Housing Crash ‘Dead Certain’
May 30, 2011 14 Comments
Attention grabbing right?
This headline’s possibly coming next because, despite hysterical storylines and catch cries to date, the Australian housing market just stubbornly refuses to throw in the towel to Australia’s newspapers and admit it is 40 to 50 per cent overvalued.
RP Data Indices, due for release tomorrow, will show that although home values were down 2.1 per cent over the March quarter, month to month results show an improving trend after January with values in February down by -0.5% and March virtually flat at -0.2%. Watch them say the market’s ‘locked in the doldrums’.
And this follows one of the world’s strongest post-GFC property market performances? There must be something wrong.
Considering Australian housing stock levels are riding 68 per cent above average and the number of days it takes to sell a house have adjusted accordingly, it takes no genius to work out that it’s the homes that are being significantly discounted that are selling. That hits statistics hard, but even still, these results show resilience beyond mere luck.
With the market showing a virtually flat result for March, one wonders when, if ever, Australia will indulge itself momentarily and acknowledge the market’s fundamental strength. Look around, the streets are not exactly awash with overly confident Australians. The rapidly rising cost of living and a looming carbon tax have seen to that. Yet housing prices have managed to arrest their slide?
But the horror, doomsday headlines persist.
Michael Pascoe explains it succinctly – scary headlines get attention. ‘You attract more readers by shouting “You’re about to lose everything” than with a headline that suggests “It’s a nice day”’.
The Reserve Bank and Australian Prudential Regulation Authority have closely analysed the risk of a huge swathe of value being wiped from Australian homes and have convincingly, easily and overwhelmingly declared it unlikely.
Yet when rating agency, Fitch (who helped create the US sub-prime crisis) declared it would ‘stress test’ Australian banks because of our housing prices, it sounded like something must be desperately wrong to the vast majority of Australian newspapers – once again. It’s an all too familiar refrain.
It didn’t bother them that our banks’ housing exposure had already been tested by more credible authorities, or that our banks had already passed the best stress test of all with flying colours in 2007 – the Global Financial Crisis.
What Fitch found amounted to almost nothing. Still, it made an announcement for the sake of an announcement, about just one part of the market.
The claim? The number of Mortgage backed securities and low-doc loans where repayments are 30 days late has increased by 0.42 per cent. Yes, that’s right folks, less than half a percent. And, worse still, these people who are late with their payments haven’t defaulted. They’re just a little late.
Somehow, this bit of data was translated into one of the most outlandish pieces of spin yet produced by the doomsayers – ‘Home loan defaults continue to soar as more households crumble under financial stress and fail to make mortgage payments’ – drum roll, take a bow Herald Sun.
Stop the press.
The proportion of non-performing Australian mortgages is a tiny 0.7 per cent. Only one third of Australians have a mortgage. With such high levels of unencumbered property owned by Australians, the kind of spiraling housing crisis being experienced in the USA is virtually impossible to replicate here. And that’s before you consider the local shortage of supply, strong immigration, near full employment. But let’s not digress with mere facts like those.
When house prices enter a downward cycle, many Australians just choose not to sell their property, whether they have a mortgage or not. In America, and particularly as a result of the GFC, it has proven the reverse. Non-recourse loans encourage borrowers to abandon their property, return it to the bank, and escape the responsibility of repayments on a property no longer worth what was paid. After all, why stick around if there’s no legal requirement to do so?
This vicious cycle hurls a glut of properties onto an ever-growing real estate bonfire, prices being the sickening casualty.
See any similarity to Australia Fitch?
Following one of the worst years of natural disasters in living memory, quite a few Australians have been pre-occupied with recovery. At the same time, we’ve been on a much-lauded saving trend as well. So, while many of us are busy replacing more TVs, washing machines, cars, furniture and household belongings than normal in any given year, clearly the overwhelming majority have managed to meet mortgage obligations as well.
It would appear the worst is over for Australian economy.
Well-known and respected economic forecaster, Charlie Nelson recently said Household debt is no longer growing, credit card debt is growing sustainably and house prices have recovered from their 5% drop in the GFC. Household savings ratios have been increasing since 2006 and more and more people feel they have no major financial concerns. Willingness and ability to spend are increasing, especially among younger and older age groups.
With increased savings, Mr Nelson believes Australians will go back to spending, but not until their asset bases have recovered to pre GFC levels. With regard to house prices, ‘Negative price commentary from the media does not help the situation’ says Charlie, ‘we need to be more realistic’ he says. ‘House prices will stay steady and then gradually rise unless there is an increase in interest rates. Australia does not have the structural faults of the US market and we are still 180,000 houses short in Australia’.
So, while the media gets on with selling newspapers and its never-ending ratings war, the real estate profession needs to get the message out that there is no housing bubble, no looming crisis, and that when the elephant in the room, uncertainty, moves on, more normal conditions will return.
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Rents are up, there are more tenants then vacant houses, yet nobody wants to put his hand in the pocket and build investment properties. Even in the Bush, builders are going broke because nobody is building, the money is there…. Yes definitely the PM and our own Premier (Qld) have contributed enormously to the uncertainty and frustration. A lot of people are sitting on the side line and waiting ….. for the next election!
What’s new ? Doom and gloom “financial expert” jounalists many of whom would possibly struggle financially to buy a half decent car let alone a property, have always delighted in expounding their “widely experienced” views. The reality is in my opinion that our real estate is dear etc when compared to the USA but that is because there is continued underlying demand in most areas of our Country ( not all) caused by lack of supply and the strong rental returns available to investors.
People have to live somewhere, even if under a bridge, and as it gets harder and harder to buy a home, which I beleive it is, as wages have not kept pace with the increase in property values… it only causes increased demand to be transferred into the rental market that then supports the “real economic value” of the property. I know from personal experience that the rental returns in my own property portfolio are increasing steadily ahead of both inflation and the % increase in the capital value of the properties.
Surely investors are an important part of the Australian Real Estate market and the reality is that if prices fall ( in most cases it is only the Vendor’s asking price becoming more realistic rather than the true values being cut) investors will come into the market to pick up the bargains that will be showing strong rental returns not far below the interest rate that needs to be paid to the Banks to buy them. Any smart Estate Agent will recognise this and market his stock accordingly, especially to his Landlords in his rent roll which can be a goldmine if worked properly. And yes, I’m a former Estate Agent and First National member with about 40 years in the Industry and I guess I’m biased. But I beleive in property as the path to prosperity and history shows that in times of crisis people fall back on the tried and true things they can see or touch.
Chris Thomas-Warburton
‘Doom and gloom “financial expert” jounalists many of whom would possibly struggle financially to buy a half decent car let alone a property, have always delighted in expounding their “widely experienced” views.’
Got to say, Chris, I find your tone a little smug. Working in the real estate industry for 40 years doesn’t mean you can control the direction of the property market. Unless, of course, you have sufficient funds to prop it up all by yourself. Seems to me the real estate industry is happy to spruik the property market to serve its own interests, with stories of house price resilience and inevitable rebounds, but cracks the sads when someone suggests this might all be bollocks. Even the old Herald Sun was saying prices were heating up in Melbourne less than 6 months ago – things appear to have changed:
http://www.heraldsun.com.au/news/victoria/prices-rebound-as-property-heats-up/story-e6frf7kx-1226008836500
http://www.perthnow.com.au/business/perth-property-market-to-rebound-in-2011/story-e6frg2ru-1225972819230
The other chestnut that cracks me up every time is the old under-supply argument. Where does this 180,000 figure come from? Lets say the average home contains two people – that’s 360,000 people (almost twice the population of Hobart) sleeping under bridges, in parks or at homeless shelters just hoping that some nice builder will stump up a nice little two-bedder so that they can share the Australian dream.
Try the Sunshine Coast or Gold Coast if you want to see what over-supply is. Maybe that’s the issue – all the QLD builders need to relocate to Vic or Tas or SA or WA or NSW where the thousands of homeless in desperate need of a new house are obviously living.
And can you please explain this to me:
….and the reality is that if prices fall ( in most cases it is only the Vendor’s asking price becoming more realistic rather than the true values being cut)…
Say again? What exactly is the “true value” of a property? The true value (and I’m sure you know this) is what a buyer is prepared to pay. I’m sure you’ve used this one against a belligerent vendor in the past, Chris. It doesn’t matter what the vendor is asking or what the council just valued the property for (vested interest) – it doesn’t even matter what it cost the builder to build the thing. It’s only worth what a buyer is prepared to pay. And it’s a buyer’s market, Chris.
How can prices continue to grow at a clip when real wages have stagnated? The banks, and particularly, the mortgage insurers see that this can’t be sustainable and are tightening lending. They were the ones who started this property boom and they’ll be the ones to end it.
Is it time to trot out the other old favourite; the property market in Australia is different – a crash can’t happen here? We’ll see how that pans out, but I aint betting on it.
Bob Lever seem to be “very” well informed, “Not”.
Take a small country town like Mareeba, we have people living with relatives and friends and in Caravan parks because we are very short of rental properties. ( Cairns has lots) Not that anybody is buying or building….All the punters have firmly stuck their hands in the front pockets and they ain’t coming out! Not unless or until there are 2 elections a Federal and a Queensland one. People want certainty not this climate of uncertainty and fear that pervades all level of society. This morning I was reading another article about the possible intentions of the Reserve Bank on interest rates, admitted, the majority of economist have discounted a rise in the short term, at the same time a small percentage have said that a rise is very possible. News like that have the uncanny ability to stop the market in it’s track. The property market is as skittish as a stock broker on ice……I think a lot of people have being stung by the GFC and now are very very cautious. All the expert talk about a housing bubble and prices going down the gurgler obviously doesn’t help.
As far as the perceived Over supply in Tourist destinations: Cairns is the same as the sunshine coast, you can fire a gun in the middle of the street and you’ll hit nobody. there’s no tourist in town and when that happens all people that service the industry Move!! And guess what: all the vacant properties that are about town ( Your Oversupply) use to house all those workers and their families! So far we had 4 Major builders going belly up, a number (Lots) of shops closing, tourist ventures either disappearing or scaling back to Mum Dad and the Kids operation, no staff ! I cannot put a number on how many people have left town, it would not surprise me if it was in the thousands……No staff no rentals no rentals nobody wants to buy your Investment! Full price, Half price or give it away nobody wants it. That’s not oversupply…… It’s a tourist recession and, like the stock market, we will come out of it and prices will rise again………
The stock market is still 30% lower than its peak and is lower now than it was at the start of 2006. Any reason the property market couldn’t see a similar outcome?
That’s certainly a valid concern Bob and one which, understandably, is preoccupying many Australians – particularly self-funded retirees.
The share market is, amongst other things, a reflection of consumer confidence. It’s certainly a factor that influences overall property market opinion. However, a great many complex factors are at play in Australia’s property market and First National believes the great majority of fundamentals point towards a period of moderation (falls in some areas and gains in others – parts of Sydney, for instance, already show this), followed by a return to slower than previous growth.
Having just surveyed our entire network, we’ll be releasing our Property Market Outlook – Mid Year Update in the next few weeks on http://www.firstnational.com.au and via this Blog. It may interest you to observe the wide variance of opinion expressed by our members Australia-wide.
Thanks for your question.
you wish, It started in Europe end of 2008 and all the real estate agents where saying that there will not be a house market crash/crisis,sowing reports of sold houses which were a year old and now 2011 it is still going down, nice try, but window painting will have to suffer because of the bad weather which is coming.
and I think it takes another year , I’ll wait.
I am waiting for my buyers market
Thanks viva de Laviva,
The housing prices slide actually started in the States and spread to Europe. The common factor was that both markets had completely different home loans scenarios and a massive oversupply of property. When the music stopped, we all know what happened. However, it can’t be ignored that the same set of conditions produced different results here.
You may wish to read this article which is based on the latest data and, in fact, shows that house prices have gone up, marginally.
http://bit.ly/jnk6Nz
It’s a ‘buyers market’ right now.
I don’t know what rock’s you are all hiding under but the crash is already happening! I’m no property expert but I’m also not in denial like the rest of you but its not hard to see it’s happening already. I’m in the process of selling my house which I bought 3 years ago. If I sell at the price I’m listing it at at the moment (I’ve already dropped the priced 50k from where it started) I’ll be left with a debt of $50k with nothing to show for it. It’s a simple equation, houses cannot continue to grow at 5-10% annually when wages are only increasing by 3%. Unaffordability just gets worse and worse and either the market corrects quickly or it does nothing for over a decade or both!
Hi Luke,
It sounds like you’re experiencing exactly what First National Real Estate talks about in its Property Market Outlook Mid Year Update – see our National Website http://www.firstnational.com.au. Some areas have fallen, some have risen and uncertainty is making selling very difficult in particular price ranges and some areas. It’s easy to oversimplify property market debates but I don’t think you’ll find First National’s in denial. We do, however, quite deliberately present exactly what we believe to be the case and we are not in agreement with many of the naysayers. Naturally, the price you paid initially is just as important as the price you’re asking now and there are no guarantees, as you quite rightly point out, that the market will continue to grow at 5-10% annually (First National makes no such prediction). Your greatest enemy right now is the recovery of the excessive Stamp Duty you would have paid and you will find considerable evidence of First National Real Estate’s efforts to highlight your plight in that regard on this website.
We wish you the best of luck with your sale and I am sure any of our agents would be willing to offer you any advice you need to expediate your sale and maximise your price.
Regards,
Stewart Bunn
National Communications Manager
News Just In From BIS Shrapnel – 8 July
BIS Shrapnel forecasts a recovery in residential property markets – Prices not expected to crash despite recent declines.
Despite many capital cities recording a decline in median house prices in the year to March 2011, leading industry analyst and economic forecaster, BIS Shrapnel, is not expecting a property price crash. The company is forecasting steady prices through 2011, with some capital cities even showing moderate price growth over the following two years to 2013.
According to the company’s Residential Property Prospects, 2011 to 2014 report, in 2010/11 the residential market was hit by a ‘perfect storm’ of falling first-home buyer numbers – which flowed through to weaker upgrader demand, stalling economic conditions and increases in interest rates. All of which coincided to dampen purchaser demand. Full Media Release
Hi Luke
Sorry to hear about your personal situation. This is where people start to realise that they’ve been duped by the whole bricks and mortar investment line that we’ve accepted for too long. This extended property boom has resulted in most people feeling rich. “I bought my house for $160K in 2002 and just sold it for $450K” – that’s fabulous but now I’ve had to turn around and buy a bigger house for $550K because I’ve had another kid and the old house just wasn’t big enough. So, I’ve just paid the agent $15K for selling my old house, the government $20K in stamp duty on the new one and now I have another $100K in debt that I’m paying the bank 8% on.
So who really has the greatest interest in keeping this nonsense going? The real estate industry, state governments and the banks. But why should government stamp duty be the real enemy? As far as I’m aware it’s not a new tax – it’s just become such a big impost lately because the price of houses has become ridiculous. But everyone wants the government to fix things – God forbid we should let the maket do what markets should do and correct when prices get beyond our means. Cut taxes! Increase grants! Here’s an idea – allow housing to become something approximating affordable again.
Oh, and I see that BIS Shrapnel have released another forecast predicting a rebound in the residential market of up to 20% over the next 3 years. Looks a lot like their prediction in mid 2009:
http://www.news.com.au/australian-house-prices-to-rise-by-up-to-20-per-cent/story-0-1225734646473
Or their prediction of October last year:
http://www.smh.com.au/business/property/house-prices-up-20-20101012-16hr6.html
I laugh when I see that they keep predicting 15% increases in the Hobart market where I live. Trust me, the market here is knackered. No doubt BIS will have some other “perfect storm” scenario that will explain why the rebound wasn’t as fast as predicted when they trot out their prediction next year.
The RBA will not raise rates as people are defaulting and falling behind in repayments even though interest rates are extremely low at 8%. I think the RBA will lower interest rates in late 2011 by 2% or more to try and restart the Australian housing market but when they do this it is a sign for me as a prospective first home buyer to continue to stay away from the property market. Any government first home buyer grant increase for me is a warning sign to also continue to stay out of the property market. I have $250k in my savings account thanks to still living at home at almost 35 and I am not going to put this into the Australian property market. Please note that Australian banks will go bankrupt when market does start its much needed correction. Immigrants do not have money. Any immigrant that has 1 million in cash will get Australian residency overnight bypassing normal immigration process. Most immigrants do not have such money and therefore go through normal immigration process which takes years and therefore these people will not prop up the housing market as they do not have the cash to do so.
Westpac Australian division was bailed by the US Federal reserve to the tune of USD$4.5 billion in 2008 otherwise would of collapsed. NAB was bailed out by US Federal reserve to the tune of USD$4bilion in 2008 for Australian division and Australian RBA was bailed out by US fed to USD$4Billion but somehow the Australian media choose to not report it. All info freely available on US Federal reserve website thanks to the Frank/Dodd Act. My biggest worry is Australian banks will freeze savings account like superannuation funds have. Colonial First State will still not release some of my cash to assign to other fund. Money will be safer under the bed than in my bank account. I am looking at taking my cash out and putting it under the pillow.
It would be interesting to know who ” A of Sydney” really is. Under anonimity all sorts of comments can be made…..
The safest thing to do is what I am doing as a prospective first home buyer with physical cash in hand and stay away as far as possible from the Australian Housing bubble which will collapse in spectacular style in the not too distant future. As per my previous comment the average immigrant will not support the bubble prices. Rents in Sydney in suburbs like North Sydney and Lane Cove have dropped considerably in 2001 and it looks like they will drop further. I am still living at home at 35 as I am watching as they continue to fall. If you don’t believe me you can monitor this weekly like I have been doing on http://www.realestate.com.au instead of listening to dopy economists predictions. I have no economic or financial degree or qualification. Actually I have no form of university degree at all. I only use common sense by watching what is happening around me. The still hold views that the Australian stock market will fall below 3000 points. I was close last time it was just above 3000 in 2008 but it will I strongly believe fall below 3000 points in the not too distant future. Some may call me pessimistic but I look at reality not based on rubbish cooked up financial figures presented in the media.
If you don’t believe me about Westpac,, NAB and RBA been bailed out under TARP program by the US federal reserve in 2008 and 2009 for their Australian banking division please look this up on the US Federal Reserve website. You don’t need a login to see this information as it is publicly available information. Australian banks are a sinking ship that will sink once the property defaults sky rocket. Immigrants the vast majority skilled immigrants that get Australian residency do jobs that Aussies do not want like shelve stacking in department stores grocery stores, garbage collecting and these are the low paid jobs that will not allow you to support a 400k or 500k mortgage. At the moment the banks are lending recklessly hoping only that if you default they will not go backwards as they believe house prices in Australia only go up well I will be laughing when they crash and the banks go bankrupt.