And now the world knows

This isn’t new to anyone who reads MacroBusiness regularly. But the rest of the business world has just been enlightened to the fact that all is not well in Australian Real estate with the front page of Bloomberg looking like this today.

Apartment prices in the luxury beachside Australian town of Noosa Heads have tumbled by a fifth since 2008 as cracks emerge in a housing market that’s so far escaped the rout seen in the U.S., U.K. and Ireland.

The median apartment price in the tourism and retiree town 150 kilometers (93 miles) north of Brisbane has slumped 21 percent in three years to A$570,000 ($594,000), according to the Real Estate Institute of Queensland. Sales have more than halved across Queensland state’s Sunshine coast, home to “Crocodile Hunter” Steve Irwin’s Australia Zoo, and the Gold Coast, known for its surfing beaches and casinos.

“We have a very overvalued housing market and even a small adverse shock can be magnified by a large adverse impact on property values,” said Gerard Minack, Sydney-based global developed markets strategist at Morgan Stanley (MS), who asserts Australian home prices are as much as 40 percent overvalued. “We’re seeing that now in parts of Queensland.”

Australia’s housing is the most overvalued in the world, the Economist newspaper said last month. The country had the most unaffordable homes among English-speaking nations, with the Gold Coast and Sunshine Coast markets near the top, according to a Jan. 24 report by Belleville, Illinois-based consulting company Demographia, which compared 325 housing markets in seven developed economies.

The house price index of Australia’s eight capital cities has gained 15 percent since the first quarter of 2008, according to the Australian Bureau of Statistics. Prices gained 16 percent in Sydney and 26 percent in Melbourne.

The usual “vested” get to give some opinion about how it isn’t going to spread and how there is “nothing to see here”. But this isn’t an Australian audience. US and UK based readers have heard it all before and are well aware of what could be coming next. This isn’t a new story, but the fact that it has now reached an international audience on this platform certainly is most interesting.

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Comments

  1. Seems to gain momentum this thing… there go the foreign investors.

    Just curious, has anyone here heard any of their relatives/friends/neighbours say anything overly optimistic (invest now, prices always go up) recently?

    I got the optimistic spiel after I just arrived in Australia and made a comment to someone about what I perceived to be unsustainable high prices, but I haven’t heard anything lately, optimistic nor negative.

    Would be interesting to see whether this negative news is trickling through to the community.

    • Yes AnonNL, yes I have been given the overly hyper-optimistic drilled in my head, invest-buy now cause prices are going up again, by my parents and their neighbours. Oddly enough this rhetoric (monologue, yes I don’t get to say anything) has come about cause quite a few houses in their neighbourhood are up for sale. The Real Estate Agent told them, “…I tell you something, if I didn’t work for L.J Hooker, I’d be buying this house myself…”.

      If I weren’t 44 years old, and my parents well into their 70’s, my bum would be smacked black and blue, all because I had the audacity and to say something completely stupid (their words), like “…the prices will come down, none of these houses have been sold yet, some after many months…”.

      Well excuuuuusssse me all over the place!

      • Agreed. Though iv’e recently turned my parents around to my way of thinking. Before they used to get on my back about not being able to “live in” shares, now i don’t hear anything. My arguments are finally starting to penetrate…..i tell them i’m only 24 and i will have plenty of time to enter the market and hopefully at bargain prices if this house of cards FINALLY falls on itself.

        • My parents have finally turned around, too; in part, humbly, to myself and my wife being bearish on housing for around 3-4 years.

          They recently sold their second house (Boomers! lol), and we have convinced them to not buy another with “spare cash” AND to not use some super cash to buy yet another investment property!

          They are waiting for the bottom, now….quite a turnaround…

    • Seems to gain momentum this thing… there go the foreign investors.

      As much as I wanted to agree with your statement, I know it is too much to hope in current state.

      Yes, it got more international coverage with this Bloomberg article but my feeling is the sophisticated investor-type who regularly read financial news-feeds like Bloomberg probably already knew about Australian property bubble long time ago.

      The problem we have is the huge numbers of ignorant, un-sophisticated mom and dad kind of investors / investors wanna-be. They never read any financial news like Bloomberg / AFR and contrarian blogs like this wonderful one. They just talk amongst themselves and with their bankers and RE agents and as far as they know, it is still clear and blue-sky situation in property. What, FHB strike – that’s good more bargains for us…I can imagine what they said in recent chats.

      In the last 6 months, I still saw a few friends of mine keep accumulating IPs or “upgrading” their home while also “upgrading” their mortgage-debt. You would be surprised to know how many people in Australia who never read / watch MSM, let alone informative blogs like this one.

      I guess Bogans truly rule in this country. If I see such prooperty bearish news / articles in some local and/or ethnic papers, then I can see some hope there.

  2. I think the consensus view is all this is boring and unnecessary “pessimism”.

    And nothing exciting is happening either: as incomes rise across the whole country (check out the National accounts – phwoar) and hence house prices will re-commence above trend growth rates (you know, perfectly in line with disposable income growth)

    According to the only measurement that matters – i.e it is used by the RBA who have got this all under control – capital city house prices have not fallen in the last 12 months.

    BTFD.

    • Yes “boring” is CJ’s view as well:

      Since late 2009 we forecast a soft landing in 2010 with little to no capital growth, and the risk of some nominal falls if the RBA hawked up over 2010-11. As incomes continue their inexorable rise, housing valuations will improve until the RBA starts cutting rates again, which will likely trigger a return to above trend capital growth. Until that time, the housing market is not going to be doing a great deal, and should be boring the pants off most of us.

      Then he makes a rather curious comment:

      Interestingly, if commodity prices collapse, resources investments get iced, and the China/India story ends, the one Australian sector that will probably fare well is housing. Since it is the most interest rate sensitive area of the economy, it will benefit most if the RBA slashes rates, just as it did during the GFC.

      If commodity prices collapse and the China/India story ends, the Australian economic landscape will be scorched earth. God knows how CJ thinks the banks are going to fund the reflation of our housing market in such a scenario.

      • Is this the correct translation? CJ says –

        “As incomes continue their inexorable rise, housing valuations will improve” – house prices will rise.

        “the RBA starts cutting rates again, which will likely trigger a return to above trend capital growth” – when things go bad and the RBA cuts rates, house prices will rise even faster.

        “if commodity prices collapse, resources investments get iced, and the China/India story ends, the one Australian sector that will probably fare well is housing” – if the s#$t hits the fan, house prices will shoot through the roof!

        Does CJ really believe that strongly in his undersupply argument and the ability of governments to prop up the housing market indefinitely? Is there nothing that will bring down housing? No downside whatsoever? C’mon, be serious man!

        • Lol. I get the feeling that no matter what CJ uses as inputs, the only possible output is “house prices rise!”

      • “God knows how CJ thinks the banks are going to fund the reflation of our housing market in such a scenario.”

        Well, putting CJ and thinks in the same sentence wasn’t a good start.

      • That’s uncalled for Kang.

        Play the ball, not the man.

        Although I disagree with most of his arguments on housing, (I think he’s quite right about asset allocation in superannuation) there is no need to resort to that sort of dialogue.

      • “Play the ball, not the man.”
        .
        I see CJ playing the man and not the ball, all the time. So I think the ball is now in CJ’s court.

      • I thought RP Data predicted in June 2010: “Our view is that home value growth is likely to moderate, tracking household income growth which is likely to be circa 5 per cent over the coming year.”

    • Lorax, he is part of that majority view who believe (and it is only a belief, as the empirically observable data shows otherwise) that the RBA is “in control” of how credit is applied to the housing market.

      If the RBA slashes rates amongst a commodity price collapse, unemployed people cannot buy houses. Employed people who are haemorraging cashflow due to negative gearing will have no one to sell houses to. The market stops. Hello – welcome to house price deflation (appearing in a developed country near you for a long time only….)

      Japan has had near zero interest rates for 15 years -why haven’t prices gone up there? The USA has had close to zero central bank cash rates for 3 years – again, no house price rises or an increase in sales. In fact, mortgage rates have gone up during all bouts of QE (which is in effect, going to negative interest rates)

      Its not the cost of credit the matters – its the ability of the consumer to take on that credit AND the ability of the banks to provide that credit. The banks don’t care if interest rates are 1% or 11% – as long as they can get access to credit and they can entice someone (mortgagees) to sell that credit too.

      What will be of better “use” is if the government uses extraordinary fiscal measures, e.g. $9000 cheques to households, $30K First home buyer grants and $100 billion in RMBS purchases – all to support and create employment via spending and to keep the mortgage market afloat.

  3. Only negative Anon, with one couple changing their mind and deciding not to sell their (perfectily fine) house to obtain a larger one. I think they dodged an $800,000 bullet personally.

    My wife has been keeping an eye on the GC real estate market and is watching with greedy eyes as the prices drop.

  4. While I wouldn’t suggest that this will make foreign banks significantly reduce the level of capital available to Australian banks. It will almost certainly drive up the lending costs for Australian banks.

    It will be interesting to see whether this causes the banks here move independently of the Reserve on interest rates, and what the Government’s response will be re inducements to buyers.

  5. Curious as to the authors opinion of whether this is a good thing or a bad thing. Or just a thing.

  6. prince made a correct analysis, although the last part shows his nanny state education.

    The govenernment should not do ANYTHING, they created this mess through many decades, not liberal or labour, BOTH. They are different sides of the same coin they exist for the same benefit and its not to help the average person. The more they interfere and try to prop things up, the more devistating the unwind will be its basic economics which they are trying to change the law of nature. We are headed for a DEPRESSION, theres no way out and unfortunalty any 1 under 40 doesnt deserve whats coming.

    • Ponzi – You must have missed my quotation marks around the word “use”. I was writing in context that the government will likely “use” these measures – as an empirical observation, not a prescription, or approval thereof. Only what I see is likely to go through the minds of Treasury, Cabinet RBA Board et al.

      They want to keep the whole scheme afloat – and placing cash into the hands of households (which eventually gets to banks, unlike the US/EU prescription of banks first, households never) will create employment (at least temporarily).

      This will likely be short term however (like bringing forward the 2010-2015 first home buyers purchases in 2009) with no solution to the long term problem.

      The policy solution I suggest, is a policy solution I cannot suggest – as it would go against the very “nanny” ideology that you wrongly claim I adhere too.

  7. CJ has a point in his argument about housing and a China accident. Foreign creditors may run on the banks but the government can step in guarantee again, allowing the RBA rate cuts to take effect.

    That is IF the bust is short lived. If it is more long term, marking the reversion of China to 5% growth or paralysing its banks for a few years, then we’re in deep.

    The government already has a debt stock around $180 billion. It can maybe double that and bit more before it faces sovereign downgrades…

    • That is IF the bust is short lived.

      Yeah it all depends on whether China can stimulate again successfully … but there’s a big difference between recovering from a financial crisis abroad and a financial crisis at home.

  8. Glad to see this published on the front page of Bloomberg. All publicity is good publicity… right?

  9. “Economists and analysts at organisations including RP Data, ANZ and Westpac have said the weakness in home prices along Queensland’s south-eastern coast is unlikely to spread as low unemployment and a shortage of homes underpins prices.”

    Reminds me of Bernanke in early 2007:

    “We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

    • 2011-2007=4 years – sounds about right – we usually lag the US by 5 years or so. As I said previously, I knew the end was here when I saw the advertisement for the new “Race Around the World: Australia” version.

      In this age of internet there’s plenty of quotes that have been saved for posterity. “acute housing shortages” rings a bell, as do many others.

      I still cannot understand to this day why Ben Bernanke is still at the Fed. Boggles the mind.

    • Yes, I recall Bernanke and Co using the word “Contained”. Of course it was anything but in the end…

    • Bernanke quotes:

      1/7/05 – Interview with CNBC

      “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

      20/10/05 – Testimony before the Joint Economic Committee

      “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.”

      15/2/06 – Hearing before the Committee on Financial Services

      “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

      15/2/07 – Semiannual Monetary Policy Report to the Congress

      “Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.”

      31/8/07 – At the Federal Reserve Bank of Kansas City’s Economic Symposium

      “It is not the responsibility of the Federal Reserve–nor would it be appropriate–to protect lenders and investors from the consequences of their financial decisions.”

      10/1/08 – Q&A after speech

      “The Federal Reserve is not currently forecasting a recession.”

      10/6/08 – Boston Federal Reserve’s 52nd annual economic conference

      “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

      This is good material for us to learn about ignorance, vested interests, trust …

  10. …and a lot of even our contrarian talk here assumes that there will be not paradigm-shift in the THINKING of buyers…

    There is a very good, psychological (not mechanical!) that the “after”-side of a classic bubble-curve has such a steep negative gradient: sentiment to the commodity in question has systemically changed.

    Hence, it doesn’t matter if certain things “can” keep said prices “propped up” (eg. lowered IRs, stimulus, etc) – if the decline becomes systemic, it will build on itself and cascade…low IRs, stimulus, etc.

    We’re dealing with psychological-moral systems here, not mechanical push-and-pull systems.

    It’s why crash-worthy economic systems do indeed crash, rather than “soft land”.

    IMHO, the only thing that MIGHT flatten the decline is the mother of all massive govt interventions – SO MUCH liquidity, IR dropping and direct stimulus that it’s “risk OOOONNN, baby!” and you can “win”by either gambling or just buying….and flip to win…but only for us long as the govt juices keep-a-pumping big time.

    Think QE, and what happens when QE is taken off.

    My 2c

  11. Yeh bernake isnt stupid, i wouldnt tell the truth either if i were him, the next day the rush to the exits would make 2008 look sexy.

    Sorry prince i thought yu were prescribing more stimulus, theres no way out or solution…its either stand back and let the liquidations happen along with massive bread lines or ? If there was an or would have been done. Some say going back to gold stand, mixed currency with gold, real bills AKA antel fekete.