Weekend musing: What’s a crash?

The saturday morning ritual of moving the yard apes between their various activities is over so it time to sit back for an afternoon of musings.

Firstly, after yesterday’s little bomb drop from NAB on housing I note that Bill Evans from Westpac has joined in (h/t janet) with a bearish post on Business Spectator.

A sustained relaxation and an associated return to rising house prices, stronger credit growth, and a consumer much more confident in their finances is unlikely without further balance sheet consolidation. That takes time and brings with it the risk of further weakness for consumer demand and the housing market.

Yesterday we also had a visit from Stormboy who left the following comment.

I am a lender with a one of the big four and based in Qld. I can tell you that lending is very quiet here in Brissy. This time last year was one of the busiest periods we had in the last eight. We achieved 125% of our half year target (which ends on the 31st of March). This year we reached 67%. That is almost 50% less than 12mths ago. Lending is down in NSW, Vic and SA. However it is WA and Qld that impacted the most. They have already let go of over 20 corporate staff and if business lending is doing well it is not here in Qld, speak to the commercial bankers everyday and they have never seen it so quiet. We are also loosening lending policy almost back to 2007 levels and some of our biggest interest rate discounts and still no real uplift. Valuations are coming considerably lower than 12 mths ago and this seriously effecting our ability to get loans approved.

…  The valutions are down for the whole market from million dollar homes to small homes in the outer burbs. We have three real estate agents who are in serious financial difficulty and the bank is doing everything it can to keep arrears levels low. The slow down became most evident just before Christmas and has gotten worse in last three weeks with a small uptick this week. I have been in banking and this company since 1989 and this is much worse than the slow down in 2008.

So it seems that housing is looking pretty bad on the ground all the way up to the ivory towers of banking. Which brings me to my musings of today. I get asked quite often on this blog and also via e-mail the question “Is housing going to crash?”. 

But how do I answer this ? What is a “crash“? How is it different to a “collapse“? How about a “fall“?

Is a fall of 50% at the top end of housing  in a certain area a “crash”? 

Is a 20% fall across the board in an entire town a crash ?

Is a 9% fall in a capital city a crash ?

Is the sales volume of a capital city being so low that it makes a decade ago look good a crash?

Or are these just falls? Do we need a bank to fail before we call it a crash? What are the prerequisites you need to see before you say “Yep.. that is a crash” ?

I don’t know, but without a definition it is impossible to answer the question. So if you have an opinion of what a crash is then let me know. Maybe we can come to some sort of consensus on this.

Comments

  1. I need to see at least 40% in a capital city and at least 1 bank fail before I call a “crash”. I will accept a small regional such as BoQ.

    The big4 will never go as the government will prop them up.

    At the moment the market is “falling” with Brisbane almost in “collapse” territory.

    • Hard to be Zen

      No BS – this is no longer alerting; when I see an email from a Big 4 bank insider letting slip his concerns, it starts to ring a few bells – and they’re not the jingly ones.
      I’m not in the propppped market, but have cash savings in the bank here and in NZ (the flagship NZ banks now owned by the big Aus 4).
      Double trouble?

  2. The term “crash” denotes some sort of sudden impact.

    If house prices fall gradually by say 35% over a 2 year period that is a “fall” -possibly described by some as a “correction”. The social and economic fall out from this drop in prices may be minimal or less obvious.

    However, if house prices fall 35% in 3 months that is a crash and the knock-on effects may be significant as there is no period of adjustment for participants to lay off or reduce their losses.

    Magnitude is another issue – you can have a small crash – say 10% fall in prices or a real write off – 40- 50% fall.

    The resilience of the market participants is also a factor in whether we describe a price fall as a crash. If prices crash but homeowners do not change their economic behaviour – i.e. there are no knock-on effects – then the situation cannot be described as a crash.

    My 2c.

  3. It’s like ‘depression’ replaced ‘crisis’ and now ‘recession’, even ‘great recession’ replaces depression and then there is the weasel word, ‘downturn’. Yes, there is a percentage for a truly great fall or crash or collapse but in truth its in the mind of the speaker and whether they have got skin involved in the investment; which is why we hear so much from the MSM about a ‘soft landing’ because it alarms people, otherwise.

    • How about “Soft landing”? Every time I hear it, I imagine that a neat pile of pillow cushions is going to protect the bums of investors/spruikers as they fall backwards.

  4. I think a “crash” could be defined as a relatively quick fall in today’s bubble prices to a level that represents their long term historic value.

    Steven Keen has mentioned a 40% drop would be approximately right if you’re looking for a percentage.

    This is why I am 100% pro-crash because it is simply adjusting prices to where they out to be instead of the horribly unaffordable situation we have had for some years now.

    • Professor Keen has said a 40% drop over 15 years – Japan style.

      I would not call that a crash. I would even go so far as to say that a Japanese style slow deflation could be called a “soft landing”.

  5. johno says that a drop of 35% in 3 months equals a crash, the only way i can see this happening is if there is widespread panic selling, other wise it will take time for the vendors to change their price expectations.

    so, perhaps the definition of a crash is widespread panic selling, something to look out for would be a large spike in properties on the market with vendors dropping their prices to get a good position in the ‘sort by price’ list on the websites

  6. Since 2008 i been told im a wanker for taken notice of Steve Keen, Max Keiser,
    Marc Faber, just Steve and Max,actually
    no one seem’s to know Marc,
    i hope i can stay a wanker,ya cant have this much debt and not have a crash,fall
    what ever spin you put on it, the Chinese are going to have to breed a lot better if were to keep up the export of minerals, that will keep all mineral employeers happy, and the rest can pick up the crumbs. hope no one has to go on welfare.

  7. Referring to aircraft, I would define it as the following.

    – A crash is when the market loses control and suddenly loses quite a lot of value in a very short space of time.
    – A crash landing (fall) is when the engines of the ‘boom’, whether it’s credit, a strong trading partner or whatever, loses a bit of momentum and the market comes back down, but a bit slower and most passengers survive the hit.
    – A soft landing (correction) is when the market hits a peak, then comes back down to earth, but they experience some turbulence on the way and the flight attendendants (bankers, investors etc.) might get injured.

    I just made this up now by the way, so it probably isn’t the most in depth analysis I’ve ever had. Hehe.

    • Continuing the theme – we’re in coffin corner now. We can neither speed up or slow down without dropping like a stone!

  8. DE,

    Given the degree of overpricing compared to the mean (in multiples of annual household income) I would call reversion to the mean a crash.

    There’s always a lot of inertia in property market trends. Ultimately fundamentals determine the direction of the trend but emotion is the key driver. In a downtrend the dominant emotion is fear, of course.

    So RE markets can take a long time to change direction and establish a new trend when the fundamentals demand a change.

    After the new trend is in place it also takes time to build momentum. A serious RE downtrend often develops as a series of step changes driven by events that reinforce the prevailing psychology in the market. The events don’t have to be objectively or logically relevant to the RE market at all. We are talking emotion here.

    Stormboy’s report is very, very interesting. I notice most of the FIRE sector actors get a mention. The only big kids missing from the playground are the mortgage insurers and the builder/developers. There’s a link below, with a few extracts, to Chris Whalen of IRA discussing the former. Those naughty boys apparently have nowhere near enough capital to meet claims.

    If Stormboy’s report is true then I think we know when the crash is going to begin, “just before Christmas” last year!

    http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

    Chris Whalen – A Crime Called Private Mortgage Insurance

    “Many of the mortgages that the MI’s pretend to insure are actually ‘rejected” upon default. The act of “rejection” is not the same as rescission and, in effect, amounts to the MI pretending that the loan was never insured in the first place. Litigation typically ensues. A good example of the litigation strategy involves Genworth Financial (“GNW”), which began a litigation with Countrywide to reject insurance coverage of securitizations by this large thrift.”

    “The same litigate rather than pay approach is used by JPMorgan Chase (“JPM”/Q4 2010 Bank Stress Rating: “C”) on reps & warranties claims by investors with respect to the private label securitizations of Bear, Stearns & Co. Ditto with respect to Bank of America (“BAC”/Q4 2010 Bank Stress Rating: “C”) and the legacy securitizations of Countrywide. “Foxtrot Yankee, sue me,” is the standard reply from the MIs and large bank CEOs when it comes to private label exposures.”

    • “Given the degree of overpricing compared to the mean (in multiples of annual household income) I would call reversion to the mean a crash.”

      Can you point me to the “mean” price/income multiple that reversion to mean will take us? This chart was produced by Nigel Stapledon and covers 1901 to 2005.

      http://img710.imageshack.us/img710/8338/stap2.jpg

      • Sarah P,

        I’m reluctant to nominate a multiple as the target for the reversion.

        At some points in history you may be looking at multiples that are based on a household with a single breadwinner. More recently the multiples would reflect a two income household as the norm. The level of other household expenses is another complicating factor that needs to be considered. All of this feeds into any calculation of “capacity to pay”.

        If you simply want an absolute worst case scenario on which to base your analysis that is easy. In the very worst case the market will clear at the cash price ie. no debt component. As a rule of thumb you can derive this figure from rental return to a cash investor with reference to bond yields. In this kind of market turnover would fall dramatically as people held on who have negative equity but good cash flow. This scenario would assume no government intervention. This might sound alarmist but ask Stormboy how much more exposure his bank wants to Cairns RE at present. Location will matter, as will the depth of the liquidity in the market.

        Some very interesting comments since I posted my comment. I notice someone has made the connection between an earlier RE market downturn and rising unemployment in the UK.

        According to one report I read the mining industry in Australia employs around 100,000 people. Let’s assume that estimate is incorrect and the actual figure is double. Compare that to the numbers of people working in the FIRE sector, construction and retail.

        RE market crash = substantial rise in unemployment. Baked in the cake unfortunately.

        Personally I would expect government intervention before we hit rock bottom. IMO income multiples will give us a guide but the key questions will be: How will the politicians respond? What are their options? Which one(s) will they favour? Who foots the bill?

  9. Even in the US and Ireland (or Las Vegas and Dublin) house prices never fell anything like 35% in three months. So that seems most unlikely.

    35% over two years, even without any panic, would have a serious effect on household consumption, bank balance sheets, etc.

    But a crash is a psychological concept as much as anything else, I think. It’s when people start to lose their faith in property as a safe asset.

    • Ire land peaked in early 2007, eased a bit until 2008, then declined, then they talk about the crash of 2009.

      In 3 years from early 2007 to 2010, prices had slid 35%. They are calling it a crash (considering the collateral damage to banks and the resulting unemployment).

      Now in 2011…
      “Irish House Prices 2011: Asking prices nationally down 40% from peak and 50% in Dublin”
      http://www.finfacts.ie/irishfinancenews/article_1021318.shtml

  10. Do we regards the USA experience as a crash? If so it provides us with our parameters.

  11. Lets see. The spruikers say property prices double every 7 – 10 years. So if it stays flat for the next 7 – 10 years… that’s a crash.

    • In the short term that equates to about 7 percent a year (if I’ve got my maths right). So if we see none or say 1 or 2 percent increase every year for several years it’s obviously a crash.

  12. The State govt’s highly reliant on property transfer tax are going to have a tough time meeting budget forecasts. Look at the Melb volumes from RP Data, VIC is stuffed. They should’ve listed to Ken Henry… Stamp Duty bad, land value tax good.

  13. A crash of 50% over two years is needed. Anything less than that would still leave homes massively overpriced. Every bubble pops and house prices always revert to the mean. It’s not different here.

  14. From jumbos article, it all sounds too familiar

    “Another sign (and this is my favourite) is non-stop industry denial. Property insiders are predicting a gentle slowdown in the UK’s housing market, just as they did in 1989. The Royal Institution of Chartered Surveyors asserts that low rates and low unemployment mean a crash “is not on the horizon”. This, despite the fact that unemployment was also at a decade low in 1990. It didn’t prevent a crash then. In fact, the crash in property and consequent recession were what then sent the unemployment rate up from a ten-year low of 6.8% in 1990 to more than 10% by 1994. To me, the extent of the denial is as good as confirmation. “

  15. Dave From Pakenham

    The one statistic/occurence that defines a crash is NEGATIVE EQUITY, it is agnostic to all variables, peculiarities and characteristics of all and every individual property market.

    It takes into account LVR’s, deposits, interest rates, inflation, population growth, base effects, credit growth, percentage movements, explains consumption, employment etc etc. Infact it invariably probably explains all of the preceding.

    Determining what level of mortgage holders must be in negative Equity to prove a crash is slightly more difficult, but its likely far less than the ~25% or ~40% in the US or Ireland.

    I’d suggest that when/if 5-7% of australian mortgage holders are in negative equity, the Australian Residential Property Markets will be described has having experienced a crash.

    • I’d summise that 5% of Perth mortgagees are in negative equity.

      All of the 2009 FHOGs with LVRs >90% are in NE without a doubt. Definitely in Perth, possibly in Tourism QLD (GC, SC, FNQ etc).

    • I think a crash should be defined as an event that causes visible economic damage. Negative equity is obviously one but another would be rising unemployment due to job losses in the construction sector.

  16. Hi,
    Really interesting. I was living in London when the run on Northen Rock Bank started, I think that was 2007? I had friends I worked with who got mortgages for expensive property with them. They even worked with the bank to get dodgy loans approved.

    I remember reading that people were lining up oustide the banks to draw money. I thought, what is happening? I’ve never heard of something like this before? Anyways – Boom crash! That was the start of reading all about such economic problems while in London. Was good to just be a bystander, with most of my cash sent back to Aus.

    I think a bank might need to crash. When heaps of people start to default on their loans and there is a lack of new business. The overseas banks might stop lending to Aus? Not sure? I read about rising interest rates, rising cost of food, carbon tax. etc etc. We are DINKS, and are worried without having a massive mortage. Pray for those who will be pushed to the wall. I’ve heard of two defaults in the past year. One a wealthy family in Bellbowrie, they only got half price on their place, the other family members of a work colleague who were relying on overtime to pay the mortgage.
    Watch out!

    • History rhymes,

      I remember in 1987 in London, as a self employed person being coached by my mortgage seller on how to fake a letter of employment to satisfy their needs.

      I also remember the pressure I was put under to cover it with what turned out to be a bunch of useless endowment policies.

      • By late 1989 my house had nearly doubled (nominally), by 1990, back to what I paid for it.

        Pity those who bought in 1989.

  17. 1. We have an equity bubble, not a housing bubble, as the ‘crash’ can only go down as far as the intrinsic value. To me that is when the weekly mortgage payments are slightly higher than the rent for the same property quality. Then the 32% of renters will more than likely buy a home.

    2. As an equity bubble, it can not deflate to $0. That is a crash.

    So we should be calling it an equity correction.

    Demographics indicates that around 2018 may be around the bottom of the slow deflation of the equity bubble.

  18. I wonder if what I hear is true, that is, that The Governor of the RBA Mr. Glen Stevens is in Europe spruiking (and presenting false – or manipulated – statistics) for and in concert / collaboration with CBA for the CBA effort to get access to money – to boost their housing mortgage industry – which is becoming harder to find and more expensive every day.

    Is this a similar moment to that of Mr Greenspan openly spruiking the Iraq invasion during the Clinton and later the Bush WH Administrations?

    I also noted a comment posted the other day that the Banks were feverishly foreclosing on Queensland (assumed) properties and forbidding the RE Agents to expose the Banks’ position to potential buyers.

    It has become abundantly clear (to me) that the Real Estate recursive policy – of our Government – is the only priority of the Bank / government cartel, a priori.

    The Carbon Tax being just another part of the same scam.

    sigh…

  19. rational investor

    The book, This time is different, which is a statistical study if 8 centuries of this type of occurance by two ex IMF economists mentions that the two most important precursors to banking crisis are an influx of foreign capital and dramatically rising housing values. After a banking crisis property prices generally drop 40 to 60 percent over 4 to 7 years.
    It is a highly recommended read.

  20. I find it ironic, that these NAB and Westpac economists didn’t realize, by their employers jacking up rates higher than the OCR, would eventually push the market to breaking point. I would love 1 of them to say “Well maybe its our fault by taking an extra 1% over historic margins, that has started this event” But no, we’ll just say “balance sheet consolidation” Pffft. Then we have a never ending Govt balance sheet that needs public funding, which cause more strain on peoples budgets. (Yes I’m still jacked at my local council upping my rates by 40% last year, old Vic State govt sending $5B on a desal plant that will end up being $25B, and a Fed Govt that thinks spending is the new black)

  21. I think you will know a crash when it happens.
    I expect it will come as a result of global event/s.

    • True, and I think oil is going to be the catalyst. I’m back to $100 per week to fill my car, which is pretty close to in 2008 when WTI was $147/b. I think this time when its gets back to $147, I think petrol will be in the $2 to $2.30/l range, this time.(Instead of $1.70c/l).