Australia's long running property bubble has burst

Australia's long-running property bubble has burst
Land Values Research Group director Dr Gavin Putland writes:



Early data received by the Melbourne-based Land Values Research Group for the second half of 2008 indicate that the ratio of property sales to GDP in Australia has fallen almost 30% from its peak in 2007-8. This is the largest fall since the 31.4% plunge that preceded the recession of 1990-1. Since 1972, recession has followed whenever this ratio has fallen more than 17.5% year-on-year.

The PCA/IPD indices of Australian commercial property, together with the various indices of home prices cited by the RBA in its latest
Statement on Monetary Policy, show that the fall in sales is accompanied by falling prices, confirming that Australia's long-running property bubble has burst. Stephen Mayne's article further supports that diagnosis.

Australia is therefore on the threshold of a domestic credit crunch caused by falling collateral values -- the same mechanism that precipitated the "subprime" recession in the USA and similar recessions NZ, the UK, Ireland and continental Europe. We are entering recession not because of the rest of the world, but in imitation of the rest of the world, because we did what they did: we pumped up a property bubble.

By itself, the decline in the ratio of property sales to GDP indicates a recession starting no later than 2009-10, and possibly before the end of 2008-9. The speed of that decline, combined with auction data showing that it continued into calendar year 2009, suggest an earlier onset of recession. Combining this with more commonplace considerations (terms of trade, employment, retail sales, and capital expenditure), I have offered the following tip concerning the upcoming National Accounts release:

On balance, then, let us say that the chances of a recession beginning in the December quarter of 2008 are somewhat less than 50%, that the chances of a recession beginning in the March quarter of 2009 are somewhat more than 50%, and that the chances of avoiding recession through 2009 are somewhere between zero and Buckley's. In short, the question to be answered by Wednesday's release of the December-quarter GDP result is "When DID the recession start?"

Those who claim that the recession will be fully imported may well agree with me on the timing. But they have no idea how bad it's going to be.

Has Property hit rock bottom yet?

I t does not appear so. Jonaton Chanceller (property ed for SMH) was on ABC radio last week predicting a further average 10% fall this year. He also claimed there were a record number of properties still on the market that failed to sell late last year mainly because vendors were unrealistic about declining prices.
There certainly seems to be a glut of unremarkable 2/3 bed semi's in the 700 - 850k range in the inner west. Who the hell wnats to pay that sort of money for such little space. In comparison I'm amazed at how much the lower North has dropped, there are plenty of large 3/4 bed freestanding homes available for around the 1 million mark.

ROUGH YEAR AHEAD FOR SYDNEY REALESTATE

Silvertail suburbs hurt the hardest
Email Printer friendly version Normal font Large font
Latest related coverage
Time for a new world order: PM
It's summertime, so the family home is up for rent
Converted caravan may be someone's castle …
… or for just a few dollars more in Bali
Advertisement
Jonathan Chancellor Property Editor
January 31, 2009

ALTHOUGH the average Sydney house price slipped only slightly at the end of last year, there were big falls in the eastern suburbs and on the lower North Shore.

Eastern suburbs house prices fell 14 per cent to an $887,000 median during the December quarter. Lower North Shore house prices fell 13 per cent to a $1.03 million median, the latest figures from Australian Property Monitors show.

Overall, Sydney house prices fell just 0.7 per cent in the December quarter. But the year's 4.2 per cent price deterioration shaved $23,000 off the city's median house, which now stands at $536,000. The inner west recorded a 2.7 per cent drop to $700,000 in house prices.

Small increases in house prices were recorded during the December quarter in the south, south-west, upper North Shore and Canterbury-Bankstown.

Sydney's median house price hit $568,500 in early 2004, with the subsequent $32,500 decline representing a 5.7 per cent drop on the boom-time peak.

But Sydney's price pain has been mild compared with Perth and Canberra. Perth, which had previously been challenging for the priciest mantle, recorded a 7.9 per cent drop during 2008 to a $475,000 median. Canberra house prices fell 6.7 per cent during 2008 to a $458,000 median.

Sydney units remained more resilient than houses, falling 3.8 per cent during 2008 to a $362,300 median after no price movement during the December quarter.

"While the first home buyers share of the mortgage market increased from November, these latest figures show that the Government's first home buyers boost scheme has done little, thus far, to stem falling property prices," said Liam O'Hara, an economist at Australian Property Monitors.

He said property prices were unlikely to fall as precipitously this year, such as the falls in the United States and Britain last year, but market values would "continue to slide modestly" over the next two quarters.

The market for units was weakest on the northern beaches during the December quarter. They fell 3.7 per cent to $457,000.

"There is now a genuine belief, among even the most optimistic economists, that the current fiscal and monetary policy stimulus packages are not enough," Mr O'Hara said.

Some economists predict cash rates could drop to 2.75 per cent by April. The Reserve Bank is expected to cut the cash rate of 4.25 per cent to 3.25 per cent when it meets on Tuesday as markets absorb the bleak forecast for global growth from the International Monetary Fund.

Australia could soon have the lowest interest rates since the early 1960s, when Sydney's median house price was $8500.

While rate cuts will alleviate mortgage stress, concerns about higher unemployment have prompted Fujitsu Consulting to forecast 929,000 borrowers under mortgage stress by July.

Queensland's Sunshine Coast was listed as the world's least affordable property market, ahead of Sydney, London and New York, in this week's 2009 Demographia International Housing Affordability Study. The study ranked Sydney as the fifth most expensive city given house prices are running at 8.3 times median income.

Property loses $5M value in 3months

Property
search News

News
Gold Coast beachfront property loses $5m value in months
By Jeremy Pierce and Michael Madigan
The Courier-Mail
January 26, 2009 12:00am
Text size
+ - Print Email Share Add to MySpace Add to Digg Add to del.icio.us Add to Fark Post to Facebook Add to Kwoff What are these? AFTER knocking back $14.5 million last year, a Gold Coast couple have seen their beachfront home go for $9 million at auction as the financial crisis bites.
The house on the Gold Coast's Marine Pde highlights the power of what former Treasurer Peter Costello 15 months ago dubbed the "financial tsunami".

As the mining industry this morning warns a Senate Inquiry about the "strength of speed" of the crisis and its impacts on jobs, the Queensland real estate industry is already feeling its power.

The beachside home, on 963sq m of land with 21m of direct ocean frontage, was bought for $13.5 million by Maxwell and Cleo Conrad in 2006.

The couple knocked back an offer of $14.5 million last year but yesterday were forced to swallow a hefty loss, as the house fetched just $9.01 million.

The couple had instructed marketing agent Ray White Broadbeach to sell the prime beachfront parcel for "whatever they could get".

Yesterday's bidding started at $5 million, but it soon became clear investors were being cautious.

The price inched up in increments of a few hundred thousand dollars before a late bid from the undisclosed buyer pipped a Brisbane investor by just $10,000.

Related Coverage
Reader's Comments: House prices start to tumble
NEWS.com.au,
Panicked property sellers vs eager buyers
NEWS.com.au, 3 Nov 2008
Extra cash fails to lift home sales
NEWS.com.au, 20 Oct 2008
Beachfront home drops $5.5m
Courier Mail, 26 Jan 2009
Beach house falls $5.5m in six months
The Australian, 26 Jan 2009 Your Say
well i mean to buy a house of $13 millions shows that they have money and never thought would be hit by the financial crisis. Stick with small and affordable houses for investment a...

(Read More)

p Agent Michael Kollosche said the sale was a sign of the times.

"We've now hit the bottom of the market and a lot of people's circumstances have changed," he said.

"They (the Conrads) knew they were at the whim of the market but they just wanted it sold."

What is prudential lending?

Back in the good old days ( when I inadvertently ended up being a bank manager!), lenders used to follow a practice called "Prudential Lending" i.e careful, prudent lending. How did they do this? Simple really, the applied a standard set of rules called "the 4 C'S of Credit":

1.Character - what does the applicants history look like? do they show job stability, stability of residence/relationship/ employment etc?

2. Collateral - how much cash do they have to contribute to the scenario? Can they show the discipline of a savings pattern?

3 Credit - what is their credit record like? Have they successfully re- paid previous debts?

4.Capacity (Cash flow) - how much money are they earning and can they afford the repayments after all living expenses and other debts are taken into account?

When a lender received an application, all 4 of theses aspects of a persons life were assessed in order to (rightly or wrongly) get to the outcome of approved or declined.
Frequently people would be strong in 3 out of 4 catagories but still get the big thumbs down from the bank, this opened up a very big door in the world of finance

How did the Global FINANCIAL CRISIS happen?

In order to understand the current economic crisis we have to look back at the changes which happened in credit markets over the last 10 years. Slowly but surely the rules of "Prudential Lending' were thrown out the window and ultimately forgotten in an ever increasing spiral of lending money that didnt ever really exist.
So how did this come about? It all started with the invention of sub prime or ( as it is known in Australia) non- conforming lending. It has become increasing apparent to me that many of my friends dont really understand what this is, everyone has become used to the term " sub prime crash' and how it stared the collapse of the worlds economic markets, but what the hell are the papers talking about?

Asutralian Housing Bubble Yet to Burst

Housing 'severely unaffordable'
Email Printer friendly version Normal font Large font Natalie Craig
January 26, 2009

Advertisement
AUSTRALIA is home to three of the most "severely unaffordable housing markets" studied by an international group that predicts the housing bubble here is yet to burst.

A comparison of median house prices with median household incomes in Australia, Canada, Ireland, New Zealand, Britain and the United States found that Australia had the most cities in the "severely unaffordable" category - where house prices are more than five times the median income.

The Sunshine Coast in Queensland was the least affordable. The Gold Coast came third, behind Honolulu, and Sydney was fifth, behind Vancouver. Melbourne and Adelaide were equal 12th and were still less affordable than New York (14th), London (16th) and Dublin (32nd).

The public policy group Demographia, which conducted the study, said affordability in Australia was worsening relative to Britain, Ireland and New Zealand, where prices had recently collapsed.

Australia would be next, it said. "Sooner or later, the inherent instability that characterises virtually all bubbles will lead to house price declines in Australia."

But an economist for CommSec, Savanth Sebastian, said falling interest rates and the first-home buyer's grant would help keep prices steady.

"We are not going to see dramatic falls this year," he said.

"In November we had more home buyers signing on the dotted line for mortgages than in the past year … It really suggests that if employment holds up, the housing sector is set to see some strong growth over the next couple of years."

Alan Moran, director of the deregulation unit at the Institute of Public Affairs, said house prices may have collapsed in Australia over the past few months.

But affordability was a problem, he said. "Adjusted for inflation, the average house price in Australia is now more than twice what it was 20 years ago."

Like Demographia, Mr Moran favours reducing the regulations that govern building in Australia.

"The reason Australia is so expensive is because of the regulatory-induced supply shortage that has pushed up the price of land permitted to be used for housing."

Property Prices: Bargain or Slump?

Property prices: bargain or slump?
By Andrew Carswell
The Sunday Telegraph
January 11, 2009 08:16am
Text size
+ - Print Email Share Add to MySpace Add to Digg Add to del.icio.us Add to Fark Post to Facebook Add to Kwoff What are these? Is it the best or worst of times for real estate? Andrew Carswell sifts the evidence.
MANY property fanatics are proclaiming 2009 as the best year in decades to buy a new home. But others vehemently disagree, arguing that house prices are due for a sharp correction.

At the beginning of 2008, 68.9 per cent of respondents for the Mortgage and Finance Association of Australia/Bankwest Home Finance Index believe property prices would rise in the coming quarter.

The latest figures, out this week, show only 14.6 per cent of respondents retained this optimism in the first three months of 2009, with 60 per cent believing we're heading for a decline in property values.

Can 60 per cent of Australians be wrong?

Many property experts say: yes.

They say Sydney's 50 best suburbs will continue to enjoy sustained growth, while other areas will see flat to mild growth. But those forecasts come with clear caveats.

Residex property analyst John Edwards said the biggest factor weighing on property prices is unemployment.

Related Coverage
Great holiday ideas and deals
NEWS.com.au,
Bligh promises jobs bail-out
Courier Mail, 22 Jan 2009
US housing confidence at record low
The Australian, 22 Jan 2009
Mining giant's cutbacks hit home
The Australian, 22 Jan 2009
Buyers beware as housing market stalls
NEWS.com.au, 27 Oct 2008 Your Say
Ned of Adelaide 1:30pm January 20, 2009 Comment 4 of 6 and Michael of Sydney 8:49am today Comment 6 of 6 got it right!

(Read More)

the king of the castle Currently sitting at 4.4 per cent, unemployment has been tipped to rise as high as eight per cent in 2009 as the global financial crisis starts to hit home.

If those levels of unemployment become reality, house prices could slide.

"The key to what happens in western Sydney is employment," Mr Edwards said. "If unemployment doesn't rise significantly, then those suburbs will have already bottomed out.

"The areas that are in close proximity to industry/manufacturing areas or small business - probably have some more suffering to do."

Despite job uncertainty, Mr Edwards is positive on house values in Sydney.

He's an analyst who swears by a simple motto: "As long as you pay the right price for property, it's never the wrong time to buy."

"In every year, no matter what, there will be areas of the city that will grow well and there will be, even in boom times, areas that do fairly poorly," Mr Edwards said.

"So it's not the wrong time to buy property in Sydney; in fact, it's a good time, because now is the time when you're going to find bargains.

"If you've selected properly and in the right areas, you won't see a fall in value. They may stagnate, but not fall."

Others, however, dismiss such optimism as naive. Mr Edwards' argument certainly doesn't sit well with notorious bears Steve Keen and Gerard Minack.

Both men - a professor at Western Sydney University and a Morgan Stanley economist, respectively - have predicted the sky to collapse on housing prices.

Their conservative estimate is an across-the-board fall of 30 per cent.

But Shane Oliver, chief economist at AMP Capital, says the severe downturn in housing construction - marked by a whopping 34 per cent fall in residential building approvals in 2008 - should ensure any falls aren't quite so steep.

"I've been forecasting 10 per cent falls throughout the year," Mr Oliver said.

"I don't think we're going to see the 30 to 40 per cent falls some have been predicting, because Australia isn't going into a depression and we have an under-supply of housing in Australia.

"Interest rates have made a mortgage more affordable, and the first-home buyers' grant is helping, but the flipside is that unemployment has only just begun to rise and the rise will be substantial. Normally, when unemployment rises, it puts a big dampener on the housing market."

Oliver says the period of high unemployment during the 1990s put significant downward pressure on housing prices.

Frighteningly, he now predicts 2009 will bring even bigger decreases because the household debt, relative to income levels, is now four times higher than in the 1990s.

Property guru John McGrath is, predictably, much more bullish.

By Mr McGrath's own admission, asking a real-estate agent whether it's a good time to buy is akin to asking your barber whether you need a haircut.

So it's perhaps no surprise to hear him utter the phrase "best buying opportunities for almost 20 years".

In his synopsis of the summer of 2008-09, McGrath believes there will be a fundamental shift in the psychology of buyers - many of whom, he believes, are sitting on the sidelines, waiting for the hammer to come down on a dire 2008.

"Economic uncertainty has caused a decline in consumer confidence," he said.

"In the past 12 months, the average days-on-market in the Sydney metro region has increased from 40 to 60 days.

"This indicates that buyer psychology is changing, as they have a more considered approach to transactions. But I believe this buyer sentiment will shift in coming months, as property once again becomes the preferred asset to creating wealth."

Mr McGrath believes straying too far from the CBD heightens risk.

"For buyers, there will continue to be a flight to quality, so don't stray far from the top 50 suburbs of Sydney, most of which are located on the coastal belt or within 15km ofm the CBD," he said.

There are, without doubt, risks to house prices. They are more expensive, relative to incomes, than in Britain and the US, and British prices have fallen, despite a massive under-supply of properties and huge demand - so it's possible for house prices to fall, even if there's demand for properties.

Mr Minack believes there's another problem: "There's huge demand for Rolls-Royces, too, but most people can't afford them. Demand is no good if prices are too high."

Article from SMH re Kosiuszko bet

'Rate cut Rory' bets his boots on house pricesNovember 28, 2008
An academic predicting a collapse in house prices has made a bet with Macquarie Group economist Rory Robertson that commits the loser to walk from Canberra to the top of Australia's highest mountain.

A forecast by University of Western Sydney associate professor Steve Keen that house prices will collapse by 40%, double the current plunge in the US, has a 1% chance of being correct, Mr Robertson said today.

Mr Keen, who made headlines in Australia and overseas with his forecast that the nation may be facing a depression, and last month sold his inner-Sydney home, accepted Mr Robertson's challenge.

If house prices fall by less than 20% he will embark on the 230 km hike from Canberra to 2228-metre high Mount Kosciuszko.

"Moreover, the loser must wear a tee-shirt saying: "I was hopelessly wrong on home prices! Ask me how,'' said Mr Robertson, dubbed "Rate cut Rory'' after accurately forecasting the central bank would cut rates in 1996, betting against the market.

"I expect to record an easy win within two years,'' Mr Robertson added. "That's because falls in Australia-wide home prices will be limited by our lack of overbuilding, our much more disciplined mortgage market, and especially, the Reserve Bank's ability to drive mortgage rates lower.''

RBA Governor Glenn Stevens has cut the benchmark lending rate by 2 percentage points since early September to a 3 1/2-year low of 5.25%, the biggest reduction since a recession in 1991.

The RBA is widely expected to reduce the overnight cash rate target by at least half a point when it meets next Tuesday.

The decline in house prices will be measured using Bureau of Statistics figures starting from the second quarter of 2008, "peak to trough,'' Mr Keen said in a telephone interview.

"That could take 15 years,'' he added. "I've got a feeling I'll still be fit enough and I hope he is.''

While Mr Robertson said he "never says never,'' Mr Keen's forecast of a 40% drop in Australian house prices "effectively requires a meltdown'' of the nation's financial system.

Australian house prices fell 1.8% in the third quarter from the three months through June, the biggest decline since 1978.

Household debt has almost doubled since 1999 to around 160% of incomes, a higher ratio than in the US and UK, according to AMP Capital Investors. The median national house price soared about 140% in the same period.

Bloomberg

Who will win Australian Housing Price Bet ?

In October 2008, Macquarie University academic Steve Keen predicted Australian house prices will fall by 40%. Is this likely? Rory Robertson, a Macquarie Group eccomonist thinks he's talking rubbish and the result is a bet with the loser climbing to the top of Mt Kosiuosko.

I plan to watch the market closely over the coming months and predict who the winner will be.I have worked as a Real Estate agent, Bank Manger and Mortgage broker and predicted to all my friends 5 years ago that the insane principles of sub prime/ non conforming lending would lead to catastrophe.