http://business.smh.com.au/housing-dodges-worst-of-global-wreck-20080714-3ewd.html
Housing dodges worst of global wreck
July 14, 2008 - 3:33PM
Page 1 of 2
Australia, like many rich nations, is in the throes of a painful housing slump but there are peculiarities here that mean the impact on the domestic economy will be a lot less brutal.
Crucially there is no hangover of unsold homes in Australia, unlike the United States where a record glut has been driving prices inexorably lower.
If anything, Australia has too few homes to match the demands of a growing population and a record immigration intake, a phenomenon that is keeping house prices near historic highs even as the cost of buying has surged.
"Sure, Australia has taken a hit but it's nothing like as bad as in the US, UK or New Zealand,'' said Matthew Hassan, an economist at Westpac.
"In fact there's a pent-up demand for housing because construction has been running below average for some years now,'' he explained. "That's putting a floor under the market and should ensure that any decline in prices won't be precipitous.''
There are no official data for unsold homes in Australia but the Housing Industry Association (HIA) estimates that the industry is currently building around 40,000 fewer homes than are needed to meet population and migration levels.
Since that has been going on for several years, there could actually be a net shortage of around 140,000 homes. In contrast, the United States has a backlog of more than 5 million unsold homes, an all-time high.
Indeed, the HIA estimates that 1 million new homes need to be built in Australia over the next five years.
"Supply must increase rapidly to meet expected demand, particularly in the capital cities,'' said HIA's head of policy, Chris Lamont. "Demand for housing is really biting as evidenced by record low vacancy rates in the rental market.''
National vacancy rates are hovering around 1%, compared with more normal levels of 3%.
That demand owes much to migration which was a record 177,600 in the year to June. Many of these are skilled migrants with jobs and who aspire to live in decent homes in the major cities.
The supply of housing has not kept pace in part because the Reserve Bank of Australia (RBA) made it clear early on that a housing bubble would not be tolerated.
The central bank began raising interest rates in May 2002 and launched a verbal campaign against housing speculation. The US Federal Reserve, arguing that monetary policy could do nothing about bubbles, did not stop cutting rates until June 2003, when they were at 1%.
Home building here duly fell away and has been running below the long-run average for several years now.
"In hindsight, the building industry owes a lot to the pre-emptive action of the RBA,'' said Stephen Roberts, a research director at Lehman Brothers. "It stopped them getting carried away like their American cousins, so the resulting drag on the economy is a lot less.''
Builders also have lucrative opportunities elsewhere in the booming mining and infrastructure sectors.
According to the national accounts, total private spending on engineering and non-residential construction like shopping malls and offices amounted to $74.8 billion in the 12 months to March.
That was up 20% from the previous year and surpassed spending on homes of $66.8 billion.
Lately, the state governments have also gone on an infrastructure spending spree and the backlog of work to be done in engineering alone amounts to $50 billion.
That is not to say the Australian housing market is immune.
Aiming to restrain a run-up in inflation, the RBA has hiked its main cash rate by 100 basis points in the past year, taking it to a 12-year peak of 7.25%.
Mortgage rates have risen even further as local banks seek to cover higher funding costs from the global credit squeeze.
Just Friday, the country's biggest home lender, Commonwealth Bank, lifted its variable mortgage rate by 14 basis points to 9.58%. National Australia Bank followed today, taking its rate to 9.61%.
That is far above rates on US 30-year mortgages, which are around 6.25%. The UK 10-year mortgage rate is at 6.45%, though you need a 25% deposit to get that. Loans without a deposit are virtually unattainable.
Home loans have also become harder to get in Australia as non-bank lenders have struggled to obtain funding while investors have shunned securitised mortgage debt.
As a result, the number of new home loans fell by 22% in the year to May, the biggest drop on record.
But, again, that decline is relatively moderate compared to, say, the UK where the number of mortgages approved sank 64% in the year to June.
"Australia's financial sector has held up better than many others,'' said Westpac's Hassan, noting that none of the major banks had suffered serious losses from subprime debt.
"Banks have been able to expand their balance sheets and keep lending, which has really cushioned the market,'' he added.
All of which has helped Australia avoid the sort of drastic falls in home prices seen elsewhere.
The latest figures from the Halifax showed UK home prices fell 2% in June, after a 2.5% drop in May. In the United States, the Case/Shiller measure of home sales dropped 1.4% in April, to be down 15.3% on the year.
Yet the latest official data on Australian housing showed prices actually rose 13.8% in the year to March. Real estate surveys have since pointed to some easing in prices, particularly in Sydney, but they are still up on the year.
This resilience comes despite that fact that, by some measures, Australian homes are the most unaffordable on the planet. Average house prices are six times annual household income, up from four times a decade ago.
"It's been a remarkable performance and, with so much pent-up demand, there could be a rush for housing once interest rates start to fall, as we expect next year,'' said Westpac's Hassan.
Housing dodges worst of global wreck
July 14, 2008 - 3:33PM
Page 1 of 2
Australia, like many rich nations, is in the throes of a painful housing slump but there are peculiarities here that mean the impact on the domestic economy will be a lot less brutal.
Crucially there is no hangover of unsold homes in Australia, unlike the United States where a record glut has been driving prices inexorably lower.
If anything, Australia has too few homes to match the demands of a growing population and a record immigration intake, a phenomenon that is keeping house prices near historic highs even as the cost of buying has surged.
"Sure, Australia has taken a hit but it's nothing like as bad as in the US, UK or New Zealand,'' said Matthew Hassan, an economist at Westpac.
"In fact there's a pent-up demand for housing because construction has been running below average for some years now,'' he explained. "That's putting a floor under the market and should ensure that any decline in prices won't be precipitous.''
There are no official data for unsold homes in Australia but the Housing Industry Association (HIA) estimates that the industry is currently building around 40,000 fewer homes than are needed to meet population and migration levels.
Since that has been going on for several years, there could actually be a net shortage of around 140,000 homes. In contrast, the United States has a backlog of more than 5 million unsold homes, an all-time high.
Indeed, the HIA estimates that 1 million new homes need to be built in Australia over the next five years.
"Supply must increase rapidly to meet expected demand, particularly in the capital cities,'' said HIA's head of policy, Chris Lamont. "Demand for housing is really biting as evidenced by record low vacancy rates in the rental market.''
National vacancy rates are hovering around 1%, compared with more normal levels of 3%.
That demand owes much to migration which was a record 177,600 in the year to June. Many of these are skilled migrants with jobs and who aspire to live in decent homes in the major cities.
The supply of housing has not kept pace in part because the Reserve Bank of Australia (RBA) made it clear early on that a housing bubble would not be tolerated.
The central bank began raising interest rates in May 2002 and launched a verbal campaign against housing speculation. The US Federal Reserve, arguing that monetary policy could do nothing about bubbles, did not stop cutting rates until June 2003, when they were at 1%.
Home building here duly fell away and has been running below the long-run average for several years now.
"In hindsight, the building industry owes a lot to the pre-emptive action of the RBA,'' said Stephen Roberts, a research director at Lehman Brothers. "It stopped them getting carried away like their American cousins, so the resulting drag on the economy is a lot less.''
Builders also have lucrative opportunities elsewhere in the booming mining and infrastructure sectors.
According to the national accounts, total private spending on engineering and non-residential construction like shopping malls and offices amounted to $74.8 billion in the 12 months to March.
That was up 20% from the previous year and surpassed spending on homes of $66.8 billion.
Lately, the state governments have also gone on an infrastructure spending spree and the backlog of work to be done in engineering alone amounts to $50 billion.
That is not to say the Australian housing market is immune.
Aiming to restrain a run-up in inflation, the RBA has hiked its main cash rate by 100 basis points in the past year, taking it to a 12-year peak of 7.25%.
Mortgage rates have risen even further as local banks seek to cover higher funding costs from the global credit squeeze.
Just Friday, the country's biggest home lender, Commonwealth Bank, lifted its variable mortgage rate by 14 basis points to 9.58%. National Australia Bank followed today, taking its rate to 9.61%.
That is far above rates on US 30-year mortgages, which are around 6.25%. The UK 10-year mortgage rate is at 6.45%, though you need a 25% deposit to get that. Loans without a deposit are virtually unattainable.
Home loans have also become harder to get in Australia as non-bank lenders have struggled to obtain funding while investors have shunned securitised mortgage debt.
As a result, the number of new home loans fell by 22% in the year to May, the biggest drop on record.
But, again, that decline is relatively moderate compared to, say, the UK where the number of mortgages approved sank 64% in the year to June.
"Australia's financial sector has held up better than many others,'' said Westpac's Hassan, noting that none of the major banks had suffered serious losses from subprime debt.
"Banks have been able to expand their balance sheets and keep lending, which has really cushioned the market,'' he added.
All of which has helped Australia avoid the sort of drastic falls in home prices seen elsewhere.
The latest figures from the Halifax showed UK home prices fell 2% in June, after a 2.5% drop in May. In the United States, the Case/Shiller measure of home sales dropped 1.4% in April, to be down 15.3% on the year.
Yet the latest official data on Australian housing showed prices actually rose 13.8% in the year to March. Real estate surveys have since pointed to some easing in prices, particularly in Sydney, but they are still up on the year.
This resilience comes despite that fact that, by some measures, Australian homes are the most unaffordable on the planet. Average house prices are six times annual household income, up from four times a decade ago.
"It's been a remarkable performance and, with so much pent-up demand, there could be a rush for housing once interest rates start to fall, as we expect next year,'' said Westpac's Hassan.
