Housing falls accelerate

This shouldn’t be a surprise to any daily MacroBusiness readers, but here it is.

Capital city home prices continued their downward slide in March, posting their worst slump in at least 12 years as the property market showed more signs of sagging demand. Brisbane and Perth fell the most.

National city home values slipped 0.2 per cent, seasonally adjusted, in March, following a flat February, according to property research group RP Data-Rismark. The decline brought the national city median dwelling price to $455,000 in March.

In the March quarter alone, national city homes prices sank 2.1 per cent, the group said. That’s the biggest decline since RP Data-Rismark’s data series began in the June quarter of 1999.

“Basically there are more people putting their properties on the market than there are people buying them,” RP Data research director Tim Lawless told BusinessDay. “Until we start to see that effective supply being absorbed, I really don’t think we’ll see any upward price pressures.”

The pace of sales of Australian homes has slowed in 2011 even as the stock of houses on the market increases. Would-be buyers have been put off by poor affordability, higher interest rates and concerns about taking on new debt with uncertainty about the global economy lingering.

Auction clearance results, a barometer of market activity, have hovered around 60 per cent in Sydney and Melbourne in recent months, well down from the 80 per cent levels seen last year.

The average time on market for a property was 59 days in March, compared with 45 days in March 2010, RP Data said. The average discount on a property has risen as well, hitting 6.5 per cent in March, up from 5.2 per cent in March 2010.

The discount figure had been as low as 4.7 per cent in October 2009, after the Reserve Bank slashed interest rates to 49-year lows and the first home buyers rushed in to the market with help of government stimulus.

Other recent reports point to weakness in the real estate market. Property data firm SQM Research earlier this month said the stock of houses and units on the market has increased, rising 45.5 per cent in the year to March to 356,600 properties nationwide.

This week, real estate information group Australian Property Monitors said the national median house price had slumped 0.6 per cent to $550,946 in the March quarter, while national unit prices sank 1.2 per cent to $406,279. Fairfax Media-owned APM said Sydney home prices fell 0.4 per cent in the quarter, while Melbourne’s were flat.

Units in Sydney fell 0.7 per cent in the first three months of the year, while Melbourne’s turned down 1.4 per cent, Fairfax-owned APM said.

Brisbane, Perth drop

Over the March quarter in seasonally adjusted terms, all capital city median home prices fell, led by Brisbane which saw prices drop 4.6 per cent, followed by Perth, which posted a 3.4 per cent decline, RP Data showed.

Melbourne home prices fell 1.5 per cent, while Sydney’s eased 1.1 per cent in the three month period.

“Unsurprisingly, the flooding that has occurred within South East Queensland has likely compounded Brisbane’s weak market conditions,” said Mr Lawless.

Among other cities, Canberra prices fell 1.3 per cent, Hobart 1.4 per cent, Adelaide 1.6 per cent and Darwin 2.5 per cent.

I will leave you all to analyse those words yourselves, you can probably imagine what I think of most of them.

I can only repeat myself. There is no driver for increased rates of credit issuance in housing and the appearance of articles such as this in the mainstream media will just make that worse. Demographics and the economics of the boomers is against the housing market for many years ahead. As I have been saying for months and months, and repeated again last month the “soft landing” rhetoric is wishful thinking by vested interests and not based on any economic fundamentals. I see no reason why this slide in values will not continue for some time yet, and my predictions have been correct so far.  However, for the sake of the newly indebted in Brisbane and Perth I hope the rate of decline slows somewhat because that is 18.4% and 13.6% annualised respectively.

The chart I posted last month (below)  is now in negative, and I see no reason why that downward trend will stop. It is 2008 all over again and the only reason there was a bounce in the market then was the due to the super-stimulatory environment created by the government. I see no reason why a government preparing an austerity Budget or an RBA trying to manage a resources boom and bubbling inflation are about to repeat that action, so hang on to your hats.

For those who follow such things the RPData Index now looks like this for the capital cities.

And for a historic perspective here is the changing face of it over last year.

Comments

  1. Wow – 4.6% in a quarter? I thought that was the annualised figure until you pointed out otherwise.

    I see the floods were nominated as the “reason” for the big drop in Brisbane. Has anyone in the MSM taken a shot at explaining Perth’s figures?

        • I’m running with..Imagination ,Fell
          .. into a slumber,by real-estate seems fail off a Dresser’..weekly..with
          And the one in Green-motion,what?,..
          ‘Padding is Good for’,when it’s taken off an aging society…Let me guess,
          ‘a fall,sleep n Rest ?…Also the other..and,Does that single ‘Blue Box’,Flash-red Vertical Jail-lines ,once all green circles turn red ?..I’m new at this…anyhow…At least ,
          MB’s got Traction n seems ,Hittin’em
          Out of the Park..and Fair n Square of late…Deserved,..finishing ,Let’s remember too,brush our teeth with ,n Week-ends aren’t free…So enjoy..for now ,”abudget”
          a-waits..”See who picks up the Soap..”
          Imagine That’…cheer..JR

    • The stats probably do not accurately describe the correction in prices occurring in Perth. “Premium” properties – those in better locations, or built to a higher standard – are not being offered to the market because of perceptions that “It’s not the right time to sell.” As a result, sales data do not capture the whole spectrum of value changes. Despite this, the market is carrying excess listings (maybe 50% higher than usual) and the pace of sales is very slack, with property as likely to be withdrawn from the market as to sell.

      The decline in values is attributable to a complex set of factors:

      First, prices had advanced very quickly through until 2008 – too quickly to be sustained for long.
      Second, household behaviour generally has changed as a result of the GFC. Households are tending to limit consumption, reduce debts and increase savings, resulting in lower/ deferred spending on housing.
      Third, household disposable incomes are under pressure by rises in the price of many staples – energy, food, health care, education, government services, rents. This limits the willingness and ability of households to spend on housing among other things, and increases pressure to increase savings.
      Fourth, while past interest rates have affected the affordability of housing and sapped household spending, the expectation of further rises in rates is inducing potential buyers to defer entry into the property market.
      Fifth, while some parts of the economy are benefiting from the resource boom, much of the economy is experiencing static demand, mild-to-weak employment conditions, sluggish profitability and dull real household earnings. This is reinforcing risk-averse behaviour by households.
      Sixth, given the weakness in the property market is quite obvious to all observers, potential buyers have no incentive to “buy early”. They may get a better deal by waiting, rather than by arriving first. It is in any case logical for potential buyers to wait for more information – information about price changes, interest rates, tax, incomes….the whole array of factors that feed into household decisions.

      In the Perth market, where a lot of the buying through 2005-7 was inspired by fears of a housing shortage and an associated rush of speculation, there is plenty of room for prices to retrace. Now that the actions of buyers favour withdrawal and delay, it is just inevitable that selling pressure will bring prices down. There is probably a very long way to go before the cycle bottoms.

  2. I wonder how Christopher Joye will spin this??

    That’s one commentary I’m looking forward to.

    • According to the consensus thesis, house prices move in lockstep with real growth in disposable income.

      Since the consensus measure of disposable income – from the National Accounts – is well above CPI inflation, this current period is considered an anomaly and prudent buyers should step in as wages keep rising in a fully employed economy.

      i.e he and others would see it as opportunity, with a reversion to the mean of house price appreciation in line with wages meme…

      But I”m sure he and others will say something about it shortly.

      As Pascoe continues to take pot shots at gold bugs/Steve Keen etc…

      • Pascoe is hilarious. I keep a very close eye on what he says. As a trader, you can wait for his articles, and take contrarian trading positions against them, and make money.

        One example is his Gold Bubble rant from July 28 last year.

        http://www.smh.com.au/business/time-for-gold-bulls-to-feel-a-little-fear-20100728-10us5.html

        Guess what Gold did the same day that was published? Bottomed at 1156 USD, and is now 1532. Thanks Michael!

        Okay, he doesn’t deserve all the thanks, the charts were pretty blo*ody obvious. But his timing was immaculate. Genius.

        Now that he has been proven monumentally wrong on Gold in USD, his latest rant this week was against Gold in Aussie dollars. Must be worth a good close look. The GOLD ETF on the ASX gives exposure.

        Disclaimer & Disclosure: I am not recommending a buy or giving investment advice, just having a laugh at one of the best contrarian indicators on the planet, Mr Michael Pascoe.

      • Well said Avid. I (and others here) also count Craig James from Commsec as a similar contrarian.

        Pascoe’s beef against gold prices has a half element of truth: in AUD it hasn’t gone anywhere in two years. Unlike the purchasing power of AUD, which has declined by almost 7 per cent. Unless you go on holidays or buy online.

        And he forgets there are plenty of hedged products to trade gold in USD but get paid in AUD.

        He also writes for YTE and regularly bashes Keen in his column. I’m almost at the stage of unsubscribing just because of his article….

        • I shouldn’t be too harsh on poor Michael. He’s just doing his job, writing the words that his readers (the general public) want to hear. Which is precisely why he is such a good contrarian indicator… he reflects the mood of the mob, and the mob is usually wrong about financial markets.

          • Maybe he just ‘runs with the wolves’?

            Maybe he’s a dis-info agent?

            Maybe he’s not that clever? or

            Maybe he’s all of the above?

            Whatever he may be, as a wise man once said, “by their deeds you shall know them”.

    • CJ is even predicting a rate rise next month (he later changed it to next 3 months).
      .
      I wonder how property investors feel now, when they have been betrayed by the poster child of the housing ponzi finance scheme. With his interest rate predictions, he is literally dancing on their graves now!

  3. It’s nice to see your analysis of the property market validated.

    But it is still unfortunate that so many young people were sucked in to the property market, leveraging themselves to the verge of insanity.

    Remember, leverage works both ways, amplofying small gains AND losses.

    They will now suffer the worst of the consequences, especially if the flow on effects become generalised across the economy (as I expect) and the job market slumps pretty badly.

    • A few young FHB friends are putting offers on the table now because they think a falling market is a complete anomaly and won’t be repeated once the market picks up again. For their sake I hope they’re right.

      I’m a believer in the “long, slow melt” scenario and I don’t expect it to be a true “buyers market” from an affordability perspective for another couple of years at least.

      However, I called a correction in 2003 and then again in early 2008. The former correction was stalled by the resources boom and in the latter the RBA cut rates to 3% when I was expecting no lower than 4% and I didn’t see the FHB Boost coming either. So don’t listen to me. Call a mortgage broker, take out a mega mortgage on a two bedroom fibro shack in Cannon Hill and get RICH RICH RICH!!!!

    • Yeah it’s certainly bad times ahead.

      And some of them didn’t stand a chance. A lot of kids, who didn’t know their arsehole from their earhole, had the money dangled in front of them by government, were further seduced by the real estate infested media, and finally, any wavering was swept away by a reassuring parental chat. I heard the “Dad told me…” chestnut once too often when the first home owners’ boost was in full flight.

  4. Check out the RBA housing credit aggregates today. Lowest monthly growth rate for housing since 1986.

  5. “However, for the sake of the newly indebted in Brisbane and Perth I hope the rate of decline slows somewhat because that is 18.4% and 13.6% annualised respectively.”

    i’m hoping they get smashed. Iv’e been getting ready for this for the last three years…….now all that is left is the waiting 🙂

  6. It’s not 4.6 x 4 to annualise it.

    It’s….((1.046)^4) – 1

    That’s 19.71%

    Perth is at 14.41%

    • Actually, sorry to be a math pedant here, but it’s a loss so that’s not how it’s annualised.

      It’s actually:

      1 – ((1 – 0.046)^4)

      That’s a loss of around 17.2% annualised, still pretty significant.

  7. I dont buy into a lot of the sympathy being expressed above. I am 28 years old and since my brother first warned me of the housing bubbles around the world in late 2006, I have been making a massive effort to tell people my theories…

    They didnt want to hear…it wasnt that they didnt understand or were convinced otherwise, they simply didnt want to hear an opinion that required some critical analysis.

    They were more than happy to brag when their investments went up, they show no compassion for other less well off and they show no sign of changing their ignorant approach to life.

    The crash will change that, and yes it will cause pain, but spare me the sympathy for overly indebted kids who wanted it all now.

    I have far more sympathy for the 2 billion people around the world that just want food in their belly

    • My experiences are that people simply don’t want to believe there is risk in RE investing. I’ve forwarded some quality articles by Leith, David Lewellyn-Smith and DE to several people and nobody wants to listen. Thing is, most of these people are smart. A couple of engineers, a financial planner, a dentist, a couple of maths/science teachers and a software engineer. Clearly not your stereotypical uneducated, clueless young first home buyers by any stretch. People with a good grounding in tertiary level mathematics who are happily ignorant of the difference between real and nominal and the relationship between credit growth and RE value growth. The mind boggles.

        • Actually most of the people I mentioned aren’t greedy and are younger than I by 5-7 years. They’re really the new lower end FHB (ie. educated professionals, combined income of $120K+, looking to get into the lower end of the market and “trade up” etc) just looking for a family home. Most of the RE induced avarice I’ve seen comes from certain Boomers and Gen Xers who got in before the boom and are convinced RE is a risk free, gold paved road that deserves even bigger tax breaks than it already receives.

      • I agree. There are simply thousands of people who are simply convinced (read brainwashed) in to believing the RE hype.

        Having fallen victim to an orchestrated campaign of misinformation and false assurances, perpetrated by family, friends, the media, self-interested industry bodies, and commercial advertising, these lemmings have continued their inexorable march to the precipice and are now poised to leap over the edge.

        Who’d have thought that critical thinking would prove to be in such scarce supply?

        I started on my brother some time ago when he and his girlfriend were looking to buy a house. They are on a good wicket between them and initially kept saying that not only wouldn’t RE drop, but that if it did, they’d not be impacted by it badly enough to have to worry…

        My response was to remind him that if the first part of his statement was correct then he shouldn’t have felt it necessary to mention the second…Furthermore, I asked him how he would feel if he had a 5% drop on his $500K ($25K loss) home? Bravado kicked in and he said that they wouldn’t be too worried, and would simply stay there a bit longer if they had to. When I told him that $25K is ~3.5 years of payments based on the schedule he blanched a bit…that’s when I asked him how he would feel about a 25-30% drop…

        Anyway, they’re sitting on the sidelines now, hopefully they’ll stay there until the market gives some clear signs of bottoming out – provided the government isn’t silly enough to wade back in to prop it up again. They’re renting for now, which is still costing less than the interest the landlord pays on their place.

      • I cannot agree more. I have told a far few well earning and intelligent people about the reasons why we are in a bubble, etc. They simply don’t want to listen. I have even SHOWN them the irrefutable mathematics (I am an engineer) about how price growth of even 10% is actually horrible for investing (with rental yields so low) but they cover their ears with disgust.

        As with Stavros, I have no sympathy. A fool and his money are soon parted.

    • Same here, people just do not want to hear it. You do see worry in their eyes when you bring up the subject and present the (plain obvious) arguments. I guess denial just is a defense mechanism.

      I’ve said before that I feel fortunate to be able to compare my experiences in both Europe (as a home-owner) and Oz and I sincerely believe Oz is in a worse position than countries like The Netherlands and Germany were when the GFC (2009) had just hit. I think Australia is headed in the way of Spain because of the enormous importance of real estate over here. (though not Greece or Ireland… many more wrongs in those countries).

      Here’s hoping I’m wrong.

      • Same same here too! My wife and I were looking to get a vacation home back in California (where I’m from) in late 2005, so I started researching the markets to figure out what was what. Thankfully we’re STILL sitting on the California fence. We’ve since sold our unit (our family out grew it) and are now sitting on the fence here in Oz too (oh, and thanks for that 2008 bump .gov! I was sure we’d missed the top).

        We’re in Canberra, and we’ve had TONS of friends buy up and buy into their FHB, all with leverage Leverage LEVERAGE! For my family I hope I’m right, but for their I hope I’m wrong. But I too tried to educate our friends with talks and articles and I too got the glazed over eyes and the looks of “laa laa laa, I don’t want to listen cause I don’t want it to be true” so I too have arrived at the F-em stage. You can lead a horse to water, and all that.

        Cn

        • On cue, the Canberra Times rolls out the “look, don’t worry, prices will stabilise” puff piece. The piece also quotes the strong rental market but driving around Canberras northern suburbs, there are more and more “For Rent” signs appearing – these sings don’t appear in tight markets.

          The piece forgot to mention two things – the upcoming Federal budget is unlikely to be public service friendly and the current round of pay negotiations. One of the largest departments is offering a 3% increase – no where near the inflation level. If the government sticks to it’s guns, people are going to feel the pain as the cost of living and interest rates rise and their disposable income shriks. Tell me how that leads to “stable” market?

          • Rental vacancies in Canberra? SQM have just reported that vacancy rate to be 0.6%. Nationally the vacancy rate is down to 1.6%. Be careful when you perceive a lot of what you are looking for. It can be a sign of confirmation bias.

            On public pay the latest ABS data shows public sector full time adult earnings to be rising by 5.4%.

          • Hi SP, Your comment didn’t have a ‘Reply’ button???

            Anyways…I’m dubious of stats, they can be misleading and depending where they come from, can be crafted to suit an outcome. When we moved to Canberra a year ago there was much the same vacancy rate yet had 6 properties to look at in two suburbs. The problem was not choice, it was getting the real estate agents off their ass to shows us the property. Something to do with arrogance, shortage of rentals etc – only had open homes when they felt like it. We did find a human eventually and all ended well. 12 months on, end of lease, 9 x 3 bedroom properties for rent in our suburb alone; the number exponentially explodes if we look further a-field and if we want to pay more, dam what a choice! This is not confirmation bias, just experienced based fact.

            As for the public pay data, the SES graciously awarded themselves near on 6% pay rise (plus in-band progression) while the minions were kept at around 3.5% (plus in-band progression). The APS get two ‘pay rises’ per year. One for performance progression (don’t get me started on this, there’d be alot of ex APS if I had my way) and the other for inflation adjustment (average negotiated at the 3 year life of the employment agreement, not actual). Be interesting to see what the figure is if SES data is removed. I’ve not had a 5.4% pay rise this year.

    • I have had the exact same experience. Although I gave up trying to convince a lot of people a long time ago.

      I called the bubble years ago (while I was still at university). To me it was obvious, how could an investment be worth $550,000 if it only got $18,000 in income? Then I found delusional economics and a few other blogs and they just explained what I already suspected.

      With some help I have managed to convince pretty much every one of my friends and family. I don’t bother with people at work though, my boss is ex-real estate and there are a few ‘investors’ that believe the same old ‘prices never drop’ mantra that everyone else does.

      I recently got dragged in to a discussion with a guy who leveraged the crap out of himself on a property and made a decent profit telling me how much of a genius he was. When I asked the obvious “what if prices went down?” He got angry with me for even suggesting such an absurd notion. When I, stupidly, pointed out the US and Europe, he, angrily said ‘this is Australia!’

      But hey, it’s the same every time. Only a crash will wake them up, even though I really don’t want one to happen.

  8. I’m with Stavros on this one. Over the past few years the arrogance of property owners has been sickening.

    They borrow up to their eyeballs to buy property and then have the audacity to lecture people with lots of savings and zero debt what mugs they are for renting.

    Yep it’s going to be tough for a lot of people. My business will probably suffer as well, but it will be worth it to get back to a world where hard work, spending less than you earn return and substance over style return as the markers of success.

    • Considering net rental yields are almost as low as the US 10 year treasury yield, its a marvellous investment.

      A rental increase of 25% to the renter is still less than a 50 basis points increase in mortgage rates to the mortgagee.

      So even higher than inflation rates of rental increases (e.g 6-7%) will not even meet any minor increase in funding costs.

      What I don’t understand is that the RP Data’s of the world don’t understand that: they are calling for rate increases from here to eternity, but think that this will have no impact on mortgagees?

      Its a pity you can’t short RP Data any more. Macquarie is still there since it owns most of Rismark, so at least that gives me strength.

      Where are the property CFD’s!!!! This trader is dying for some action!!!!

      • Despite newspaper claims to the contrary, in Perth at least, there do not seem to be any rental increase pressures here.

        Last week a signed another year at the same price as my original lease 2.5 years ago.

        Granted we are good renters and they want us to stay, my wife just did a good garden makeover for them, but the owner is far from a charity and she left it unchanged without a murmur.

        • Since selling our unit we’ve ben in the rental market in Canberra (since March 2011). The wife and I looked basically all over Canberra and of the 20 or so properties we viewed, no less then 15 were vacant. Yet we’re told here in Canberra that rentals are tight! Yea? So I guess 3/4 bedroom homes (both detached and non-detached) aren’t in high demand then?

          I can’t see how there can be any pricing pressure with 75% of the properties are currently without tenets. Oh, and this was in the run-up to Uni starts too, so these things should have been flying off the shelves (we were looking in Feb/Mar).

          Cn

          • sub-prime comes home to roost

            Sounds like ‘speculative hoarding’ is alive in Canberra as much as Melbourne:
            http://www.earthsharing.org.au/wp-content/uploads/Earthsharing_Vacancies_In_Melbourne_Report.pdf

            “Speculative vacancies are motivated by capital gains being disproportionately higher than rental returns. Even with the power to write off costs under negative gearing, the variance between capital gains and rental income is often three to one.”

            Until govt stops hosing investors with tax breaks, it is business as usual – an on-going RE rort by the well-off at tax-payers expense.

    • I would also add self serving politicians and journalists. Similar to leeches, but less useful! They should be serving the productive Australian’s, not the other way around!

      • Lindsay Tanner summed it all up well with the 24hr media circus debacle that now dictates (appalling) policy on the run. The sooner we move to a non-compulsory voting system the better.

        • Proportional voting would be nice… imagine actually having a choice and politicians not acting as if politics is a footy match!

        • Nah, worse then. Everyone assumes if non-compulsory voting comes in then only the motivated/intelligent/responsible will vote and no gimps. But gimmicks are the only way to motivate people to vote, so more gimmicks and more show business. Try a USA primary and election cycle as a good textbook of the failings of non-compulsory voting.

  9. The interesting issue will be the negative feedback loop of local government rates, will they decrease, will councils pass on lower rates because of falls in the market value of land. Most councils have enjoyed larger revenues over the last 10 years, these have fueled pay increases and staff.

    • No they won’t – they will just adjust the rate in the dollar. I know my own council reduced the rate in the dollar when capital values increased at a rate which out paced inflation. Its all covered. The councils know what income they need and if they use improved capital values from the Valuer General they will adjust accordingly.

    • Agree with Johno’s comments. That’s exactly what the local council has done over here in my local area in the US. Home prices are falling – the property tax rate went up!

  10. It is very refreshing to read honst opinions as to where are market is at. Over the past two years (since the announcement of the FHB Boost) i have been trying to convey to people of where the market is heading, the underlying supports provided by the Rudd government and their inevitable negative effect on the market.

    Our market has arrived at this point through organised chaos, creating competition between cash ready investors (who have the support of banks in their corner) and the credit hungry first home buyers who have had for years the “owning your own home is the best investment..” story shoved in their mouth, followed by a “free cash” chaser.

    Over the past 8 years our economic growth has been fuelled by debt, with average people (not investors, although they think they are) willing to take on greater and greater mortgages without any substance to what they are purchasing, without any regards to the true underlying principle of value!

    So what happens if people NEED to sell and there are no investors willing to buy as they are the ones offloading and no potential first home buyers because they cannot afford the entry level? My thoughts are we are going to see!

    I wish i had only wrote down the contact numbers of all the people they have called me wrong, and a doomsdayer.

  11. I suppose you can’t expect much out of such a publication, but check out what Your Investment Property Magazine has to say about the figures

    “Property market stabilising: time to invest?”
    http://www.yipmag.com.au/news/5385/default.aspx

    “Sections of the Australian property market are beginning to stabilise after the market slowdown during the summer.

    The latest figures from Australian Property Monitors (APM) suggest that the Sydney, Melbourne and Brisbane markets are showing “early signs of stabilisation and recovery” following price falls during the first three months of this year.”

  12. I’m a ‘Boomer’ born in 49. I lose girlfriends because I’m a negative person! That is I’ve tried to warn them about RE prices. Anyway prices couldn’t fall on the Sunshine Coast. It’s different here!

  13. IMHO, another 2 months of “decent” drops, and “Deflationary mindset” will kick in…ie. sales dry up, except for “large” discounts….THE key for bubbles popping, IMHO…

    it’s all psychology and belief…

  14. “As I have been saying for months and months, and repeated again last month the “soft landing” rhetoric is wishful thinking by vested interests and not based on any economic fundamentals.”

    Are you saying there will be a crash? You are clearly mocking the idea of a “soft landing”. You obviously don’t expect price rises. What is left for you other than a crash? Why pussyfoot around. Be a man and say what you think.

    The atmosphere here currently is very reminiscent of that on house price fora in late 2008 and early 2009, especially the now defunct GHPC. Several drinking celebrations of the crash then took place in Sydney, Melbourne and Adelaide – just before the boom. There is now little trace of the celebrants.

    Anyway, the ABS reports its house price indices on Monday. More food for partying for you all.

    Seriously, stand back a little. How significant is a 2% national quarterly fall in the context of the 8-city weighted average rise of 22% from March 2009 to December 2010 (ABS)? Oh dear – house prices have only risen 20% in the last 2 years – whatever are we going to do?

    • Whether Australia experiences a NZ-style slow melt, a UK-style correction, or a US-style crash is a moot point. All scenarios will be painful. The fact of the matter is that the downside risks for property far outweigh any upside potential, and anyone purchasing now stands to lose-out from an investment perspective, especially when rentals are around half the cost. Housing is the wrong asset, at the wrong price, at the wrong time.

    • Sally Periwinkle

      “Be a man and say what you think”

      … says the man using a woman’s name for his handle.

  15. I’d say buy a few more houses Sarah. They are sure to go up at 20% every two years.

    I’m not sure most here are too concerned about house prices per se. I think we are more concerned about the level of distortion involved in turning from a productive economy to a non-productive economy that the over-investment in Real Estate has produced.
    The fact that the non-productive investment has largely been financed by foreign borrowings and , even more importantly by the sale of Australian national assets, is the really critical issue.
    What should our policies be in order to have a productive Australia where debt doesn’t increase exponentially every day?
    More RE?

  16. Sarah,

    at what point do you feel that rising prices are simply too much for the average buyer? How much further do you think they can go? How much more of their monthly income can the average household commit to repaying mortgage debt. Will the average household mortgage debt committment reach 75% of after tax income? Then 80%? Will they all start downgrading from car to pushbike, living on 2 minute noodles and wearing clothes from lifeline for the rest of their working lives. Is everyone so instictively and unquestioningly driven to want to own a house that they will happily launch themselves into a lifetime of near poverty in order to achieve it?

    Even with interest rates payable on your average mortgage only around 1.5% above an all-time low, repayments on the average size mortgage would consume a good half of the average household’s income. If your household is bringing in $200 000 a year, this isn’t a problem. But the great majority don’t earn anything like that.

    Prices can’t keep booming forever. Sooner or later, they have to slow down to grow in line with real, broad income growth at a minimum. Problem is, large numbers of people have invested everything in the notion of never-ending strong annual price gains. At some point – and I think it is quite possible that we may have reached that point – these sorts of gains fail to materialise. What might start to happen then is interesting to ponder.

    • “How much more of their monthly income can the average household commit to repaying mortgage debt”

      Repayments for a typical house have been much higher at times in the past, even the recent past. If the RBA sees difficulties there they will cut rates. Default rates are historically low and not giving any concern to the RBA or the government.

      Saul Eslake has recently written on this blog:

      “…… but instead one should look at ratios such as aggregate debt to aggregate assets, or aggregate interest payments to disposable income. And neither of these aggregate measures give any particular cause for concern about the capacity of Australian households to meet their financial obligations.”

      • good… raise rates another 2% and then my cash will be doing really well and those FHB will be really stuffed, I buy their house rent it back to them … they will have big loss… i will have big property portfolio …

        the RBA are already noting the extra $’s being removed from peoples wallets due to inflated prices, so I don’t think it will be as bad a rise as many expect.

        I am now waiting for my REA colleagues to see no evidence of falls in their areas.

      • Sarah P,

        I got one question for you would you buy an investment property now in this market?

        Also do you own some investment properties. I actually have an investment property and at one point owned 3 of them but sold 2. The reason why is because the writing is on the wall. Australia is about to go through the same pain the US, UK, Europe etc are experiencing and so is China.

        LBS

      • Sarah,

        I have a deal of respect for Saul Eslake – however, I’d like to point out a tiny (and not much talked about)vulnerability in the ratios that he cites.
        In each of the ratios, there is an inbuilt and potentially fatal weakness.
        In the case of “aggregate debt to aggregate assets”, the weakness is this – debt is a fixed sum of money, it must be repaid in full (theoretically, at least), it is not a variable – Assets on the other hand have a value ascribed to them at a particular point in time, and that value often is simply somebodys’ opinion. The true value of an asset can vary, depending on many factors, whereas the debt remains a constant.
        In the case of “aggregate interest payments to disposable income” – whilst it is true that interest payments can vary at the whim of the RBA and lenders, it is also a fact that disposable income can vary (I would suggest far more wildly than interest rates) – ranging from a simple drop in disposable income due to increasing costs of living (are we not seeing that happening right now?), through to a total loss of disposable income due to unemployment.
        So, both of the ratios that Saul, and many others, use to soothe the jangled nerves of the restless natives, are only really valid at any given point in time, and are both very susceptible to variables, the likes of which could come under significant adverse pressure in the near future.
        For mine, I wouldn’t bet the house on either of them, so to speak.

      • Please Sarah, this is rubbish. People were committing less to mortgage servicing when interest rates were twice what they are now because the size of mortgages was very much smaller.

        We were just informed last night by some relatives of ours with a household income around twice what we earn (resource sector worker) that they are offloading their investment property they have owned for 6-8 months because they have concluded that the financial burden is too great. I was incredulous when they told me some time ago that they were selling the 4WD because it was too expensive to run – for anyone on their sort of income, the running cost of the car should be pretty inconsequential! Unless you are mortgaged to the eyeballs of course.

    • “…If your household is bringing in $200 000 a year, this isn’t a problem…”

      Lefty, for those that are prudent such a salary enables you to live a good, fulfilling life. For few (I know personally) that earn(ed), $150K, $185K, $220K, that spent like idiots that thought were rich, are now one pay day away from very hard times. Take that $1.2 million dollar mortgage, the BMW for him and the 4WD (or Audi) for her, the private school fees, holidays, an iPhone for all family members, laptop for everyone too, 7 near maxed out credit cards, other keep up near the Jones’ expenses, and see what (many?) people can now afford or can’t afford. They too are looking at selling cars cause they’re too expensive (for them) to maintain and no one will buy [not]their house. Though times Sarah P, though times.

      On top of all that let us tease and mock our friend (your humble narrator) cause he prudently chose to rent, save much of his high salary cause one day he knew things would go belly up, the high salary would not be there anymore, but that’s OK he could think of a business venture or two and sleep very well. It is sad to see people being so euphoric up to 2007, are now shamefully (well one person I know) ask you for money.

  17. I say Ossstralia is heading for an Irish style correction…housing has created offshoot employment in the banana land, besides burger flippers and gov workers and paper shufflers the country doesnt really produce much finished product anymore thanks to deindustrialisation.

    Whether the gov props it up again is no issue, it will go down and when it does we will see how badly managed and bankrupted the country is. For the productive people the future is offshore, untill those left here canabilise each other.

    • Don’t forget the sole remaining lifeblood of the economy….resources. And quite likely into the future the agricultural/livestock sector. Australian icons both!

    • Nice comments ponzimania. You are right on this comment

      ” it will go down and when it does we will see how badly managed and bankrupted the country is.”

  18. resources right? some 1 has to want the resources, cheap credit and lower debt levels have reached a peak. What will happen when the cycle changes and slows down and other sources like africa come online and are cheaper to extract?
    Australia should focus less on “finance” and more on looking after itself. Do we even produce enough food to feed the population? Why is there imports of fruits and veggies?

    • My comment was meant semi tongue-in-cheek but tell me what else do have to offer? We have not developed our economy further; we have become little more than a second tier FIRE economy – and not done even that particularly well. What we do do well is resources (some of the best, most innovative mining engineering solutions around, globally sought after), and grow stuff that needs space (wheat, sheep, etc). We are systematically destroying what little manufacturing capability we have left. We have squandered the rewards of our mineral wealth and from what I can see, will continue to do. We have been The Lucky Country and our complacency has led us to Mediocristan.

      A government with no vision and a population that mostly doesn’t care.

      You ask “can we feed ourselves” – I don’t know but would guess that we just about could, if we had to. If we harnessed the massive seasonal waterflows of the north (think Kimberley region/Ord River) surely we could develop agricultural regions to rival the Nile delta of old. To do this would be an enormous project with a timeline of several years and cost billions. Potentially the benefits could be equally enormous.

      You can’t eat NBN connections…