Strength not weakness is hitting housing

The Unconventional Economist posted on the bearish musings of Louis Christopher overnight. Mr Christopher’s thoughts looks fine and good, but made little sense to me. Here is the quote:

I still do not believe this is going to be the big one- that being the big 40% house price crash. However for many vendors, it’s certainly going to feel like it, given that the downturn is building momentum somewhere between a 5-10% decline (as an average for the capital cities), with Brisbane, Perth and Darwin potentially falling more. Sydney is likely to experience just a moderate downturn given its genuine shortage of rental accommodation and a stronger local economy.

The question is that if a 5-10% decline is already in the bag then what will be the limit to this downturn? Probably not much more than that. I fail to see how one can have a 40% decline when AT THIS TIME we have near full employment, we have a central bank that has plenty of room to cut interest rates and we have both sides of the government who have both publicly stated that they don’t want a housing crash and have the means to stop one. On top of this we have nominal GDP running at 9% and in a number of cities we have a very tight rental market as our vacancy rates illustrate.

However, there is an outside probability that future economic events can turn very negative while the Australian housing market is currently vulnerable, that would then potentially turn a 5-10% decline into something much greater. These events would have to include a major downturn in China and/or a sudden rationing of housing credit from some type of GFC II. Any sustained rationing of credit (through say fierce reduction in maximum LVRs) or major ongoing reductions in resources incomes would smash our national housing market and make it difficult for an effective stimulus response from the powers at be.

Yes that is a possible future outcome, however as stated above, we believe the most likely end game for this downturn is federal government and/or central bank intervention as what happened in 2008. The timing though is not likely to be soon. Indeed, the central bank is quite likely enjoying the housing price falls as it means the housing market is slowly deleveraging itself in a controlled way during a time of prosperity.

And that is why this downturn is now happening at pace with no imminent recovery in sight

Well…I am still managing to agree with the outcome that this is a correction and not a crash but my faith in this is sorely challenged by this analysis. NONE of these reasons stack up:

  • Near full employment

Yes, and as we know, unemployment follows not precedes a crash. Low unemployment also drives up rates.

  • We have a central bank that has plenty of room to cut interest rates

No, we don’t. The RBA has maybe enough room for a little cut to boost confidence. Unless there is a crash, it can’t cut more because the dollar will crash and simmering inflation will erupt with a rocketing oil price.

  • We have both sides of the government who have both publicly stated that they don’t want a housing crash and have the means to stop one.

Again, only in the case of a crash.. All rhetoric is about austerity not stimulus. And, in effect, to stimulate housing would be to drive up rates anyway. Plus, there would be serious blowback at another FHOG. On the upside for investors, it’s inconceivable that the government will mess with negative gearing in this environment.

  • On top of this we have nominal GDP running at 9%

See a, b and c.

  • In a number of cities we have a very tight rental market as our vacancy rates illustrate.

Which is very slowly causing rents to rise and, sure, in five or ten years might make property an ok income return investment. Which is way too far away.

In my view, Mr Christopher, who is, I agree, the only objective property expert at large beyond MB bloggers, fundamentally misunderstands the current interplay between housing and the economy. The fact that house prices are backed by high levels of debt isn’t new. What is new is the sustained commodity boom that has huge income flows but also huge inflationary pressures in oil and therefore transport, as well as in anything that competes with the commodity sector for resources, which includes construction and utilities.

In short, all of the reasons cited by Mr Christopher for economic strength are the same reasons for why interest rates are going to go higher in the second half of the year. Economic strength, not weakness, is the Achilles heel of housing.

Truth is, the only reason I can think of for why Australian property won’t crash – the ONLY reason – is the psychology of the bubble. It’s big, it’s bad and it may mean that investors irrationally hold on through early losses. How strong is that lifeline do you think?

David Llewellyn-Smith


  1. What do you mean exactly by “crash” anyway?People talk about a slow deflation but America’s prices are still dropping, five years since they first went downhill and everyone says they had a crash. Just how slowly do prices in Australia have to drop in real terms for housing to be affordable again while making sure absolutely no one suffers any economic pain?

  2. Achilles heel not heal.

    The RBA will have plenty of scope to cut in the context of a major slowdown in China or GF CII (as LC puts it). But I agree, the RBA simply cannot cut while the resources boom continues.

    Do you really believe a major housing downturn is possible while China is throwing money at us? In my view, stagnation or a slow deflation is much more likely.

    • This is how i see it…

      Housing >> Mining

      aka Gozilla >> T-Rex

      Sure, T-Rex is big, mean, scary and strong and all…but compared to Godzilla? A mutated, gargantuan lizard from the deep?! pppfffttt…!

      We often forget about deflationary mindset, too: the initial decline of a sector can bring about its own crash, via the onset of a far-ranging enough Deflationary Mindset.

      My 2c

  3. Cheers on typo. Yes, I think it’s possible. Indeed, its the rational outcome. The RBA has a gun to negatively geared investors’ heads.

    Though, as I say, I still don’t think it will happen because after generations of growth, investors are deeply irrational. So, a slower deflation is still my best guess.

    But I wouldn’t bet the house on it.

    • I regularly check Property Sale History for most of properties in my neighbourhood. What I noticed is that our investors do not hold properties long. On average property is hold around 2 years. Our investors are not of the kind that sits on a property waiting for substantial CG or rent to rise to get decent yield. Most of them are short term speculators (2 years is short term for properties). We may expect that most of them will rush out and this is exactly what increasing number of listings and reductions are showing us. Australian investors (more than million of them) are losing money every month and many of them are alredy sitting on zero CG or even loss if bought in 2010 – they cannot afford 10% or more nominal price drop over the next 3 or more years plus wait for slow recovery after that to turn any nominal CG. By the time prices recover after that slow deflation they may lose 20% on interest payments and as much on inflation.
      Our PI will rush out faster than USA or Ireland investors.

  4. “it may mean that investors irrationally hold on through early losses. How strong is that lifeline do you think?”

    I would suggest not that strong at all. With so many owning property (1.7m according to the ATO, around 1 in 7 taxpayers) there must be quite a few ‘weak hands’ out there.

    Statistics in this article from last year suggest Australian property investors don’t have a lot of patience:

    “An Australian Housing and Urban Research Institute report this month said 80 per cent of investors buy for long-term gain, but at least half sell within five years because of cashflow problems or disappointing capital growth. One in four investors sells within 12 months.”

    • In the early 2000s holding on a property for 5 years did yield a long term gain – 100% gain quite common

    • Torchwood1979

      I’m starting to doubt my “long slow melt” stance as more and more hard data and anecdotal evidence mounts up. An Australia wide correction (which I define as a 5-15% drop before bottoming) looks more certain as each month goes by. This would essentially eat away the excess caused by the FHB Boost, which isn’t necessarily a disaster unless it spooks the punters into rushing for the exits. Brisvegas and Perth are already in danger of being 10%+ down before Q4 unless this trend slows quickly.

  5. Bit off topic, but sort of related.
    Few days back on a housing item on this blog, Booboo posted a formula to calculate the longer-term percentage decline in the value of an asset given a particular percentage decline over a given shorter period. One of my (rainy day) hobbies is playing with Excel spreadsheets, and many of the functions contained therein. I have been unable to either Google up the name of this formula, or identify it in any of the Excel functions.
    Could somebody please tell me the name of the formula, and whether it is contained in any Excel spreadsheet function. I have the formula itself (courtesy of Booboo), but don’t know the name of the mathematical function it represents, or where to find it in Excel.
    Many thanks for any assistance, and apologies for mathematical ignorance.

    • Discounting? The formula is (if I’m thinking straight): D = P * (1+r)^t, where P is the current amount, r is the rate of decay, and t is the time period.

      • Sorry. Timbo,
        I probably should have posted the formula, instead of leaving you groping in the dark.
        The formula posted by Booboo was:
        Where X = % rate of decline for a period
        and Y = number of periods.
        In the example being discussed at the time, the formula was used to calculate an annual percentage rate of decline in house prices, given the latest quarterly decline figure.
        “Discounting” sounds pretty right – I’ll go check it out.
        Thanks for your help.

  6. What is this obsession about house prices? The really important quote from Mr Christopher is this “Sydney … given its genuine shortage of rental accommodation”.

    Instead of fussing about prices to buy or sell, when is somebody going to do something about the genuine shortage of rental accommodation?

    • Well Claw, if you’re so confident of future housing demand, go down to your bank and borrow some money to build some apartments!

    • Claw,
      I think you will find that there is a greater linkage between house prices and rental shortage than you may think.
      One of the main problems with the way our housing market is currently functioning is that more money can be made from a property through negative gearing and capital gains, than through actually letting somebody live in it.
      Take away those “easy money” options, and you might find that more houses/units start being used for the purpose for which they were intended – that is, people living in them.

      • There’s no negative gearing for property vacant and not available for rent. If anything, negative gearing encourages letting. The advantage of letting over leaving vacant is greater with negative gearing than without negative gearing.

        • negative gearing increases property speculation. (look at the long term chart of property prices), and note how when negative gearing was introduced it shoots up like a rocket, hence making it less affordable. Too many people going into debt, to renovate a property to sell it for a profit.

        • It must be nice to live in a perfect world, where everybody obeys the law, tax accountants and real estate agents are pure as the driven snow, and the tax authorities patrol the streets at night looking for all the bad guys.

        • Am I missing something…isn’t that just extreme negative gearing? Borrowing to invest in a zero income generating asset in order to create the maximum income loss for tax purposes, all the while the rate of capital gain outpacing the after tax interest expense…?

    • Never. The federal governments entire immigration strategy revolves around keeping immigration as high as politically possible in order to give the economy a facade of growth.

    • Many stressed investment property owners seeking to sell outright will settle for putting the place up for rental, once they realise the thing isn’t moving….rental problem solved.

    • if so many people weren’t using housing as a vehicle for wealth, then there would be more affordable housing for sure.

    • My theory on that – and it’s only based on anecdotal experience – is that Sydney is trailing the other cities by around 6 months. In a few months time, we should see rental availability increase in Sydney.

      Currently, I believe that lots of apartments/houses are vacant while waiting for a sale. Real Estate Agents usually suggest that an investment property should be made vacant prior to inspections. One reason for this is to put more pressure on the vendor, as they would be losing money while the investment property is vacant, and eventually will drop the price and sell. If they still have tenants, then they might keep holding out for a while, which REAs hate.

      So in Sydney, the housing stock is starting to rise, but is still relatively low, compared to the other cities (population adjusted) and compared to 2008:

      But eventually the vendors will either start leasing them again, or they will be sold. My guess is 3-6 months.

      Same thing happened in California, with vacancy rate shooting up after the prices started to crash:

  7. In my view, if housing declines at a greater rate in the other states and if rental accommodation in Sydney fails to follow suit, then there could be a significant exodus.

    Employment potential in these other states would be the key.

  8. If house prices do crash, will this result in higher rental prices due to propertyinvestors trying to recoop losses and higher mortgage repayments?

    I am a young person waiting for the right time to buy a house. Just wanting to know how a crash would effect rental rates.

    • Just two examples from owning property in the UK. We have two properties both declining in value and both declining in rental income.

    • The general populace complains that rents are too high here, and they couldn’t afford higher, but they don’t mind paying 4 times that for mortgage interest.

      In other economies, such as the UK, rent was approx equal, if at best only half the mortgage interest for the same property. It’s just that here in Aus rents have been artificially reduced through a race to the bottom by “investors” who are happy to take a loss on their cashflow for a property, as a result distribution of free cash after paying for a home is distributed quite differently. My theory is that many of our retailers such as Woolies and Coles couldn’t gouge the extent they do if we didn’t have this free cashflow available.
      It is time for Australians to wake up and realise rents have been very low relative to income, and especially mortgage interest (on the same property) for a very long time.

  9. “The only objective property expert at large beyond MB bloggers.” While I agree, I think at the end of this Christopher might be known as ‘splinters’ because he enjoys the position on the fence. He’s long endeared himself to the bears. Yet he’s never too far out there to send the wind up anyone. And right now I hear bulls parroting ‘only a correction’.

    • The_Mainlander

      Chris has a business to run, I like his critique and I think he is one of the more reasonable voices in the Australian property maelstrom. So sitting on the fence does make some sense to me.

      Besides Tasrealestatetrouble we can not all fire with you black and white, take no prisoners style of debate… as much as I love your work. And I do love your blog and critique of the Australian RE industry.

      Also, when your running an SME and posting regularly all your thoughts may not be as polished or as perfect as one would like. I think that is OK as I would rather hear these thoughts… besides the MSM articles are generallt so poor and lacking in content I think they have come straight from a PR Agency or vested interest comms team.

      And ‘All’ of our opinions do move over time… that is all about being human (not saying Bull to Bear but minor positioning corrections as we discount or shift on the ‘known’ so called truths).


      I think all long time readers here and of the Unconevtional Economist can clearly see the ciorrection has started.

      The ‘real’ debate seems to be focused on how quick or slow the correction will be.

      I am surprised no one has actually said “We were right, the bubble has burst!” or am I crowing to loudly in a glass chicken coop?


      100% positive we are 20% into what ‘looked like a minor accident’ on the Freeway and will end up rear-ending hundreds in a sudden succession of painful impacts.

      Keep ya heads down out there!

      The Mainlander.

  10. Sandgroper Sceptic

    What we are really discussing is the psychology of property investors as the property markets peaks or has peaked depending upon your view. Behavioural finance is a fascinating area. Bubbles often go on for much longer than anyone expects due to various psychological factors and then pop much faster than anyone can imagine as well. I lived through an amazing property bubble in Hong Kong where the market soared in 1996-1997, peaked and then fell 75% in about 12-18 months in 1998. Negative equity was rampant, quite a few people simply jumped off buildings or fell in front of trains as they were unable to cope with the extent of their losses.

    I doubt Australia will see the same rush for exits but even a small move will cause significant price falls. Once the market ‘mindset’ turns there will be large falls.

    As for rentals – investors will certainly consider putting more stock into the rental market particularly if it cannot be sold (for their unrealistic listing prices), however there will be shrinkage in household formation as more people double up, move back in with parents, friends, family so I doubt there will be a rental shortage. My tip is that rental vacancies will increase as the market fals, sounds counterintuitive but the US provides some evidence of this.

  11. on a 2nd note, who will buy after the rich chinese?? this aint gonna end well guys, and the trolls want to pull in a carbon tax to kill the economy quicker.


    • This is starting to sound like what happened on the gold coast (as said by a guy who grew up there, then moved to Hakuba in Japan):

      In the 70s-80s the Japs came in and bought up the gold coast for top $. Then their economy crashed. Then the Aussies bought it back for 1/3 of what the Japs paid.

      Now Aussies have bought up realestate in Japanese ski resorts (Hakuba, Niseko). Niseko had the fastest growing real estate prices in all of japan for about the last 2 years!! Now if our economy takes a dive…

      And the Chinese have bought up our big cities for top $… Wonder how much we’ll buy it back for!

      Gotta love this economonics 🙂

    • The_Mainlander

      Hey Ponzi… Carbon Tax has not even been implemented yet… I would suggest you read up on the 60 Billion being spent on the Australian National Power Network (pfft NBN is cheap compared to that)and investigate the real reasons we have power prices going up/will keep going up regardless of the C02 Levy/Tax.

      We need a C02 off set levy/tax for my kids-kids and to build augmented power networks. Not just 200 year old fossil fuel based economies and tired tech. (hmmm the piston fired engine has not chnaged since it was invented in essence. has it?)

      Sorry all I am off topic but I am tired of the nonsense critque about a C02 tax that is driving up power prices when it has not even been impemented and will actually decrease prices for our future generations and my children.

      Last rant… triple bottom line… we have been ripping off the planet and not paying for it but we will all pay if we do nothing.

      The Mainlander.

  12. If we start seeing a reduction in property prices what will happen with mortgage insurers (loans above 80%) wont they NOT want to get involved in the property market? Wont this restrict the ability for banks to lend money and effect the availability of credit? could this be a cog in the negative feedback loop anyone?

    • just a small cog. The big blow will be when the overseas investors stop lending them money at a price they can afford.

  13. Jarrod, you have things messed up a bit. I am highly paid professional here in Australia, but also recent immigrant. Program is intended to fill in skill shortages not the coffers of homeowners. I do represent maybe 1% of immigration with 6 figure salary, and my position was not so bad even from where I came from but what people fail to perceive is that if I was so much better of in my country I would never come here in first place. People immigrate here to offer better lifestyle for their families, and that lifestyle quality is measured in money. I worked 10 years to afford coming here (in other words it is easier and cheaper to come as boat people). It took me 50 000$ AUD to spend on whole process, and buy that I mean from the day I started paying for immigration to day I got my first salary. And some people take less some take more than that to establish them selves(I came alone so it was cheaper). Point is think what you like but Immigrants don’t come here with coffers full of money except for 10% of British expats that sold their houses in UK to some poor bastard that is going to repay them next 4 lifetimes. Effectively from 180 000 people that come in AU maybe 5% was better of than me when they came in financial means. If you put that in figures it is about 9 000 people and that means pert would have maybe 100 people per year that can come here and in time less than 5 years buy house. Actually you as Australian even with smaller sallary have more chance to buy house here because you were supposed to have surplus in income for those 10 years that I had to work to come here. While I have empty pockets at that point you should get 50k if you put 5k a side every year, which would with raising living expenses say you are 7-10 years ahead of me with having average salary here versus my high salary right now. So Immigration is basically fairytale. Poor immigrants in which I count probably 90% of people that come here will establish their second generation, and their children will have better life ( I know that because I know about 50 immigrants here). You as Ozzie with Ozzie lady and 2 combined income should be lifetime ahead of me as first generation immigrant, but as I see everybody are affected with such high house prices so it is rely a problem.
    Or take it in simple words, lets say that US/AUD $ are in parity and story actually goes not in our favor in this comparison, but if you would try to sell any AU home in comparative city in US you would not pass buy price because it is 2x higher than market price. Houses are spacious as here, people have high income as here, though unemployment at this levels is higher there now, they are one of 3 turbo engines of this planet buy means of manufacturing, therefore when I talk about job security for professionals it is much better there than here. Yet somebody is fueling equitation here that prices are here “normal”. They were normal in US on same level as here, as well as in UK and everywhere else, but they halved after speculative bubble deflated. Now fact for it is because you as average Ozzy and you wife have to work for 30 years to payoff average MC Manson and put everything a side for it, with maybe highest average income in the world. And you tell me that it is right for you. OK maybe you are house owner at this point and therefore you like to boost that your home is valued lets say 1 million $ and therefore you are millionaire, but fact is that your kid when it grows up will want to have its own house, and unless you are willing to sleep on the street he needs place to live of his own. Paying 1M in real terms for house is not possible from anyone salary, simply because you need to pay 8% of whole debt to bank every year. Now if house here was 500k only, trust me I would take my pick as soon as I got my job here, but with empty pockets and wish you do not go far. on 500k loan you need to repay 40k every year to bank on interest only, which goes almost 4k every month. For that much money I am better of renting same house for 1.2k
    I hope you understand the parallel. House is worth how much you can pay, and average person with such salaries as here can not pay more than 230k for average house. It is not a matter of wish its pure mathematics. And if things are here as they are many immigrants will take AU passport, work here for 10 years take 300k home and buy flat there, start business there and be better of 10 times. Before I came I met almost 40 people that did the same thing from Australia only. While I was here I met 8 people that were investing their hard earned cash in housing back home ( I am talking different countries) because market here is simply too hot. I understand that it might be painful in your eyes to lose millionaire status on Cotesloe house (or similar in other cities) for house somebody paid 200k 20 years ago, but you have to ask you self if your needed to start from scratch, would you be buying your house for price you would like to sell it right now. For me there are better things in life than working as mortgage slave till the rest of my life, though I believe it is better to own house, but fortunately for me there is only about 10% of population that actually paid houses over the price it is actually worth (in past 10 years) and cutting back prices will be more a gain for government, because there are about 30% of population that would like to purchase house once this charade of prices is over versus 10% established “hurt” owners. And considering that that 30% is politically undecided youth in most cases, market deflation will not necessarily be political suicide, it might actually tip the favor for labor that are in this moment deemed to lose next elections.

    • Slob, basically I agree with you if you assume all net-migration intake of about 180,000 pa is for skilled professionals like you and me. I have similar case with you and I believe most recent skilled migrants, especially ones that recycled from Asian students studying in Australian uni are not highly paid since they’re mostly “under-employed.”

      But at the same time I also noted quite a high proportion of very rich migrants coming to Australia either as “business migrants” or “family migrants”, i.e. rich parents joining their kids who had studied and lived here in Australia. If you think about it, studying in Australian uni as overseas students is very expensive and only rich parents can do that and naturally they expect their child to reap better living standards in Australia as part of their ROI in sending their kids here to study 😉

      So, I can see the argument where the government decided to open migration gates wider to catch more rich Asians buying property here and prop-up the property bubble to foreseeable futures.

    • I can only agree with you slob.

      The ‘never ending boom’ & ‘onwards and upwards with immigration’ brigade appear to think that there is there an irrevocable attraction to Australian.

      All one has to ask is ‘does somewhere else offer me something better’. Even the UK or the USA, while in some economic dislocation, will provide for me right now a reasonably better life if I can relocate and make myself one of the 90%+ that STILL have a job.

      That said, I thought the FIRB relaxation of foreign buyers could be considered a master gambit.

      Sell iron ore to China, leverage up on their lending, build up housing prices, sell it back to the Chinese, only for them to lose the equity, and us with the massive cash-in-hand position for selling at the peak

      Perhaps this gambit was only mastered by RBA members.

  14. My view is that Australia is absolutely F$%*ED. I think the market is heading for a bad crash. Did anyone pick up on this today from the ANZ report

    “The ANZ results showed a 12.6 per cent increase in the value of loans that are considered 90 days in arrears. There are now $1bn worth of mortgages in arrears, with a sharp spike in the number of troubled loans in Queensland. The trend emerged before the states floods and cyclone in January. ANZs Australian chief executive, Phil Chronican, told The Australian the bank was monitoring the pick-up, which was blamed on higher interest rates and growing cost-of-living pressures. “It is a concern, we dont want to overstate it but the arrears have hit a level that we have not seen for a long time,” Mr Chronican said.

    When the market crashes the govt will not be able to lower rates like the US and everyone else did. Nor can they stimulate anymore because prices are out of reach and the banks are pulling back on loans. The reason they cant lower rates is the mining boom. If they did that while the boom was continuing then inflation would go through the roof. So really I dont think that will be a tool unless housing and mining went down the tubes together. Either way you look at it ALL IS NOT PRETTY and I dont think we are looking at stagflation or a soft landing. All you have to do is look at the ANZ results and this statement here “It is a concern, we dont want to overstate it but the arrears have hit a level that we have not seen for a long time,” Mr Chronican said.

    It seems obvious that things are not landing softly or stagnating.


    • How about some kind of big super profits tax to reign in the miners and then we can use the interest rates for what they are meant for …

      radical idea eh ?

      • But then does that kill the mining boom. Alot of what ifs for sure. That is my point any way Australia govt goes there is going to be a possible bigger downside to what they implement.

  15. With all this bad news hitting, how are the banks going to roll over their massive foreign dept? It appears we are now between a rock(housing bubble collapse) and a hard place (hyperinflation)