Business Spectator - Analysis of Australian Property Market - Part 3

http://www.businessspectator.com.au/bs.nsf/Article/The-mercurial-Shadow-LP-blogs-pd20090430-RL9CN

An analysis of the Australian Property Market

Part 3: Why the gloomers are wrong!


The doom and gloom crowd frequently make spurious assertions regarding the Australian property market. In particular they like to make up reasons why an imminent crash is inevitable. This article aims to address and correct their most common claims.

False claim number 1: ‘House prices will revert to historic price vs income trends’

The gloomers often claim that property prices have diverged from fundamentals and must revert to historical price vs income ratios. This argument is clearly nonsense. What they fail to recognise is that the fundamentals have changed, and therefore the trend has changed. House prices won’t revert to historical price vs income trends for the following reasons:

- More women in the workforce means dual incomes going toward housing is now the norm.
- Financial deregulation, product innovation and competition make finance available to a wider range of borrowers.
- Lower interest rates and reduced financial institution's margins on housing loans improve debt serviceability.
- New incentives such as negative gearing, capital gains tax advantages, SMSF can now invest directly in property etc.

Of course, along the way there will be property cycles, booms and busts, but the house price to income ratio will never revert back to past historical trends.


False claim number 2: ‘There is no shortage of houses in Australia’

Another frequent doomsayer claim is that the critical housing shortage recognised by the RBA, media, major banks, government, HIA, real estate industry, and all property analysts and commentators is actually an illusion. They claim that Australia has a massive number of empty houses that will somehow flood the market at some point in the future when interest rates or unemployment levels get too high. This is of course rubbish – the percentage of empty houses in Australia has barely changed in 30 years as shown below.

Year Occupied Empty %Empty
1976 4162064 431200 9.4%
1981 4691425 469742 9.1%
1986 5285571 543539 9.3%
1991 5765021 597582 9.4%
1996 6496072 679165 9.5%
2001 7072202 717877 9.2%
2006 7596183 830376 9.9%

Some gloomers even go so far as to suggest that many property ‘speculators’ are hoarding empty houses while claiming negative gearing deductions. This would of course be completely illegal, and in any case does not make sense from a business perspective, since the investor would be losing rental income while risking severe penalties if caught by the ATO.

Australia has always had empty houses, and an excess of bedrooms in occupied houses, however these empty houses are not necessarily available for sale or rent. And they are not necessarily located in places where people want to live. A house is marked empty if it is unoccupied on census night. Many people are on holiday, out with friends, travelling etc. on census night, so their houses are counted as ‘empty’. This does not mean that the house will shortly become available for rent or sale.

Remote coastal towns always have a large number of empty holiday homes and high vacancy rates, but that doesn't help all the people who work and need to live in Sydney or Brisbane. On census night, there may have been plenty of empty villas in Thredbo and empty houseboats on the Hawkesbury, but again, not much use to the majority of the population who live and work in our cities.

As for the empty bedrooms... well, Australians want empty bedrooms in their houses. We're used to them, and we're not going to start inviting people to share our houses and bedrooms unless forced to by extremely adverse conditions.

High prices and low rental vacancy rates are a symptom of shortage. We see these symptoms across Australia.


False claim number 3: ‘I see very few homeless people in Australia. How can there be a shortage? Where is everybody living then?’

The number of persons per dwelling in Australia dropped from 2.97 in 1991 to 2.76 in 2001 and to 2.74 in 2006. So after falling considerably over a decade, this metric has basically flat-lined from 2001. Australians are now bunching up in existing dwellings rather than continuing the trend of forming new households. Why? Because we don't have enough houses to allow people to continue spreading out at the rate they desire.

Construction is currently down and rents are rising strongly in all cities. The Australian population grew by 390,000 people or 1.84 per cent in the past year. This is the largest number added to the population ever.

We can't just keep bunching up into the existing housing stock forever. The government is beginning to recognise this, hence their plan to build 100,000 new 'affordable' houses. But that is a drop in the ocean - we need many more. They will leave that up to the private sector to build (i.e. property investors and private developers).

Unless we develop new stock, we cannot possibly hope to appropriately house the growing population. So where are all these people who contribute to the pent up underlying demand actually living right now? They are:

- Bunched up in existing houses.
- Sleeping on friends sofas.
- Living in caravan parks and campsites (caravan parks in Australia are overflowing).
- Staying with parents for longer then they desire.
- Hotels, motels, backpacker hostels, guest houses.
- Crisis shelter, homeless centres and public housing.
- A small number of people are living on the streets.


False claim number 4: ‘I have a lot of pent up demand for a Ferrari, but I can’t afford one so my pent up demand is irrelevant, just like pent up demand for housing is irrelevant.’

This is a very common misunderstanding from the gloomers. What they fail to understand is that a Ferrari is a highly discretionary luxury item, while a home is a basic necessity. You can't really compare them like this. If a person cannot afford a Ferrari then they have the option of buying a cheap second hand car, or a bicycle, or walking. On the other hand there is no real alternative to living in a house. Shelter is a basic need. If a person is priced out of a particular housing market then they will do one of the following:

- Move further out, to a less desirable suburb.
- Buy a smaller house or unit instead.
- Make use of a shared equity arrangement or partner with another buyer.
- Rent.
- Leave the country.

Unless they choose the last option, then their demand on the Australian property market still exists. This underlying pent up demand doesn't just disappear. Everybody needs to live in a house.

It would be fine to compare a Ferrari with a luxury waterfront mansion, or to compare ‘transport’ in general with ‘shelter’ in general. But to compare ‘Ferrari’ with ‘shelter’ is just ridiculous. One is a highly discretionary luxury item. The other is a basic necessity.


False claim number 5: ‘Australia’s debt to GDP ratio is at 160%. This is unsustainable - the ratio can’t possibly get any higher and must collapse.’

Credit growing faster than GDP is not necessarily a problem. GDP is income received each and every year, while credit is an expense that is only paid once. It makes more sense to either chart GDP against the interest on the debt, or to chart total debt against total assets.
GDP is not really comparable to total credit. If my income rises by $100 and my total debt rises by $110 then even at an interest rate of 10% pa, I’m still ahead by $89 (100 - (0.1 x 110)), even though my total debt has increased at a faster rate than my income. The same analogy applies to Australia’s Credit vs GDP ratio.
Although the interest on the total credit must be paid every year, much of this interest is owed to other Australians, so to some degree we are paying the interest to ourselves. From the perspective of the overall economy, debts are not just negative assets. They simply represent a pledge to transfer funds from one person to another at some future point in time. They are as much an asset to the lender as they are a liability to the borrower.
In short, Australia’s credit vs GDP ratio is not necessarily a problem. Many countries have a much higher credit vs GDP ratio than Australia. The ratio is over 300% for some countries. There is no reason why our ratio can’t continue to grow. Here is an interesting comment from the RBA on Australia’s debt situation.

QUOTE
http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html
Has the expansion of household credit run its course? Will it reverse? We cannot know the answer to these questions with any certainty, but my guess is that the democratisation of finance which has underpinned this rise in household debt probably has not yet run its course. In the past, the lack of access to credit had resulted in Australian household sector finances being very conservative. Even as recently as the 1960s, the overall gearing of the household sector (taking account of all household debt and all household assets) was only about 5 per cent – that is, households owned 95 per cent of their assets, including houses, outright. This meant that the household sector had significant untapped capacity to service debt and large unencumbered holdings of assets to use as collateral for borrowings. Financial institutions recognised this and found ways to allow households to utilise this capacity. The increase in debt in recent years has lifted the ratio of household debt to assets to 17½ per cent (Graph 6)3. I don’t think anybody knows what the sustainable level of gearing is for the household sector in aggregate, but given that there are still large sections of the household sector with no debt, it is likely to be higher than current levels.

END QUOTE


False claim number 6: ‘Many economists have said that property values in Australia will fall by 40%’

The only public figure who is claiming that property prices will fall by 40% is Steve Keen, an associate professor from a Western Sydney university. Mr Keen has not actually based this 40% figure on any real data, but rather has suggested that because this is approximately how much prices fell in Japan, 40% sounds good for Australia too.

QUOTE
Originally Posted by Steve Keen
http://ourfinanceblogs.com/forums/index.php?topic=18.0
Japan also had a bubble economy in the 1980s, and its house prices have since fallen 42% in real terms, and more in nominal terms since consumer prices have fallen over the 90s and 00s courtesy of Japan's long-running Depression. That's the reason I give a 40% figure for a price decline in the press: our bubble was larger than Japan's in general (though much smaller than Tokyo's), and a fall of that magnitude would seem a good ball park estimate even though it would take a greater fall to restore the median house price to median income ratio to 3, which is Demographia's estimate of the peak level for affordability.

END QUOTE

It seems strange to compare Australia to the Japan experience, when there are so many differences between the property markets in each country. It does not make sense to expect the same outcome from different inputs.

The other notable identity who gained some notoriety in 2008 for his claim of a 40% fall was an internet blogger known as Edward Karan. Karan asserted that property prices in Australia would fall by 40% over two years, starting from the ‘tipping point’ of Q1 2008. With only 8 months to go until his deadline, and prices down only 3% (and rising again), it is obvious why we no longer hear from Edward Karan in the media.

For prices to drop by 40% we would need to see massive levels of forced sales. Unless you are a forced seller, why on earth would you sell for a 40% loss? For prices to fall by 40% there needs to be no buyers at 5% down... no buyers at 10% down... no buyers at 15% down. However there are plenty of buyers ready to jump in right now (even before any significant falls) and even more would be ready to jump in at 10% down. Most people simply want a house to live in and will buy when they can afford it. Many can afford it right now. Property investors are already seeing many cashflow positive opportunities due to the historically low interest rates. There is simply no mechanism by which prices can fall 40% in the current environment.

If I live in a street with 200 houses, and even if two of those houses were forced sales to lucky buyers for a 40% discount, while 10 others sold for a 5% discount (because those vendors didn't need to sell, and the buyers were willing to buy at 5% down), then my valuation would come in at a 5% reduction. For median prices to fall by 40%, then 40% down sales need to become the norm, not the exception. This means massive levels of forced sales. This simply will not happen, especially with the government and major banks agreeing to payment holidays for the unemployed.


False claim number 7: ‘Australian house prices are the highest in the world’

This is another factually incorrect statement, generally based on the Demographia survey. The Demographia survey has been thoroughly debunked due to its massive flaws. It uses a very basic measure of 'affordability' - i.e. median house price to median income. This is an extremely blunt tool. Demographia compares house price to income ratios across various countries, however there is no reason why house price to income ratios would even be consistent across different countries, because there are substantial differences between the housing markets in each country. The survey fails to consider the following factors:

- Disposable/discretionary income
- Employment rate
- General cost of living
- Interest rates
- Rental yield
- Availability of public housing
- Marginal tax rates
- Mortgage default rates (Australian defaults are way below UK and USA default rates)
- Tax incentives such as negative gearing, FHOG, CGT reductions
- Land/Block size
- Dwelling size and quality
- Proximity to transport and infrastructure
- Currency exchange rates
- Economic and political stability
- Home ownership rates
- Urbanisation (much higher in Australia than in US, UK or Japan)
- Population growth - Australia (1.84%), compared to USA (0.9%), UK (0.4%) and Japan (negative)
- Demographics (it is ironic that a survey called Demographia ignores demographics!)

Of course, no survey is perfect and no survey can possibly hope to account for all these factors. Our best option is to examine as many different surveys as possible, each of which may address several of these factors, and this will provide a better general impression of comparative affordability in each country, rather than looking at just one survey in isolation.

Regarding the 'demographic' failings of the Demographia survey, take for example its assertion that a certain 'sea-change' town in Australia is particularly unaffordable. Demographia bases this on the median house price to medium income in that town. What they fail to consider is that the median income there is largely irrelevant, because much of the population are cashed-up retirees (no income) who have saved up for their whole lives and purchased a nice big beach house, often with very low borrowings. Sure, these beach houses may be unaffordable for a first home buyer who lives there and works in the local supermarket, but that's not the primary demographic driving prices that town. In reality, the Demographia survey is comparing apples with oranges.

Another key issue with Demographia is that it only compares Australia with five other countries, yet the gloomers proceed to claim that Australia is the 'most expensive country in the world'. The survey conveniently ignores all the many cities around the world with much higher house prices than Australia. For example Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore, Monaco. Here are some alternative studies:

World's Top 10 Priciest Cities To Own A Home
http://www.forbes.com/2009/02/09/cities-top-expensive-lifestyle-real-estate_0209_cities.html
Sydney - Not in the top 10

GlobalProperty Most Expensive Cities 2008 (apartment price per sqm):
http://www.globalpropertyguide.com/investment-analysis/Most-expensive-cities-in-2008
Sydney - Number 13

Mercer Most Expensive Cities (cost of living, including housing)
http://www.mercer.com/costofliving
Sydney - Number 21

CityMayors Expensive Cities
http://www.citymayors.com/economics/expensive_cities2.html
Sydney - Number 24

Knight Frank Survey (prime residential property)
http://www.finfacts.com/irelandbusinessnews/publish/article_10010019.shtml
Sydney - Number 8

Overseas Property Mall Survey
http://www.overseaspropertymall.com...-prices-evaluated-in-42-international-markets

Aneki (most expensive countries to live in)
http://www.aneki.com/expensive.html
Australia - Not shown in the top 20

Most expensive countries in the world
http://www.associatedcontent.com/article/173434/top_5_most_expensive_countries_in_the.html?page=2
Australia - Not on the list

Most expensive rental markets
http://www.forbes.com/2008/02/11/properties-world-rent-forbeslife-cx_mw_0212realestate.html[/url]
Australia - Not on the list


False claim number 8: ‘Australian house prices are unaffordable’

The majority of Australians are well ahead on their loan repayments. Less than 1% of borrowers are 90 days in arrears on loan repayments. The RBA has demonstrated that 25-40 year olds today have more disposable income left over after buying a 30th percentile house than at any time in the past. Clearly the majority of Australians are not finding property unaffordable.


False claim number 9: ‘Australian house prices will crash when unemployment rises’

The unemployment rate has been at historic lows and could not realistically do anything other than rise. Obviously there will be job losses across Australia over the medium term, however house prices have boomed through much higher unemployment levels in previous years. The people most impacted by a rise in unemployment tend to be those who do not own a home anyway, and those who do own a home will be covered by the mortgage payment holiday recently announced by the government and major banks.


False claim number 10: ‘Nigel Stapledon’s data shows that real house prices in Australia were flat thoughout the 1800s and early to mid 1900s’

Stapledon's work has been largely discredited. Nobody was actually collecting Australian median house price statistics in the 1800s and early 1900s. Stapledon’s methodology for collecting the statistics is described in his thesis at the link below.

http://www.library.unsw.edu.au/~thesis/adt-NUN/public/adt-NUN20071210.120652/index.html

Stapledon collected the data by visiting the library and reading one old Sydney newspaper for one day of each year from the 1800s. Then he looked at the advertised price of properties for sale in that paper. Then he extrapolated this out to create an Australia-wide house price index. He based the whole thing on a handful of advertised sale prices in one newspaper from one city on one day of each year, and somehow arrived at a house price index for Australia. He preformed no compositional adjustment and failed to recognise that one city in Australia may be booming while another is stagnant. In addition, Stapledon's measure of inflation in the 1800s bears no semblance to anything we would call CPI today, never mind the fact that houses were purchased using a completely different currency in the 1800s. Stapledon's data is meaningless when analysed critically.


False claim number 11: ‘House prices in Sydney have peaked and cannot possibly get any higher in real terms’

Five years ago, Sydney house prices were 20% higher in real terms. There is no reason why they cannot get that high again or higher. There is no known limit to house prices. Prices in cities such as Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore and Monaco are already much higher than prices in Sydney.


False claim number 12: ‘No subprime in Australia? Ha! I saw an 18 year old on Today Tonight with no job, seven kids and twelve investment properties.’

Of course there are isolated instances where lenders have provided finance to people who are unlikely to be able to service their loans over the long term. But these are exceptions. As a rule, Australian lenders have taken far fewer risks than their US and UK counterparts.


False claim number 13: ‘Fundamental supply and demand, population growth etc is irrelevant. Availability of credit is the only factor responsible for house price growth.’

In 2007, house prices in Melbourne rose by over 20% while prices in Sydney rose by only 8%. Did Melbourne have twice the amount of credit available? No. Prices were driven by supply and demand, not availability of credit. Credit is equally available throughout Australia, but house prices do not rise by equal amounts in each city.


False claim number 14: ‘Interest rates were cut in the UK and USA. It didn’t save their markets and it won’t save the Australian market.’

The UK and US did not start to slash their official rates until after house prices were already falling sharply, and in any case the official rate cuts were generally not passed on to the borrowers to the same extent as they were in Australia.


False claim number 15: ‘The UK and USA had high population growth. It didn’t save their markets and it won’t save the Australian market.’

Annual population growth in the UK is actually very low at 0.4%. The figure is 0.9% for the USA. This is much lower than the Australian growth rate of 1.84%.

Link to part 1: http://www.somersoft.com/forums/showthread.php?t=52058
Link to part 2: http://www.somersoft.com/forums/showthread.php?t=52061
 
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Shadow,

You've made it now mate. Chris Joye is posting your blog on Business Spectator! :D

You know I've got nothing much to add as those are much the same arguments I've been mounting for some time now. I guess recent price performance goes some way to vindicate our positions. I note prices are flat again in March, just marginally up 0.1% and this against the massive recessionary pressures backdrop.

Good stuff mate. Thanks for linking.

Cheers,
Michael
 
I just want to warn about the danger of these Shadow posting, that are not giving the reader a correct analyisis and most of important data is missing.
I am not going to waste time reply point by point also because it has been done previously. I just quickly point a couple of things:
first on the suplly side
False claim number 2: ‘There is no shortage of houses in Australia’

Another frequent doomsayer claim is that the critical housing shortage recognised by the RBA, media, major banks, government, HIA, real estate industry, and all property analysts and commentators is actually an illusion. They claim that Australia has a massive number of empty houses that will somehow flood the market at some point in the future when interest rates or unemployment levels get too high. This is of course rubbish – the percentage of empty houses in Australia has barely changed in 30 years as shown below.

Year Occupied Empty %Empty
1976 4162064 431200 9.4%
1981 4691425 469742 9.1%
1986 5285571 543539 9.3%
1991 5765021 597582 9.4%
1996 6496072 679165 9.5%
2001 7072202 717877 9.2%
2006 7596183 830376 9.9%
So, in 2006 there was around 8.426.500 homes, the annual rate was around 140.000-150.000 new dwelling for the last few years, so we are closed to 9.000.000 dwelling now with a population of 21 mil abitants (so rate of around 2.35 abitants for house).
The US data where oversupply seems obvious is (source) :
April 27 (Bloomberg) -- A record 19.1 million homes stood unoccupied in the first quarter and the U.S. homeownership rate fell as the recession sapped demand for real estate.
.
.
.
.
There were 130.4 million homes in the U.S. in the first quarter, the Census Bureau said. In addition to the 2.1 million empty properties for sale, the report counted 4.2 million vacant homes for rent and 4.9 million seasonal properties that are only used for part of the year.

Foreclosures are included in a part of the Census Bureau that also includes vacation homes intended for year-round use and homes that are unoccupied because they are under renovation. There were 7.9 million such properties empty in the first quarter, up from 7.5 million a year earlier, the report said.

Foreclosures could also be counted as vacant homes for sale or rent, or as owner-occupied properties if lenders have not yet evicted previous owners, the agency said.
So, in US there are 306 mil abitants and 130.4 mil homes that make 2.35 abitants for home like in Australia.

Shadow
The number of persons per dwelling in Australia dropped from 2.97 in 1991 to 2.76 in 2001 and to 2.74 in 2006.
Shadow measure the occupancy rate without considering empty homes, fine! for Us is 306 mil/111.3 mil occupied homes= 2.75 that is higher then Australia :eek:
Also in Shadow post number 2 he chart the long term median home growth for Sydney: is it realistic that would see the median of sydney get to 1 mil$ in 5 years? are banks goingto lend 99% of the home value to everyone? :rolleyes:
 
Shadow measure the occupancy rate without considering empty homes, fine! for Us is 306 mil/111.3 mil occupied homes= 2.75 that is higher then Australia :eek:
Also in Shadow post number 2 he chart the long term median home growth for Sydney: is it realistic that would see the median of sydney get to 1 mil$ in 5 years? are banks goingto lend 99% of the home value to everyone? :rolleyes:
Hi Boz,

You're a good guy so don't take this as a personal rebuff. Just wanted to point out that you're off the mark in your post. I won't bother rebuffing the first couple of points although they are also a tad misleading, but the last one needs to be addressed.

To suggest that a median price of $1M would require anything approaching a 99% lend is completely off the mark. With a median around $550K the equity to valuation ratio of all properties holistically is still well North of 50%. Over half that price is supported by net equity. If the median were to rise to over $1M, which I fully suspect it will, then there's no reason to suspect this will require average LVRs over 50%

Remember, FHBs or those with little or no equity, should not be buying median properties. The median is the mid point and by definition not for entry level buyers. The median price is supported in large part by the established equity that buyers of these properties bring to the transaction. The top end prices similarly so.

Median pricing is more a factor of affordability which is driven by a number of factors which Shadow rattled off a few of. Affordability has improved markedly of late due largely to lower interest rates which supports arguments that prices show more risk to the upside than downside.

Just some perspective.

Cheers,
Michael
 
...Also in Shadow post number 2 he chart the long term median home growth for Sydney: is it realistic that would see the median of sydney get to 1 mil$ in 5 years? are banks goingto lend 99% of the home value to everyone? :rolleyes:

Pretty ordinary stuff Boz. Are you suggesting that Shadow predicted “the median of Sydney get to 1 mil$ in 5 years”? Are you suggesting that Shadow predicted “banks [are] going to lend 99% of the home value to everyone”? Seems to me that words are being stuffed into Shadow's mouth by others once again.

I agree with Christopher Joye when he said:
… the bears have a deep visceral hatred of a mysterious contributor otherwise known as Shadow…

I think some bears just hate property investors and constantly use Shadow as their virtual voodoo doll. Others have a split personality – behaving pretty well when using their SS nicname only to completely forget their manners when responding to Shadow’s posts.

Anyway, Shadow I read your work and, for the most part, tend to agree. Congrats on the effort and thanks for posting.
 
Pretty ordinary stuff Boz. Are you suggesting that Shadow predicted “the median of Sydney get to 1 mil$ in 5 years”? Are you suggesting that Shadow predicted “banks [are] going to lend 99% of the home value to everyone”? Seems to me that words are being stuffed into Shadow's mouth by others once again.

I agree with Christopher Joye when he said:


I think some bears just hate property investors and constantly use Shadow as their virtual voodoo doll. Others have a split personality – behaving pretty well when using their SS nicname only to completely forget their manners when responding to Shadow’s posts.

Anyway, Shadow I read your work and, for the most part, tend to agree. Congrats on the effort and thanks for posting.

I don't hate bears and I like Shadow posts (when he say something different and not when he write crappy stuff like these 3 analysis). I am not even a property bear. I mean, I do believe that property will fall somewhat in australia but I am used to walk over my ego everyday and I don't care much if I am wrong or right...
Hava a look at this chart:
SydneyResidexMar09.jpg
doesn't show 1 mil$ for 2014? No source is reported, so I believe he made it.
In any case I can easily debunk all what Shadow said (and he knows that)
 
I like Shadow posts (when he say something different and not when he write crappy stuff like these 3 analysis).

Not sure what 'different' stuff you're talking about. Pretty much everything I write is like these three 'crappy' analysis. Which of my posts do you like?

In any case I can easily debunk all what Shadow said (and he knows that)

Yeah yeah sure Boz. You can debunk everything I say, but you just can't be bothered, right? :rolleyes:

This is pretty much the same response given by all the bears on the other forum where my articles are also being discussed.

Most of those posts are along this line... we can debunk everything Shadow says, but we can't be bothered, so we'll just resort to character assassination instead. Even the moderator there resorted to spreading lies about me. Typical.
 
Not sure what 'different' stuff you're talking about. Pretty much everything I write is like these three 'crappy' analysis. Which of my posts do you like?

I like numerous source of info you often provide like the globalpropertyguide or even something like the housing finance link on abs website you post today in the part2, of course we like different part of it as it contain 32 pages...I find interesting this piece of data that it is quite hard to find in the usual concise reports:
At the end of February 2009, the value of outstanding housing loans financed by
authorised deposit-taking institutions was $840,392m, up $10,563m (1.3%) from the
January 2009 closing balance. Owner occupied housing loans financed by authorised
deposit-taking institutions increased $9,604m (1.7%) to $580,278m and investment
housing loans financed by authorised deposit-taking institutions increased $959m (0.4%)
to $260,114m.
Bank loans increased $10,159m (1.3%) during February 2009 to reach a closing balance
of $796,988m. Owner occupied housing loans of banks increased $9,212m (1.7%) to
$544,289m and investment housing loans increased $947m (0.4%) to $252,699m
to me is interesting because you see the private debt increasing while the GDP is decreasing (recession) also the public deficit is increasing (fast and see the budget release in few days). It is good to see what the actual number are and that the debt bubble is still inflating.
I guess you like to read my posts as well even if different then yours...;)
 
Prices in cities such as Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore and Monaco are already much higher than prices in Sydney.

Hi Shadow,
How do you compare these prices? In most of these cities the popular dwelling type is an apartment. In Sydney apartment dwelling is only 17% of the total dwellings. And (rightly or not) apartments are considered as kind of a "second rate" dwelling type. Thus:

- If you compare $/sqm of apartments between Sydney and Paris/Moscow/Hong Kong/Milan/Monaco you are comparing "second rate" dwelling type (Sydney units) with regular type dwellings in those places. In other words, an apartment in Sydney (cheaper type of dwelling) should not be compared to an apartment in Paris (normal type of dwelling). Of course Paris would be dearer.

- If you compare house prices with house prices in those cities again you have a problem, since you won't find Australian type houses with backyards close to the centre like in Sydney. And if you do find a couple their prices would be much higher since a free standing house with a backyard would be considered as a "luxury type" of dwelling there, thus by its definition and its rarity more expensive. In other words, comparing a house in Sydney (normal type of dwelling) to a house in Moscow or in Monaco (luxury type of dwelling) is faulty again. Of course they would be more expensive than in Sydney.

So how can you compare? Houses in Sydney to units in Paris? I know it sounds wrong to compare houses to units, but if these comparisons have any meaning (do they really) you should be comparing a "typical dwelling type" in one place to a "typical dwelling type" in the other and measure it not with international dollars but with some local type of value, like % of median income per household, or price of a local loaf of bread (or some other local product or service. The Big Mac also will do), or by the rental yield.
 
You really have to wonder if Chris ever talks with AK.

Shopping while Rome Burns

The Reserve Bank board faces a dilemma when it meets next week to decide whether to follow its Kiwi counterpart to a cash rate of 2.5 per cent (down 0.5 per cent yesterday). It’s basically a choice between looking at housing or business.

Against all predictions, including mine, Australian house prices are rising, not falling, but business conditions are deteriorating, which spells trouble for employment.

One sign of this was the data on credit yesterday from the RBA: owner-occupied housing loans rose 0.8 per cent in March while business credit fell 0.6 per cent.
 
You really have to wonder if Chris ever talks with AK.

Shopping while Rome Burns

The Reserve Bank board faces a dilemma when it meets next week to decide whether to follow its Kiwi counterpart to a cash rate of 2.5 per cent (down 0.5 per cent yesterday). It’s basically a choice between looking at housing or business.

Against all predictions, including mine, Australian house prices are rising, not falling, but business conditions are deteriorating, which spells trouble for employment.

One sign of this was the data on credit yesterday from the RBA: owner-occupied housing loans rose 0.8 per cent in March while business credit fell 0.6 per cent.

I didn't mind that AK article.
The imbalance of money going into mortgages instead of businesses can be balanced with a different policy. For example taking off the government guarantee of deposit (or reduce greatly the limit) will lead more money going into business bond and not into banks deposit. But in any case it doesn't make big difference as money going into housing end up at the end in the pocket of businesses on the revenue side and not the borrowing side. So I think the overall status of the economy should be taken into account in setting RBA rates.
This morning Freddie Mac reported that the 30-year mortgage rate in the US had fallen to a record low of 4.78 per cent (on average) in the week just ended. A year ago the rate was 6.06 per cent.
this from AK is a no news as today the 30 year bond in US is at highest point in months at 4.09%, I think it is just a lagging time before higher rates goes back in US long term mortgages. On the other hand Fannie and Freddie are owned by US government, so a lot of dodgy cheap lending can happen with that...
 
I didn't mind that AK article.
The imbalance of money going into mortgages instead of businesses can be balanced with a different policy. For example taking off the government guarantee of deposit (or reduce greatly the limit) will lead more money going into business bond and not into banks deposit.

Who's buying corporate bonds? Though I suppose doing so is better than buying company shares cos at least you are higher up the creditor tree if the company goes insolvent.


But in any case it doesn't make big difference as money going into housing end up at the end in the pocket of businesses on the revenue side and not the borrowing side.

Don't necessarily agree....with every spin of the money velocity top, it is best if something productive happens....exchanging money on the sale of existing house at all time high prices, doesn't produce a good or service so no money into revenue side of Aussie business.....

more money into housing these days means more debt dollars servicing foreign capital borrowed by our banks to lend to you and me.....cos Aussie doesn't have enough capital of its own to lend to business and resi at today's bloated property prices......ergo net foreign liabilities are going up unsustainably.....we can't keep borrowing foreign money to grow property prices....eventually the outflow of interest will compromise business expansion and public services....

today private sector debt is too high, due also to desire of companies to reduce tax liability by increasing debt / equity ratio (B&B, Macquarie, Centro, etc etc), that govt misses revenue and interest goes OS. Australia is poorer for it....infrastructure not being being kept up to date or expanding with population increase....


So I think the overall status of the economy should be taken into account in setting RBA rates.

this from AK is a no news as today the 30 year bond in US is at highest point in months at 4.09%, I think it is just a lagging time before higher rates goes back in US long term mortgages. On the other hand Fannie and Freddie are owned by US government, so a lot of dodgy cheap lending can happen with that...

bond is up because US fed keeps running printing presses.....
 
Who's buying corporate bonds? Though I suppose doing so is better than buying company shares cos at least you are higher up the creditor tree if the company goes insolvent.
yes, also it is common to sell senior bonds that are backed by assets, I think the recent TAB was like that, also even company like Chrisler will give bond holder some money back, just remind that company like BHP will give you double the interest rate you get in banks :eek:

But in any case it doesn't make big difference as money going into housing end up at the end in the pocket of businesses on the revenue side and not the borrowing side.

Don't necessarily agree....with every spin of the money velocity top, it is best if something productive happens....exchanging money on the sale of existing house at all time high prices, doesn't produce a good or service so no money into revenue side of Aussie business.....

but still at the end of the cycle money goes into the economy, if you buy a house with more debt the guy selling the house will get more money that he will recycle into the economy. But I agree that the system is imbalanced, but that is a political matter not RBA (but they must issue warning to government)


more money into housing these days means more debt dollars servicing foreign capital borrowed by our banks to lend to you and me.....cos Aussie doesn't have enough capital of its own to lend to business and resi at today's bloated property prices......ergo net foreign liabilities are going up unsustainably.....we can't keep borrowing foreign money to grow property prices....eventually the outflow of interest will compromise business expansion and public services....

yes, I agree with that, it is also political matter to solve it in the long term, for sure australia would have to reduce the living standard to enter its mean and have a positive trade balance and current account as a consequence


today private sector debt is too high, due also to desire of companies to reduce tax liability by increasing debt / equity ratio (B&B, Macquarie, Centro, etc etc), that govt misses revenue and interest goes OS. Australia is poorer for it....infrastructure not being being kept up to date or expanding with population increase....



bond is up because US fed keeps running printing presses.....


yes, and that will effect mortgages rate, who on earth will lend the money to home owner when you get same interest on treasury bonds?
 

yes, and that will effect mortgages rate, who on earth will lend the money to home owner when you get same interest on treasury bonds?

yeah the more I read, the more I think credit is going to get tighter than a tick on a dog's bum

Can see the old saying coming back in:

"Banks will only lend to those who don't need to borrow."

So rich will get richer....and Mr Rudd will annouce Policy Revision Mark 38

It blows me away that banks won't lend to business, who employ people....but they are lending against property at today's prices.....they must be stress testing business.......kill off the weak....knock off supply overcapacity.....so they must be expecting n+1% mortgage defaults.....

Looks more and more like asset prices are going to have downwards pressure.....though suppose the elites reckon OOs will go frugal+++ to hold on to their homes for dear life.....be interesting if many of them end up with negative equity.....

Very interesting times ahead....
 
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Maybe Shadow is Chris Joye..??

See ya's.

Different guys but both have coin dependent on a consensus among buyers that no major correction in resi prices is on the horizon.

Well, no more than has already occured in Sydney.

Which is ultimately the issue with the arguments (well, lists and graphs) that Shadow is so fond of.

They lack utility.

For example, imagine you're sitting with your Significant Other in Sydney in June 2004 contemplating your finances. Property, you think to yourself, might be the go. After all, cap gain has been fabulous for the last few years and when you forecast forward it looks fabulous:

AUHousePriceChart4.gif


But past performance is no guarantee of future performance says your Significant Other.

But look at the fundamentals you say, giving your SO the look of someone who clearly isn't getting it:

  • At a little over 6.5%, interest rates are low by historical standards
  • Booming economy...they not making any more iron ore or fewer Chinese!!
  • High numbers of investors keeping prices strong
  • High overseas immigration
  • Trend towards fewer persons per household
  • Already very high current pent-up demand for housing
  • Not enough new houses being built
  • Australian median prices still very low compared to many other countries
  • Banks loosening lending policy including introducing Lo Doc mortgages and higher LVRs.[/B]

So you gear up, go out and buy the mythical median house in Sydney.

In June 2008 your Significant Other gently points out that before holding costs your property is now worth a touch over 3% more than when you bought it, against a reduction is your spending power (thanks to inflation) of 12%.

WTF, the SO asks?

Not to worry, you reply, I have it on good authority that we will see moderate growth in 08/09 followed by a boom in Sydney 10/11.

On what freakin' basis, SO asks?

Well:

  • At a little over 6.5%, interest rates are low by historical standards Oops... Lowest interest rates in 50 years
  • Bearish stock market to drive investors into property
  • High numbers of investors keeping prices strong. Oops..first homebuyers returning to the market, then investors come back because of better returns- High overseas migration Oops...high enough overseas migration
  • Trend towards fewer persons per household
    [*]Already very high current pent-up demand for housing
    [*]Not enough new houses being built
    [*]Australian median prices still very low compared to many other countries
  • Banks loosening lending policy including introducing Lo Doc mortgages and higher LVRs. Uummmm....
  • Prices set to rise after past 4-5 years of falling prices and stagnation
    [*]Current Sydney median historically too low compared to other Australian cities
    [*]NSW economy starting to pick up again
    [*]Reversal of the current internal migration trend from NSW to other States
  • Top-end already booming - ripple down effect will spread throughout Sydney. Oops...FHB activity will ripple up throughout Sydney

In the fours years to June 04 we saw a 10% fall in Sydney (or 1/4 of a Keen, if you like) notwithstanding whatever people spent renovating and otherwise adding to the capital base of the stock.

Shadow's 'arguments' would have predicted strong growth over that period and been wrong, just as he used the same approach early last year to argue for (subsequently clarified as) moderate growth over 08/09 with a boom in 10/11.

The growth is already happening... Look at Melbourne and Brisbane growth in 2007. Look at the curve for Sydney just starting to head in the upwards direction. It is already happening. Now is the time to get in, before the newspapers all start reporting on it... yes the actual 'boom' part may hit in 2010, 2011, but growth will still be strong in 2008-2009. If you wait until 2010 to buy, I believe prices will be up to 20% higher than they are right now.

One can spend all the time in the world pulling the lists and graphs apart but the reality is that it doesn't matter...they simply haven't shown predictive validity.
 
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Hi TF,

I didn't predict a boom in 2010 - that's just another thing you've made up. You'll have to stop making stuff up like that.

I wasn't recommending buying Sydney property between 2002 and 2004. I myself held off until 2005 before buying. I'm up over 20% since then based on bank valuations from January this year. Of course, it helps if you buy in the right place.

Not sure why you choose 2002 to 2004? Were you suggesting that I was advising people to buy then? You appear to be using my list of fundamentals that apply to the property market today, and claiming that because these didn't apply from 2002 to 2004... therefore... not sure?

You seem to be saying that my argument would have been wrong between 2002 and 2004? But I wasn't making the argument then. Anyway the bulk of your post didn't make much sense after that, since it all followed on from that 2004 stuff.

Cheers,

Shadow.
 
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Hi TF,

I didn't predict a boom in 2010 - that's just another thing you've made up. You'll have to stop making stuff up like that.

Try re-reading my quote. You know it's you, don't you ;)

"...yes the actual 'boom' part may hit in 2010, 2011, but growth will still be strong in 2008-2009."


Or if this helps (my emphasis to assist you in locating the relevant bits):

No worries MBL... I do agree with you that property prices don't double every 10 years, but I don't necessarily agree with all of your other points.

Personally, I think the correction has already happened, and if you look at the graph above, and picture in your head the negative growth from 2003-2007, then I think we would probably be back onto the trend line, with a period of several years moderate growth to come, followed by another boom towards the beginning of the next decade. And the next boom may be even bigger than the last one... that's been the trend so far.

I have others on similar themes if you need more examples.

I expect this massive boom is just round the corner, and in fact that the preliminary growth phase has already begun in several cities...

I expect the next real surge in prices to occur around 2010-2011, with the next boom peaking around 2014-2015.


I wasn't recommending buying Sydney property between 2002 and 2004.

Didn't say you did.

Not sure why you choose 2004 - were you suggesting that I was advising people to buy then?

See above

You seem to be taking the list of fundamentals that I have said apply to the property market today, and saying that these didn't apply in 2004... therefore... not sure?

Quite the opposite. The "fundamentals" applied then as well..it just didn't matter.

Anyway the bulk of your post didn't make any sense since it followed on from that 2004 stuff, so I don't see much point responding to the rest of it.

Indeed
 
"Banks will only lend to those who don't need to borrow."

So rich will get richer....and Mr Rudd will annouce Policy Revision Mark 38

I believe this was the case in Japan, where the divide has grown between the have and have nots, because of lending criteria at a .BS% lending rate.

What insentive is there for a bank to lend for a non existant return?
 
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