therefore prices will start to rise again.

Anyway thats my opinion, assuming all else is equal.

Confidence is the big factor at the moment, who is in most control of managing the countries confidence levels and what do they want, if you can work that out you might have some answers.

 

[DavidMc]

Can't it be achieved by ever so slowly changing the definition of a 'median house'?

'Same' house prices can keep going up, yet the median house keeps moving out and gets smaller.

 

[VYBerlinaV8]

Can't it be achieved by ever so slowly changing the definition of a 'median house'?

'Same' house prices can keep going up, yet the median house keeps moving out and gets smaller.

This is a very good point, and has been the subject of other discussions. It's also one of the main points used by investors to support their argument that property makes money.

 

[contrary]

I'm not sure that averages are particularly helpful. I think past events can be helpful is delimiting the likely worst case scenario. Policy makers are aware of what happened the last few times, they know what inputs & policies produced the events, and are attempting to avoid a repeat using different policies. The events in the study are the ones that actually got to become a crisis..... there must be a few crises that were averted by fortuitous policy that would never have got into the study (survivorship bias).

These were crissis where disaster was averted ! The study does not include say weimar Germany... The asian crissis included was actually not a very severe crissis and things turned around within 5 years.

Interestingly the US GDP numbers out on friday will show an economy contracting 5-6% yoy, that is about the same as year 1-2 of the great depression in the 30's. This has a lot in common with the 30's and Japan in the 90's, namely a lot of bad debt to be worked out, no easy solutions and the economy falling off a cliff in terms of GDP growth. Year 2-3 of the great depression was -12%gdp growth so lets hope it is a bit better than that this year.

This is a bias, that we think that we have skills and insight that the Japanese or the great depression era didn't. Maybe we do, or maybe there is no easy or non-painful way to deleverage. I have little confidence in government intervention, and this has to date been a profitable viewpoint. I understand that the government needs to keep confidence as high as possible by spreading rhetoric, and blatant untruths.

I guess when they say "don't be worried , this will be ok" it mean... "this is stuffed, quick panic !". And "we have the policies to correct the situation" means "we know nothing and will stuff it up more quickly whatever we do. Why don't we use this crissis as an excuse to spend on a pet hobbyhorse I've been wanting to for awhile"

At the end of the day it is about bad debts. US private assets (stocks,bonds,resi,commercial prop) were 50T, debt 25T before the crissis and now assets are worth 30T and gradually declining. So their LVR has gone from 50% to 90%. They need to forgive 10-15T in debt. The government bailouts of 1-2T are not enough. At the end of the day the government is not big enough to take on the debt without severely impacting sovereign default risk. Government debt after all is just taxation in the future. What they need is to allow the bad debt to be "forgiven". People who invested in dud assets are suffering now. The people who lent to them should also be allowed to be wiped out. Unfortunately hiding it in a bad bank will not do it, as it just transfers the bad loans to the government.

The above is being played out in every develloped country I am aware of and it would be possible but amazing if it was not played out here.

 

[Y33]

Contrary,

It is okay to look at comparisons in regards to now and other depressions but Japan is a totally different ball game. Many times I see references about Japan and deflation, bubble burst, etc but Japan's situation was and is totally different and unique and shouldn't be used as a comparison.

How the Japanese balance their books and do accounting is one of the main reasons for their problems. Another reason is the way how Japan's ministry of finance operates and controls everything.

 

[evand]

As Alan Kohler on the ABC said last night. The US cant move any lower on interest rates and the administration piggy bank is just about empty.

They have nothing much left to fight this with. Except words. 09 is going to be a fun year.

 

[boomtown]

Evand

You will be aware that the next 800 billion rescue package has passed the house and is headed for the senate. And there may be more to come.

That doesn't sound like an empty piggy bank to me.

 

[evand]

Boomtown,

Tell Alan Kohler.

Evand

You will be aware that the next 800 billion rescue package has passed the house and is headed for the senate. And there may be more to come.

That doesn't sound like an empty piggy bank to me.

 

[boomtown]

I think Im supposed to take away from that that Alan Kohler said it therefore it must be true.

Unfortunately I dont think Alan has access to any secret knowledge or any better understanding than the rest of us - although he does get to speak on radio when he promises to say controversial things.

 

[evand]

No, i never said any of that. I'm just passing on what he said on ABC TV news last night.

But to answer your question. He's one of the more respected, non sensationalist financial commentators in Australia. Definitely not controversial.

I think Im supposed to take away from that that Alan Kohler said it therefore it must be true.

Unfortunately I dont think Alan has access to any secret knowledge or any better understanding than the rest of us - although he does get to speak on radio when he promises to say controversial things.