Is the first home buyer pool running dry?

Last week, I quoted an Australian Financial Review article explaining how Australia’s banks are lifting maximum loan-to-value ratios (LVRs) and are, in some cases, waving mortgage insurance payments on high LVR loans in an effort to increase mortgage lending:

Major banks are pitching special mortgage deals to their customers in an effort to generate business amid slowing demand for loans.

The maximum amounts banks are willing to lend to clients has returned to the levels before the financial crisis, and some lenders are offering specials that waive the requirement for customers who borrow more than 80% of the value of the property to pay mortgage insurance…

Mark Hewitt, general manager of Australia’s largest mortgage broker, AFG said…”LVRs have loosened in the past month and 95% is the benchmark again. There is strong competition on price and product features, and lenders are keen to get money out the door”.

He noted that some niche lenders were probably offering to lend 100% of the value of the property…

Mortgage Choice spokesperson Kristy Sheppard said…banks were offering 97% loans with lenders mortgage insurance capitalised. This means the cost of the insurance cover is included in the loan…

CBA and Westpac have in the past month lifted their maximum LVRs to 95% and 97% respectively. NAB is offering mortgages with an LVR of 95% while ANZ has a maximum LVR of 97% when mortgage insurance is included.

However, it appears that housing affordability is now so poor that the banks’ attempts to loosen mortgage standards may not be enough to entice many first home buyers into the market, as evident by increasing numbers instead seeking no deposit, 100% LVR, mortgages. As reported by Fairfax today:

First-time home buyers are searching mortgage websites for ‘‘no deposit’’ home loans in vain. They don’t exist.

Research by mortgage broker Loan Market shows that internet searches containing ‘‘no deposit loans’’ have increased 28 per cent since the start of the year.

An examination of web traffic by Experian Hitwise, a global online competitive intelligence service, shows that such inquiries were up 57 per cent this month.

“First-home buyers are looking to get into the property market, but many are trying to do so by borrowing the whole cost of the property,’’ Loan Market chief operating officer Dean Rushton said as the findings were released today…

RateCity, a financial comparison website, said that at present there is only one loan product out of the 2000 it monitors that covers 98 per cent of a home purchase – Teachers Credit Union My First Home Loan.

Otherwise, it says there are 95 per cent loans, that make up 59 per cent of all home loans that it monitors.

This is up from 50 per cent six months ago, suggesting lending criteria is loosening, RateCity says.

So we now appear to be in a situation whereby Australia’s housing affordability is so low that mortgage lenders must continue to loosen their lending criteria or see potential buyers priced out of the market.

Having highlighted that Australian housing is seriously unaffordable, Fairfax then turns to a mortgage industry representative to convince readers that now is still a sensible time to purchase a home. And what better way to do so than by warning potential buyers that rents are about to rise substantially.

Mortgage Choice spokesperson Kristy Sheppard points to a recent RP Data report that showed city rents increased 4.2 per cent in 2010 and expects them to increase by a further 7 per cent this year.

Fair enough, but didn’t RP Data wrongly predict that rents would rise strongly in 2009 only to then see rents flatline. What makes anyone think that RP Data’s forecast will prove correct this time around?

She said this further increase would equate to an extra $33.60 on an average weekly rent of $480 for a house in Sydney.

Conversely, even if interest rates rose 0.5 per cent by the end of 2011, as some economists expect, this would equate to an extra $23.47 for a weekly repayment of $460.29 on a 30-year, $300,000 mortgage with an interest rate of seven per cent.

Wait a minute, Ms Sheppard. According to RP Data, median weekly house rents in Sydney are $450 a week and a median priced Sydney house is currently valued at $588,250. So where has the $300,000 mortgage figure come from? Let’s get a few facts straight:

  1. a 7% increase on $450 median weekly rent is $31.50 per week.
  2. a 0.5% increase in interest rates on a $588,250 median priced Sydney house (excluding stamp duty) is $46 per week.

Low rental vacancy rates, rising rents, healthy immigration and robust competition among renters is a ‘‘highly undesirable’’ situation for tenants, Ms Sheppard said.

‘‘Times are tough financially for both tenants and mortgage holders, but at least the latter group has an asset to show for that money spent,’’ Ms Sheppard said.

Ah yes, the old ‘rent money is dead money’ claim. Since when do interest payments constitute equity? Mortgage interest and rent are effectively the same thing – ‘dead money’. Neither confers ownership of an asset.

With loan standards unlikely to be loosened much further, and the property industry’s arguments on why it’s a good time to buy appearing increasingly desperate, how much more upside is left in the housing market?

[email protected]

Unconventional Economist


  1. Good post Leith

    Some in the Real Estate industry have slowly cottoned on to the call for a FHB strike and the associated Getup Campaign.

    However, their approach so far appears to lack any kind of sophistication as evidenced by a certain “Tom Bairns from Malvern East,” meaning they aren’t too hard to spot and end up successfully sabotaging their own attempts at influencing sentiment.

    • God these incessant spruiker creatures are the lowest of the low – the amoebic detritus that scum sucking bottom dwellers actually feed on.

      Sorry – but I just had to get that off my chest. Thanks.

    • Sorry Leith, after that heading I couldn’t resist. P.S Thanks Hunters, legendary track, heres the 2011 version 🙂

      Bad news for property speculators
      Watching the world go by
      Made a motza in the middle of a ponzi
      Yoy capital gains are never gonna die

      Strategy – Don’t rock the boat – keep your head down
      Just another investa in the crowd
      Everybody knows – you can be a winner
      C’mon – equity mate, shout it loud.

      On the fat of the land they’ve been living
      Now it’s only a matter of time
      Sooner or later – the FHB open their eyes
      And see intergenertional theft is the crime

      RE agents dig deep for mugs at the top of the heap
      But now has bitten off the hand that feeds you
      You got nothin’ but your soul to sell
      You got nothin’

      When the river runs dry
      Joye Boy’s blogging becomes a crime
      When the river runs dry
      The Spruik will rain on you one last time
      When the river runs dry

      Boomers got the land, FHB have the income
      with Another forty working years to run
      BIS Crapnell, will cry for their future
      Still havent seen any real research done
      Relax – abandon ship
      Turn your back on land speculation
      What was blind luck – reversion to mean – do me a favour

      When the river runs dry
      Joye Boy’s blogging becomes a crime
      When the river runs dry
      The Spruik will rain on you one last time
      When the river runs dry

      Good news for debt free savers
      Watching the bubble go pop
      Increasing standard of living in a spruiker war zone
      FHB can then afford children
      And theivestorsclub will die


      It’s only a matter of time
      Only a matter of time
      when the river runs dry…

    • My Farther former state controller of the swollowed up CBA says there should be legislation saying that any bank that lends above 80% LVR should be forced into non-recourse lending. “Moral-hazard” swapped for actual hazard.

  2. I am one potential FHB that is happy to sit on the sidelines until this baby crashes, lots of savings and – NO DEBT!!!

    They should be building more jails to put all the spruiker and banking scum that have ruined peoples lives. Then again, nobody put a gun to their heads saying buy this at any cost or else.

    • Where are your savings Christian?

      You call bankers scum yet I would bet your savings are in the hands of the same.

    • Thanks for the link Shadow – I had thought this product was no longer available, but there it is.

      Got to love this example they give:

      The Problem:
      Andrew wants to buy his first home for $350,000. He would like to borrow $372,500 to cover the purchase price of the property, the associated costs, and consolidate a personal loan. He doesn’t have any savings, but his parents, who own their own home, are willing to help.

      The Solution:
      The RAMS Fast Track option means Andrew can borrow the amount he wants to, with the support of his parents and a limited guarantee of $115,625 secured by first mortgage over their home.

      So instead of renting a $350,000 home (which at 4% yield would cost him $269 a week) Andrew would borrow $350,000 and pay $470 a week in interest (plus around $30-40 in principal), plus his parents would be in hock for another $115K.

      Its like a CFD for property. How does this concept even get past the frontal cortex of people? Are we as a nation THAT STUPID???!?!?!?!!?

      • First Home Buyer

        The problem is that the parents (guarantors) think that their childs property will double in value in 7-10 years so they’re “not really risking anything” by doing this.

        • Agreed.

          It is a massive problem that a whole generation have assumed that the perfect storm of economic, political and demographic factors which saw them enjoy terrific capital gains must surely continue ad infinitum and that their kids should therefore hitch their wagon to the supposed “gravy train” ASAP.

          Bad news, folks… The cycle is over.

          Be thankful for the wealth you have accumulated and, rather than blowing it all in your retirement, set a bit aside for the kids’ inheritance. They’re going to need it.

        • Well I guess we’re still lucky that more of them are stupid than the other variety…though the evil ones do seem to breed more quickly in recent times!

  3. We’re down to the greatest fools, by the sound of things. Given a rise of 28% in the number of searches for no-deposit loans, we’ve surely reached rock-bottom. Using $450K as the median house price (Australia wide), we’re now talking about people that can’t save $13,500 as a deposit, yet want to get into the housing market. There can’t be many more people with any less financial nous than someone that can’t save a tiny deposit like that, but is prepared to take on nearly half a million in debt.

    The end is nigh.

    • I still think a slow NZ-style deflation is on the cards unless the China/commodities story come a cropper. In a nutshell, I don’t see any upside for the housing market but lots of downside risks.

      • I asked before and I’ll ask again. Does anyone know what percentage of the workforce is construction industry?

        Ireland was 12% and when the property market cooled, it got cold, then colder as more were laid off then a freezing vortex.

        • 870k fulltime (11.2%) and 40k part time (1.2%) workers are employed directly by construction industry, in addition almost 2% in real estate industry and 5-10% in industries that are directly dependent on construction (construction materials manufacturing, related retail, engineering and design, transportation, furniture, appliances, … )

          • Thank you raveswei. Scary numbers.

            Theres your growing unemployment feeding the vortex.

            How did we manage to get into the Irish situation where almost 20% of the workforce are involved in the housing Ponzi?

            Nice blog BTW. Great graphs, stats and analysis.

    • First Home Buyer

      Fear and greed feed markets, and the fear of missing out (gotta get a foot on the property ladder or miss out FOREVER) is a very powerful motivator, and is so strongly entrenched that it is feeding this madness.

    • A townhouse in my block was auctioned last weekend, with a price guide of 525K+. I attended purely for entertainment purposes and watched an anaemic bidding war between the FHBs (all two of them). After eeking out 500K the agent went back to the vendor, who decided exercise their bid at $540K, which was met with a well-known line from ‘The Castle’.

      Later on I saw the same property advertised on Domain at $585K! At least we know how much bargaining room there is..

      Now given that I rent an identical townhouse in the same block I can do my own valuation and I wouldn’t pay even $500K for it (especially since the whole abysmal block will need to be torn down in another 10-15 years).

  4. OK, I’ve posted this comment twice already and it hasn’t displayed, so apologies if three copies suddenly appear.

    Prince, sure, it might seem dumb, but only if you believe house prices have peaked. If (I’m not necessarily saying they will, but if) house prices keep rising at an average of 7-8% a year as they have done (on average) for the past six decades then it’s probably not a dumb idea at all. Andrew probably believes history will repeat and house prices will continue to rise at 7-8% a year for the next decade or two as they have done for the past six decades.

    Of course, it might be different now. Perhaps the past 60+ years was just an anomaly, and now prices will ‘revert to the mean’ and do what they did prior to that 60 year blip.

    I doubt it though…

    • Shadow, your memory is a bit too short then.

      Extrapolating trends without analysing the underlying causes is the folly of real estate spruikers.

      You should look a bit further into Australia’s history to see the big bust much earlier in the nation’s past. Somewhere on the net is a neat inflation adjusted house price graph over double the period you restrict yourself to. Correlate that with some other factors and you have your answer.

      • Hi Chris, I think the charts you’re looking for are here…

        Australian Property Chart Gallery

        Of course, there have been dips along the way, but nominal house prices have risen by an average of 7-8% per annum for the past 60+ years, and even in real terms, prices have generally been rising for the past 60+ years in real terms too, with a few dips along the way of course.

        If the past 60+ years is anything to go by, then it is more likely than not that house prices will be higher ten years from now.

        Of course, the past 60+ years might just have been a blip, an anomaly, and prices will ‘revert to the mean’ as the bears like to say (by which they usually refer to some kind of ‘mean’ that existed more than 60 years ago).



        • But most of the house growth has coincided with the biggest and longest commodity boom in history. And as night follows day commodity’s booms eventually crash as China matures and over supply prevails (miners can’t help themselves, they love expanding.

        • Thanks for the link – the real house price graph from 1880s to now makes the point quite well.

          There are plenty of angles I could take here, but I think they are covered much more comprehensively by the bloggers on this site. Instead, let me ask you this: How healthy do you think it is that so much of our economy is dependent on houses rising faster than GDP?

          Do you want your superannuation in such an economy? We have a dying manufacturing sector, R&D is practically non-existant and we seem unable to produce world class companies. Instead the majority of our economy consists of some big miners and a few ‘too big to fail’ banks.

          Now before you say, ah but mining will save the day, this is an industry which goes through long booms and long busts. I really think the complacency that has overtaken Australia will be its undoing. Other countries which also have access to mineral resources still manage to have somewhat diversified economies, so why don’t we?

          Now before I go and purchase an asset that by many indicators is hugely overpriced, I have to ask myself what happens when the world stops beating a path to our door?

    • Shadow, you might be correct in terms of “average” – in fact using Nigel Stapledon’s thesis I believe its 8.6% p.a (nominal i.e actual cash difference, not hedonically or inflation adjusted) over the whole 60 year period. Before that (for those of you unaware) its less than 3% (which is what it should be).

      Where you are wrong I’m afraid is you assume a normal distribution – i.e the classic bell curve – in terms of that average repeating itself going forward. e.g 7% from 2011-12, 7% from 2012-13 and so on.

      In fact, there are many non-random trends and random percentage gains – and losses – within that carefully selected 60 year timeframe. Annual gains exceeding 18% after a loss of 5%, or 3 years in a row of 15-18%, then 0-5% for the next 5 years. There were long periods of below 7% growth – even as recent as the 80s and 90s. Most of the gains have been from 2001.

      So if “Andrew” and his parents are relying upon perfectly distributed average annual returns, then theoretically, everything is fine.

      But in reality, property valuations are at a all time high – according to every metric worth measuring (price to income, rent yield vs risk free rate of return, disposable income % to interest payments etc ad nauseam)

      The probability of consistent above real disposable income asset price growth between NOW – when the Baby Boomers start retiring en masse and have no need for tax deductions on their largely negatively geared properties – and the next TEN years – when it will be the likes of Andrew who move into their “Spending phase” of their lives (i.e high 30’s early 40’s) – are still paying DOUBLE what their parents did in mortgage repayments – is very low.

      You don’t buy an asset expecting large returns when that asset is at the peak of valuations. The same applies with stocks – anyone who bought a US stock in 2001 still has lost 20% in nominal terms (in inflation adjusted terms, they have lost over 50%) – even though between then and now, the SP500 has had a few 50% annual gains – and a few 60% annual losses.

      Sure, property is less volatile than shares – granted – but because it is a speculative based secondary asset market – not a liquid, properly regulated, supply responsive, credit regulated market – the probability of even above 5% annual returns for the next few years is almost zero.

      Sorry for the long winded post folks.

      • Even if property values are at an all time high (debatable – Sydney prices were higher in 2003 for example), you could have said the same on most occasions during the past 60+ years, and it didn’t stop prices getting even higher.

        And I’m not assuming normal distribution, or 7-8% every single year… I said ‘on average’. There have been booms and corrections along the way (as shown in the chart of Stapledon’s data that I linked to above).

        Melbourne went up 20% in 2009, so for the average 7-8% to hold true as it has done for the past 60+ years, then you’d expect Melbourne to take a breather.

        On the other hand, Sydney prices fell 20% in real terms between 2003 and 2008, and even today are much lower (relative to incomes) than they were in 2003.

        I’m not saying I expect a huge national boom or anything, but I just think calls of an imminent crash or ‘reversion to mean’ are rather premature. And if someone is buying a house now then I don’t think they are being particularly stupid to expect prices to trend upwards over the long term – since that’s what has happened for the past 60+ years.

        • I would have thought that the fact you can draw a nice red exponential curve along the Australian house prices would be a huge ringing alarm bell to any property investor.

          Prices can’t go vertical forever in a finite system, it’s just math. Refer to “Classic stages of a bubble”.

          “Household debt to GDP” should be a good indicator that those limits are being reached (as limited as it is by the fact housing assets contribute to GDP measurements)

      • “Where you are wrong I’m afraid is you assume a normal distribution – i.e the classic bell curve – in terms of that average repeating itself going forward. e.g 7% from 2011-12, 7% from 2012-13 and so on.”

        The bell curve normal distribution refers to population frequency distribution. It has nothing to do with time series analysis.

  5. Gees Shadow I have seen alot of your posts and just dont understand why you even read this blog if your so confident everything is going to continue the way upwards. Shouldnt you be reading all the spruikers blogs and post. Are you really on the fence as to which way the market is going and if you are so confident its going to continue to go up then why are you reading and commenting on this blog? Australia is about to go through its biggest housing correction ever seen. The writing is all over the wall. It is just a matter of when this will happen. When it all hits the fan do you think you will stay on here or will you disappear?

    • LBS, I haven’t claimed everything will continue upwards forever without any corrections. In fact, I expect median prices in some cities to fall this year (it’s already happening in some places).

      However, over the couple of decades I don’t really see any reason why house prices won’t continue to do what they have done for the past 60 years.

      Do you think the past 60 years of 7-8% growth per annum (on average) was just an anomaly?

        • You could have said the same at any time during the past 60 years. But prices kept on rising.

          Who says it can’t continue for another few decades? I like someone to demonstrate, mathematically, why it is impossible for the trend of the past 60 years to continue for another few decades?

          I don’t mean extrapolate to infinity (the bear’s normal strawman argument to prove prices can’t keep going up ‘forever’). Just show me how the past 60 years trend can’t possibly continue for another 30 years for example.

          • Endrortsonhousing

            No Shadow, that is the Prince’s point – you could not have seen average house price growth of 7-8% at any time during the last 60 years.
            The sample period you choose will obviously affect the outcome. If, for example, you looked at Aussie house prices excluding the last 10-12 years, you would see a much different average gain.
            It is the same with stocks – you often see investment magazines encouraging people to buy managed funds by showing average gains over 30 years – but of course it depends on which 30 years and whether you include or exclude periods of above average returns.

          • There is nothing special about the last 10-12 years. Many previous decades saw higher growth. Refer to my post at the bottom for details.

          • Not sure I get your point anyway. The average over the whole 60 year period was about 8%. During that time there have been booms and corrections, but in general, house prices have been on a rising trend, in nominal and real terms, for 60+ years.

          • Curious, because there is a cognitive dissonance between the long term average of 8% per year over 60 years continuing ad infinitum and spruikers’ reasons for the increases over the large 20 years.

            I’ll give but one example, and apologies for the length.

            Over the last 60 years, there have been plenty of periods of high inflation, meaning that some years house prices actually went backwards (in real terms) at a nominal gain of 8% PA. Thus, what is telling is real v nominal gains. So what I think when Shadow says that the 8% PA will continue is he implies that we need those periods of high inflation again.

            Yet, in the last 20 years we’ve actually seen house prices in real terms fly up. One of the reasons often given for this (amongst others, eg dual incomes) is a shift to a lower IR environment, largely due to inflation targeting from central banks. The “shift to structually lower IRs” (to quote the spruikers) means people can borrow more money, resulting in higher house prices.

            So inflation targeting allows for lower IRs, but should remove the periods of high inflation (and if it doesn’t, we will have higher IRs). Remembering that the periods of high inflation were a key part in that 8% PA average gain for the last 60 years, what possibly could be the catalyst for real house price gains of about 5% PA or thereabouts (8% PA nominal) ad infinitum?

            Hence, I tend to agree when people say they see little upside to the housing market.

          • Hi booboo, I just read your post on S&S. While I love your guest appearances here booboo, as usual, you have completely misrepresented my position, (both here and on S&S). I did not say anything about prices rising ‘forever’. In fact I was very careful to exclude extrapolating anything in infinity if you look at the first post in this sub-thread.

            Please try again – my challenge for you is to prove that the general trend of the past 60 years can not possibly continue for another 30 years.

          • Anyone that says it is impossible for prices to rise 7-8% over the next 30 years is obviously delusional.

            The point is that anything is possible, but not everything is likely, That is the key. Is it possible that house prices in Australia will double in the next 5 years? Of course it’s possible. Is it likely? Er, no.

          • Shadow, I believe I just did show one reason why house prices won’t rise by 8% PA in nominal terms for the next 30 years (which you conveniently ignored, of course, when asking me to show a reason). I will even kindly summarise my reason: heading forward with central bank targeted inflation, barring some world hyper-inflationary event, houses will need to outstrip inflation by about 5% or more PA and I cannot see where this leg up will come from. Over the last 60 years, if you compare inflation-adjusted results, housing has outpaced inflation by just 3% PA on average.

            Perhaps if you analysed the reasons as to why they rose at 8% PA for the last 60 years as opposed the more conservative value before that, you might be able to show to us why housing will continue to rise as you say. Saying that “because it has done it for 60 years it will do it for another 30 years” is rather simplistic analysis.

            Let’s say you are right and we get the same growth for the next 30 years in REAL terms (assuming 3% inflation) as average PA growth in REAL terms that we’ve had for the last 60 years, what does the nominal gain become? Inflation over the last 60 years has averaged around 5% PA, so you end up with a 3% inflation + (8% – 5%) continuing average growth = 6% PA nominal gain, already below the 8% PA nominal gain you claim.

            And then if you take out the inflation adjusted jumps from the last 20+ years (due to the “structual shift to lower IRs” and “shift to dual incomes”, to use spruiker parlance) from that 60 years real PA gain average, where does the next “leg up” come from for houses to keep increasing beyond inflation? Not to mention the gains from cheap credit and relaxed lending standards, and so on.

            I await, with baited breath, your analysis of why the 8% PA nominal gains with continue for 30 years.

          • First of all, I haven’t said it will happen… I not making predictions. I’m simply saying it can happen, as it has happened in the past.

            What can make it happen? Just off the top of my head, some possibilities are stronger population growth, disposable income growth, tax changes (PPOR tax deductible?), increased dwelling density, higher inflation, more relaxed lending standards, inter-generational loans, increased grants, higher construction costs, shared equity arrangements. All these things and more could happen.

            Whether they will or not is another matter, but you can’t rule any of them out.

          • Open Excel.

            Enter $1000 for a nominal starting house price.

            Below it calculate $1000 * 1.08

            Drag that down over 100 years.

            And now tell me that 8% growth is going to continue when we are already at ~1.5x GDP in private debt, overseas borrowing by banks that has multiplied by >4x in the last 10 years, a FHB that has no chance of saving a deposit that provides some protection against any downside risk (ie 20% deposit) and terms of trade figures that look suspiciously like a big pair of rabbit ears.

          • Talk about eggs in one basket.

            Nothing like attaching your prosperity to government intervention and support of a skewed and unbalanced market.

          • Shadow, Care to put some original thought? What you have listed is just off the top of a typical spruiker’s head. i.e. We have heard and debunked all of it before. But anyway:
            stronger population growth – As Keen shows, there is no correlation to house prices. In this world, people still need money to buy houses.
            disposable income growth – i.e. income to price ratio should be more or less stable. Isn’t that what we have been saying all along !! 🙂
            tax changes (PPOR tax deductible?) – while those who have it already (US) have crashed and burnt?
            increased dwelling density – pack em in like sardines? Isn’t it already like 2? What will that do to the “undersupply” myth?
            higher inflation – wait.. what?
            more relaxed lending standards – Shall we go sub-prime? But we still need investors/depositors to lend money to the banks in the first place.

            inter-generational loans,shared equity arrangements – Your famous “equity maate” wealth effect?
            increased grants – Yes, you have the votes to do it. I think a property investor is more demanding than a dole bludger when it comes to expectations of a future government handout.
            higher construction costs – Yes, that could happen.

          • I think housing growth was once based on fundamental however I think the disconnection came about a decade ago. Since then the market has required credit growth to maintain its upward path and in later years more and more government intervention.

            2008 was the year where this disconnect became very obvious. So can the market continue on the same path for the next 30 years , sure!. But it will require more and more government intervention to maintain that trajectory or some large fundamental upwards shift in the economy.

            As I mentioned on another thread my feeling is that the only reason the market corrected upwards out of 2008 was due to government intervention. That intervention has now run it course and the hangover is here..

            As I have been saying for some time the market is in trouble without further intervention because at this point in the broader economy there is nothing left to drive further demand for increased levels of credit, which is what the housing market needs to continue its growth.

            Does that mean there will not be new demand in the future ? I don’t know, I have no crystal ball. But at present I simply cannot identify any.

            The longer the market is allowed to linger in its current state the more houses will be added to the market and that will have a further downward effect on the market because credit growth is not matching the growth in housing stock on the market, The longer this continues the worse the problem will get.

            As houses are not liquid assets then economic effects take a long time to show up in the prices. I started talking about the falling rate of credit demand and sales volumes in brisbane in April last year. It has taken 11 months to show a identifiable trend in house prices.

            Does this mean that the market won’t bounce back in the long term? Who knows? Does it mean a long term trend is broken, I suspect that is does, but that is an opinion not something I can back up with data.

            It may, it may not. But the problem was never going to be people who purchased houses 10 years ago, it was going to be the people who did it 3,2,1 years ago. These people have a problem with the here and now.

            Due to the “incentivised” environment in the previous 2 years a large number of young people went into debt to purchase assets they may not actually be able to afford once the “incentivisation” was removed. The rising stock on the market again suggests this is the case.

            This is the problem with the market here and now. We can talk for days and days about various reasons why we think house prices will or will not maintain growth in the long term, but it make little difference to the outcome for the market in the short term.

            The market requires another economic and/or government “shot in the arm”, currently I see neither so the market will continue to struggle, The longer it lasts the worse it will be.

      • You conveniently avoided the other part of that question from LBS, Shadow…

        Just why is it that you waste so many hours here to try an convince us that there wont be a crash if was not out of fear? Fear that your job, livelihood and investments will all go down the drain.

        Me thinks this is the likely answer – not that we would ever hear it from you of course, although it is very transparent.

        • I don’t see these discussions as a waste of time. While I realise many bears such as yourself feel it is a waste of time to consider any opposing viewpoint, I actually find the opposite. I find it more enlightening to consider the opinions of people I don’t necessarily agree with. Besides, it doesn’t take much time to type out a few posts, and I spend most of my posting time on anyway.

          And to address LBS’s last comment – i.e….

          “When it all hits the fan do you think you will stay on here or will you disappear?”

          Bears have been telling me for many years that house prices are just about to collapse, and that I would vanish when they did. The funny thing is, I stuck around all through the GFC, even when prices were falling through 2008… I was still here. But those bears who were telling me in 2007/8 about the imminent crash… they’ve all disappeared. Where did they go?

          Of course, they’ve been replaced with a new set of bears, telling me exactly the same things…

          • This is true. I regular read very aggressive posts from young bears and shortage-deniers proclaiming a house price crash is starting. They often use some vacancy rate number, or some unsold development, or some census figures as their “proof”. They claim that no better data exists. Some of them are quite abusive when I urge a little caution and when I suggest they delay their celebration until prices and rents have actually fallen.
            Year after year their predictions are shown to be wrong, but they usually just disappear, and never apologise.
            These type of people harm their own cause.

          • You know Shadow I am going to actually agree with you to a point. The bears have been talking a crash for a long time. The GFC was mild because the Australia govt stepped in with the guarantees and first time home owners grant it put a band aid on the issues. The thing is we are not in a normal economic cycle over the last 8 – 10 years simply because the govt keeps propping everything up. The thing is they cant do this forever and neither can China. Now house prices compared to incomes are at a record high. Australia mortgage, car and credit card debt is at records that have never been so high since they been keeping track of economies. I have had a few people disagree with me on this and fair enough to them. But the Aussie housing market wont really have a nose dive crash till something happens to China. However a slow down or stagflation is a very real thing until China pops. China might keep propping up their market but at some point you cant just keep building empty cities, roads to nowhere and infrastructure that no one ever uses. In the meantime though the rest of the Aussie industries are suffering big time. Which means that any kind of a slowdown in China will kill Australia. The problem is though as you say you havent seen a crash yet it is only because their have been band aids put in place by the govt. when the govt has no more band aids it is going to be the worst crash Australia has ever experienced. all you have to do is look at the US, Ireland, Spain etc… and sorry dont give me the excuse Australia is different that is BS. They were all very health economies just like Australia was and now they are screwed.


  6. shadow = large sigh.

    i wonder if we should also raise the misused and twisted by property strikers the exponential function? we will all be billionaires soon… and shadow?!

  7. Leith, out of curiosity, how are banks able to do this? Are mortgage insurers willing to front money for highly levered loans, or are banks taking on this risk unhedged? I highly doubt the latter.

    Your post a few days ago on the similarities between Canada and Australia is perhaps apropos here. In Canada, loose lending has been around for a while:
    – 5% down 40 year terms (5 year renewable it typical), just reined into 30 year
    – government-backed mortgage insurance
    – insurance granted to investors and owner-occupiers
    – low interest rates (5 year term around 3.9%)

    Australia has looked a lot like Canada but with higher rates. That has always puzzled me but I then remember that Australia’s wage gains (and rents I think) are drastically out-pacing Canada’s and that may have something to do with it.

    If Australia is really trying to “jump the shark” with relaxed lending, it’s worth a gander who’s the counterparty.

    Good post.

    • There appears to have been an outbreak of relatively objective writing over at My rpdata as well:

      Key takeaway passage:

      “With interest rates at above average levels, property value growth halting over the second half of 2010, new owner occupier housing finance commitments actually remaining quite weak and consumers more conservative and focused on paying down debt, Property Point Dexter expects the net result to be limited capital growth during 2011.”

      There’s a bit of hedging after that, but I’m surprised this made it past the editor.

      • I have also noted the sudden change in sentiment, and I have to say that I congratulate them for finely admitting the troubles even though I suspect it is a finely tuned message for their own finance gain.

        I am trying to work out the approach. Is this “giving up”, “strategic capitulation” or do they now offer some sort of “shorting” product that I am unaware of ?

    • Living in NZ, we sometimes hear predictions coming from across the Tasman Sea from this BIS mob. And they are usually spruikerish and turn out to be quite inaccurate.
      Who are this mob? Take out the middle letter and you get an appropriate acronym I feel
      Man I thought property here was bad. Your market really does sound irrational and well and truly into bubble territory.
      People talk about it crashing if China crashes. Why couldn’t it crash on its own accord? The USA crash didn’t need a massive foreign meltdown for it to happen
      If bubbles truly exist they usually pop on their own accord

      • Yup. Due inflated prices and a glut of empties, construction companies start laying off workers.

        Gold Coast…meet Dublin, you have a lot in common.

      • Agreed.

        If such a system has sufficient (and not necessarily total) ponzi/pyrmaid-type character or nature, then it will eventually collapse under its own weight – no shocks required.

        External changes only exacerbates (ie. accelerate or decelerate) its status quo.

        ie. a shock will make such a system collapse faster; increase wealth will make it last longer, and inflate it further, but the collapse is also larger.

        But, if you believe such a system is sufficiently characterised by ponzi/pyramid notions, then will, necessarily collapse – EVEN IF it absorbs/swallows the entire nation’s wealth in the process…it’s just an entropic hole.


    • I don’t know why the name BIS Shrapnel reminds me of grenades and IEDs.
      I think RPData is the lesser of the 4 evils – RPData, APM, Residex and BIS terrorists.
      The state REIs are in a class of their own.

  8. Apoligies for the cross-reference Leith, but something in a link from an article you posted here the other day sticks out in my mind…..

    “Importantly, the significant role of residential investors is
    a relatively recent development and their actual
    behaviour in a downturn in the housing market, in either
    Ireland or the UK, has never been observed.”

    When a full one-third of our market consists of people going very heavily into debt to buy more houses than they can live in, for the purpose of flogging them later after they have appreciated in value, we have to wonder what might happen if such a huge chunk of the market sees the prospect of capital gains evaporate, especially if prices do not merely flatline but deflate for an extended period.

    A bear might say they will all stampede for the exits and a bull might say no, they’ll hold out for price growth to resume, but the truth is that we don’t really know – we’ve never been in a situation quite like this one before.

    Which is kind of a little bit scary.

    • Don’t forget almost 15% of the workforce are employed directly in the sector. Building and flogging/spruiking.

      Any hiatus and UE will climb (like Ireland, Spain, UK and USA).

      Climbing UE will then accelerate as it effects the indirectly employed.

  9. “Low rental vacancy rates, rising rents, >>healthy immigration<< and robust competition among renters is a ‘‘highly undesirable’’ situation for tenants, Ms Sheppard said."

    "Healthy immigration"?
    January 2011 was the first month in history when Australia was net permanent emigrant country (12090 permanent residents and citizens permanently departed while 10510 permanent settlers arrived).

  10. In The Netherlands 100% (plus a couple of extra percentages for reno, car etc.) mortgages were quite common before the GFC. The banks did however enforce a strict 4.5x gross income policy (of one or both partners, that was up to the customers).
    I hear that nowadays it’s nigh on impossible to get a mortgage which will allow FHB’s to buy a home.

    It’s important to understand regarding that 4.5x multiplier that mortgage interest paid is tax deductible in The Netherlands, which means you’ll get between 40-50% back. This is often deducted from monthly payments automatically (just a friendly service from the taxation office). For comparison reasons that multiplier would be closer to 3x.

  11. When a person cannot even save for a despoit, they should not be buying a house. It is that simple. Housing has become a ‘Veblen’ good (demand goes up as price goes up), and too many people are buying houses they cannot afford.

    Irish banks were offering loans up to 125% of valuation before everything went bust. Their arrear rate were extremely low just like Australia before it went all pear shaped. Same with US, Spain, and Portugal.(not Greece though, they buy houses with cash there..) The role of banking and finance is to allocate capital efficiently. There is nothing efficient in lending money to those who cannot afford the repayment.

  12. So where has the $300,000 mortgage figure come from?

    From the ABS website:

    “In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell from 15.8% in December 2010 to 15.2% in January 2011. Between December 2010 and January 2011, the average loan size for first home buyers fell $7,400 to $274,300. The average loan size for all owner occupied housing commitments fell $3,500 to $283,700 for the same period.”[email protected]/Latestproducts/5609.0Main%20Features2Jan%202011?opendocument&tabname=Summary&prodno=5609.0&issue=Jan%202011&num=&view=

      • They can’t of course but that is apparently what the average mortgage in Australia and that’s probably where Ms Sheppard is pulling the number from (rather than from thin air).

        Using the “average” in this case is silly because first home buyers mortgages won’t be anywhere near the average. Firstly they haven’t paid any of it off yet and secondly someone who has had a mortgage for even five years would probably be closer to the average because house prices and the amount banks will let you borrow has spiked.

      • First home owners typically don’t buy the “median” house. They typically buy in the lower quartile range. Our projects have a high proportion of FHB’s and I think every property we sell is 20%-30% below the prevailing median price. That’s why i believe that using median multipliers as an indicator of affordability needs to be taken with a grain of salt – its a fair enough indicator, but it shouldn’t be taken as gospel.

        • And, those lower quartile properties are dogboxes on postage stamps still 60% overvalued.

          • To 787 – on what basis do you arrive at $200k tops?

            As for $150k homes in Texas – I respectfully disagree that there is an apples-for-apples comparison (having worked in UK, US, and AU in property). However, I accept that I would need to properly demonstrate why I disagree and unfortunately I don’t have the time to do so just now.

          • Yes there is a world of difference – Texas operates an open land market whereas Australia’s land supply is severely restricted via urban growth boundaries, prescriptive planning/zoning and development levies. That’s why a new fringe home on a small block in Australia costs $350k plus whereas larger homes on bigger blocks in Houston/Dallas-FW Texas (6 million people each) costs only $150k. The difference is primarily in the land cost ($30k in Texas vs ~$200k in Australia).

          • Hi UC

            “The difference is primarily in the land cost ($30k in Texas vs ~$200k in Australia).”

            By my readings on this blog, I understand that you attribute most of this difference to UGB’s and less restrictive planning regimes.

            But that is only a small part of the equation. However I’m well aware I’m not about to convince anyone here otherwise.

            So here’s a real life example: 2 vacant lots, <300m apart. Same englobo land component, same infrastructure, same zoning, same timing, same UGB, same size, etc. One costs about $30k to produce, the other $92k to produce (real numbers). Do you want to have a guess at why the difference? Hint: its got nothing to do with less restrictive land use policies.

          • Please entighten me. I want a developers’ perspective. Please don’t interpret my comments as an attack on developers – they are not. I am attacking various government land-use policies (UGBs, prescriptive planning/zoning and developer charges) that severely restrict competition and contestability in the land market and drive up land prices.

  13. Going back to my point above about house price growth over the past 60+ years…

    Stapledons’s data shows that house prices hovered around $50K (inflation adjusted) for 50 years between 1889 to 1949. Then this trend was broken and a new trend began – house prices started rising in real terms for the next 60 years.

    Strindberg has performed some quite detailed analysis on this, here…

    Will Australian House Prices return to long term average?

    and here…

    1990-2010 House Price growth SLOWEST in decades; slowest 20 year growth since 1950-70

    So, when bears talk about house prices reverting to past trends, do they mean reverting to the previous trend where prices hovered around $50K? That would require a massive crash of 90% or so.



    • I very much doubt that Australian home values will revert back to those types of valuations (pre-1960s). However, a reduction of housing values back to pre-2000 levels of around 2 times GDP (from around 3 times GDP currently) is entirely possible.

      It’s just a matter of whether: (1)home values stagnate whilst GDP slowly catches up; (2)home values fall in nominal terms (i.e. housing correction/crash); or (3) some combination of the two.

      Much will depend on China/commodity prices.

    • Howdy Shadow

      With your earlier comment about houses increasing in value by 7-8% have you considered this when compared with wages growth? After 20 years at 7% houses will be worth 3.9 times current values. Whereas wages will only be 2.2 times higher if you assume a 4% wage growth (which I think is optimistic for wages).

      Do you think a prolonged period of house prices outstripping wages is a good thing, or do you beleive wages will increase to meet the prices?

      PS – I like that you come here to comment. Nothing worse than a bunch of unchallenged bloggers engaging in group masturbation.

      • Hi Q, I don’t think it is good for houses to become less affordable. It is bad for society and bad for the economy. Australia would be better off with a greater supply of houses, cheaper houses, and lower debt levels.

        However, what I believe to be good or bad is irrelevant, and won’t have any impact on what happens. I look at the market from a purely logical and unemotional perspective, and I see a strong likelihood that prices will generally rise over the long term based on current fundamentals and government policy, and a much smaller likelihood of an imminent crash (that doesn’t mean I don’t think there will ever be a crash, just that I don’t see any immediate triggers for one in the short term).

        I expect prices in some cities to fall back a bit over the next year or two. Not a crash, just a normal correction as has happened quite regularly over the past years.

        If house prices in Australia were going to crash then it would have happened during the GFC. But we saw how easily the government and RBA can step in to prevent a crash, and even create a boom instead. So the crash is off the table for a while, until there is some significant change to the fundamentals currently supporting house prices in Australia.

        • If you were getting 10% growth between 1970 and 1990 you were a mile behind inflation.

          A bit of perspective is always needed.

      • I assume that to be an attempt at mocking.
        The price of houses is measured in abstract quantities having no real existence. As such, there are no physical or mathematical constraints on prices. There is absolutely no theoretical limitation to the application of the exponential function to prices. The exponential function merely states that the change in a quantity is proportional to its current size.
        It is current published government policy to devalue the price unit exponentially by 2%-3% pa. Some believe the actual devaluation to be greater than that due to the CPI definition understating the true price unit devaluation.
        The UK has an even stricter policy of 1%-2% price unit devaluation. But it is not being enforced. There is no guarantee that Australia’s policy would be enforced if circumstances dictated otherwise.

        • So I can go to a bank, ask for a loan and then pay with “abstract quantities”?House prices are most definitely constrained eventually, by very real things like wages, time to earn wages and labor – even if the price unit is devalued (so much for the goal of stable prices huh?). It is simply not possible to increase debt forever.Price units devaluing at 3% pa will nowhere near keep up with the forever “structural change” of 7% yoy growth in houses. The discrepancy between prices and wages becomes to large. Then you cannot avoid the point where new entrants will not just deem, but find house prices are so high that the loans are unserviceable.

  14. When debating rising property values, I often wonder why so little store is put inti the billions that is poured into improving stock over the years.

    I don’t just mean the million dollar Woolhara renos, which must skew the local median resale prices quite considerably, but the money spent in the builders yards, Bunnings, the rewires and replumbs, the money spent on kitchens and Italian bathroom fittings from Reece etc, right down to the odd door knob.

    Surely these billions should be factored in when considering rising costs.

    • Hedonic price indexes, like RP Data’s/Rismark’s price index, are designed to allow somewhat for this. Other price indexes will not.

      The inherent difficulty with hedonic price indexes is ensuring that your variables are well chosen, and correctly weighted.

      Quite obviously the RP Data/Rismark price index is worth quite a bit of money to them and is thus quite sensitive IP, so we will never know what exact variables they have and how they are weighted. That said, their index seems to be more accurate than the others from APM (stratified median I think), Residex (dodgy re-sell methodology), etc. Hopefully they (well I think they would) have enough integrity not to fudge their weights to put a positive spin on the market. The reason I think they “have enough integrity” is that poor data will cost them clients, and thus loads of money.

      Interior quality-wise, I guess if you could probably assume a histogram of houses resembling a Gaussian distribution whereby well kept / newly fitted homes at the right side, falling into unkept / anciently fitted homes on the left, and the bulk of houses making up the middle peak, then the system sort of works. Largely as houses fall into disrepair (to left side of the Gaussian) others will be renovated (move to the right of the Gaussian) with the middle staying largely unchanged. Of course, as we advance in technology you’d assume the average quality interior of a house to improve (eg move to cheap big flat screen TVs, cheap appliances, etc).

    • Endrortsonhousing

      What about the fact that the same 1970s house I grew up in is now worth 25 times more (or 5 times more inflation-adjusted) than my parents paid for it when it was new!
      (and it hasnt been the subject of any renovation – but it probably needs all sorts of work done on it to make it the equivalent of the six year old house it was when bought by the parents)

    • Don’t forget that assets depreciate in value too Gripper. We don’t count the 2000 year old Roman glass in the Italian housing economy any more because it has long since gone. Same goes for all other physical assets.

  15. Being a future FHB myself who is voluntarily sidelined, I agree that there is probably a low level in the FHB pool.

    I’m not sure this article was even worth bothering to address, Leith. I’m skeptical of articles quoting search term frequencies, especially when published against a specific website.

    Internet searches for “no deposit home loans” have increased 28%? On the ‘Loan Market’ website maybe… perhaps it was a rise from 18 people last month to 23 people this month.

    We see the same stats-for-RE-website here:

    You can twist search data any way you like. Go to Google Trends for Australia and plug in “no deposit” or “no deposit home loan” and there is barely enough search volume for them to track.

  16. The returns from housing have equalled (if not slightly beaten) returns from equites in the last 30 years, aminly due to gains in the last ten years.

    Now if you ask most people they will tell you housing is supposed to be a low risk investment, certainly lower risk than equities.

    The fact that returns from speculating in property have equalled that of shares over this time period, mainly due to the last decade of stupendous growth tells me that at this particular time the risk profile of housing has changed. It is no longer a low risk proposition because it’s not behaving as such. Right now Australian property is just as risky as equities.

    If you replace the word “HOUSE” with “ASSET” when you describe this market people would think you are crazy for buying.

  17. Responding to UC above (sorry if I came across abrubt, I was actually tyring to be funny, but I’m an engineer with a masters in economics, so being funny isn’t my strength).

    Land in Texas (speaking generally) is easy to develop. Its flat, clear, its got reasonable geology, with low input costs such as fuel (4 X cheaper than here), machinery (less than half price than here), wages (cheap mexican labour), shallow service trenches, very low material costs (eg fibre optic cable and aluminum electrical cables are imported to AU but local in US) etc etc. Also, there’s lots of corporate utilities that compete for customers, so they often subsidise communications backbones, electrical reticulation and even sewerage systems in new estates.
    Housing construction costs in the US are phenomenally cheaper than here. On a recent trip to Washington DC, their equivalent sqm costs were 10 (yes ten) times less than here.
    You also have city councils competing for population growth, so its not uncommon for them to provide infrastructure up front (their borrowings for infrastructure are usually federally guaranteed so they get good rates).

    All that gives you much lower input costs. And that equals lower sales prices. But here’s the kicker…becaues their margin on cost is off a lower cost base, their actual cash profit is lower, so they answer that with volume – low margin, high volume. And high volume equals lower prices.

    So yes, UGB’s and the like contribute to costs, but to say they are the majority of the reason isn’t quite right. Texas (and the US) is just a different development environment that operates on different metrics. Bceause people are passionate here, please remember this is a generalisation and I accept that there are examples where this generalisation may not be fully accurate.

    • Thanks for your response. Much appreciated. What price do you think your company’s homes would sell for with a comparative regulatory structure to Texas/Atlanta – $200k-$250k? Or is it impossible to say. I am trying to get an idea of how much Australia’s housing values are being inflated by artificial regulatory constraints on land supply.

      I’ve always found comparisons between Nevada/Arizona and Texas/Georgia interesting. Arizona and Nevada operated similar restrictive land-use policies to Australia and experienced huge housing bubbles/busts whereas Texas/Georgia operated more open land-use policies and experienced much less price volatility. I put the key difference down to the responsiveness of supply in Texas/Georgia. Don’t get me wrong, Georgia’s housing values have fallen significantly in % terms too, but by a much smaller $ amount (they were starting off a much lower base).

      • Re your first paragraph – very hard to say. Lots of variables (OH&S compliance is expensive in AU for example).

        Re your comment “I am trying to get an idea of how much Australia’s housing values are being inflated by artificial regulatory constraints on land supply”; your pursuit of this study is absolutely commendable and you’ll probably make a fortune speaking at UDIA seminars if you crack it. I’ll be happy to help where I can.

    • What! I am shocked!
      I thought that here in Australia we only choked supply of land, taxis, airport parking, shopping centres, railway stations, telecommunications, doctors, warfies, and imported bananas and ginger in order to drive up price and make undeserved windfall profits.
      Now you tell me that construction itself also suffers this problem.
      I’m going to have to go back to the drawing board now. My whole understanding of the housing market needs to be rewritten now.

      • Yeah only 11% of the workforce are employed in the construction industry CLAW.

        Its as much a shortage as your [fictitious] other shortages.

        Choking tradie supply, oh brother, I’ve heard it all 🙂

  18. So I can go to a bank, ask for a loan and then pay with “abstract quantities”?

    House prices are most definitely constrained eventually, by very real things like wages, time to earn wages and labor – even if the price unit is devalued (so much for the goal of stable prices huh?). It is simply not possible to increase debt forever.

    Price units devaluing at 3% pa will nowhere near keep up with the forever “structural change” of 7% yoy growth in houses. The discrepancy between prices and wages becomes to large. Then you cannot avoid the point where new entrants will not just deem, but find house prices are so high that the loans are unserviceable.

  19. I just did a quick look for rental properties that I might consider moving in to when my lease is up. It’s not til the end of the year but it’s good to research early.

    I did a fairly simple search: two bedrooms, any home type, a few close to the city suburbs (like Footscray, Kensington, St Kilda, etc…), rent per week $250-$350 (what I feel is reasonable and affordable). I got no less than 499 results and that was on one website.

    Anyone who thinks the rental market is tight is deluded.

    • “Anyone who thinks the rental market is tight is deluded.”

      Or perhaps they might be living in a city where the rental market is in fact tight. Perhaps they live in Sydney where $250-$350 will rent a dogbox that is a long and expensive commute from their workplace.