What’s that hissing sound?

In today’s SQM Research weekly newsletter, SQM’s Managing Director, Louis Christopher, provides a sobering assessment of the state of Australia’s housing market. Below are the key extracts, together with some charts and data added for additional context.

“The housing market’s downturn is now happening at pace and there is no imminent recovery in sight. These may appear to be some very bleak words, however it is important that the facts are acknowledged so one can make better decisions for the future.

Stock for sale levels are now approaching the 2008 highs, housing finance commitments are at ten year lows (though there is likely to be a statistical rebound next month), house prices on every measure are recording falls for most capital cities, and as we reported here a little while ago, those holiday regions are being smashed due to an oversupply of real estate, a deterioration in their local demographics and of course, a rise in the Australian dollar.

Why is the downturn happening nationally? The answer is simple. We have a housing market that has a very high level of housing debt behind it. A highly geared housing market is highly susceptible to the price of debt. And the more geared we become, the lower the price of debt has to be in order for the market to keep above water. Even the RBA lifting the cash rate to just 4.75%, that price is now just too high for many home owners and would be home owners.

Indeed, the explosion of mortgage debt in Australia over the past decade has been phenomenal, having risen from around 45% of GDP in 2000 to around 85% of GDP currently (see below chart from Steve Keen).

Not only is Australian mortgage debt high by international standards, but the rise in mortgage debt has also exceeded most other developed nations (see below IMF chart):

Anyway, back to the article.

Add to this mix- bad government policy that gave the market a drug induced like hit in 2009 and now a subsequent withdrawal feeling in 2010. Remember, there are only a limited number of would be home buyers at any point in time and if you bring them all into the market at once, there is going to be very few left for a while afterwards.

The “drug induced like hit” Mr Christopher is referring to is the First Home Buyers’ Bonus (FHBB) provided temporarily by the Rudd Government in the wake of the GFC, which led to the highest proportion of first home buyers since the Australian Bureau of Statistics began keeping records in 1991.

The impact of the FHBB is clearly evident by the below RP Data charts, which show a surge of first home buyer commitments in 2009 and a subsequent collapse in 2010 as demand was brought forward.

First, consider the number of first home buyer finance commitments:

Now, consider the percentage of first home buyer commitments:

Again, back to the SQM article.

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.”

Wise words from one of Australia’s few truly independent property advisors.

Cheers Leith

[email protected]


Leith van Onselen
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  1. Based on that Mortgage debt to GDP graph, do Denmark and Netherlands have housing bubbles too?

  2. WOW! Look at The Netherlands. Funny thing is, even though people apparently have amazed a sh*tload of mortgage debt there have never been the affordability troubles as there are over here. Probably has to do with the fact that interest is tax deductable.

    Prices are going down at the moment though and the housing sector has been stagnant for three years now. The reason for this is that credit is very hard to come by. Dutch banks use some very strict criteria.

    A couple of weeks ago government outlawed the repayment-free mortgages (sorry, forgot the official name for these things).

    • Ah, I just read that they now allow mortgages with ‘only’ max 112% of the property’s value. Before people where borrowing up to 125%!!

      Shows you insanity is universal.

    • HousingTroll

      repayment free? as in INTEREST ONLY payments, nothing comes off the principal of the debt.

      And NL banned these….


      • Correct, interest-only payments. They where banned only two weeks ago though… and only the ones of which 100% of debt was interest only.

        People can still get mortgages of which 50% is interest only.

  3. Leith, might be worth mentioning, too, that Louis has a strong case against him when he asserts that unemployment would be required to really bring the market down…as, in fact, the latter generally gives rise to the former..and then negatively feeds back, to create another cascading loop of price decline leading to more unemployment…

    • Indeed as UC posted yesterday.

      Maybe MB needs a ‘pop up’ of his graphs yesterday to drill into these ‘experts’ that when you have a large portion of your workforce committed to the sustainability of the Ponzi scheme property corrections CREATE UE not vice versa.



      UE rises LAGGED the falls in house prices. Comprende?

  4. Thanks Leith,

    I’m enjoying your insights on the property market and am an avid reader of your blog. I’d appreciate your view on the scenario below.

    I’m concerned that with the high levels of mortgage assets on the banks balance sheets (up to 58% from memory), that they could get caught in a game of ‘chicken’ with each other.

    This would play out like:
    1. Property prices fall
    2. Banks keep lending or even increase lending to support prices
    3. In the game of Chicken, one of the banks sees its mortage portfolio potentially suffering and decides to reduce it’s LVR’s on new mortgages. This reduces debt available, house prices drop and other banks reduce their risk by dropping their LVR’s.
    4. This has an impact of accelerating the price falls, flowing into a price drop spiral.

    What do you think of this scenario?

    Thanks again for your views.

    • The Vic government to be fair to them was in opposition at the time when they announced this policy. The announcement came during the good old days when all you heard at dinner parties was “doubles every 7-10 years” – so they were probably just buying votes from the plebs when they thought of it.

      Anyway better to cut stamp duty than beef up the first home buyers grant. If they increase that then we know panic is starting to set in.

      • Agreed. Wouldn’t have anything to do with Ted Baillieu having a massive interest in a number of new estates on Melbourne’s fringes aswell…..would it?

  5. H and H,

    I’ll bet the stats for US, UK, Ireland, Spain etc…. looked like they wouldnt see a crash either before it happened. Its all in the psych of the investors. As soon as that negative train took off it built up stem and built up and built up till it finally crashed. To bad none of you on Macrobusiness doesnt have a crystal ball….:)

  6. It’s a game of debt. The government will do anything to try to get you to take on more debt. If you can’t or won’t the government will take it on for you and tax you later.
    In a debt based money system, the amount of debt has to continually grow for there to be economic growth. As soon as debt declines there will be a decline in economic growth due to the reducing amount of money in the economy.
    Just look at what the liberal party is doing in VIC. They are taking more debt. The system is perverse encouraging continual and irresponsible borrowing.
    The people must understand that politicians are mere puppets for the debt based money system. That’s why all these hung parliaments all over the world – this reflects voters not wanting the debt based money system which is pushed by all major political parties. If people want true change it’s not changing your political party voting, it is changing the debt based money system to a sound money system. Research Money Masters.

  7. One thing that really interests me about the Netherlands, is that they DO “ration” the supply of land, which is what allows these historically big bubbles to start, but to try and stop the bubbles happening, their government uses powers of compulsory acquisition, at arbitrarily low prices, for fringe land earmarked for development. This eliminates the obscene windfall capital gains that farmers on the fringe make in many other countries where supply is rationed/”planned”.

    I am intrigued to see that this tactic obviously hasn’t worked so well in recent years. Of course, in some cities (Las Vegas, Phoenix, some Aussie ones) the government IS the fringe land monopoly price gouger.

  8. Ahhh … Denmark … favourite example of Luci Ellis, head of RBA “Financial Stability” department.

    “Australia doesn’t have the highest debt levels in the world, especially compared to some European countries, in particular Denmark, where debt levels are 300 per cent compared to disposable income.” — LE, Oct 2010.

    It’s a good deflection technique, I am not too sure what the response should be.

  9. I’m no financial illiterate, but would anyone care to explain to me how LC thinks that Australia can cut interest rates solely because they are at 4.75%?

    I have the feeling that the RBA are “exporting” price inflation onto everyone instead of upping the ante for the debt holders. The inflation print was high earlier in the week. Is the RBA really going to ignore that print (not that whatever metrics currently used are anywhere in the ballpark of feasibility) and lower rates? It’s already eating away at consumption. Without wage increases, demand destruction will increase. Retail numbers should be telling in the coming months.

    I also don’t see any way that the government can keep housing more unaffordable at this point in the game. This issue has reached crisis levels. People are on to the FHOG and how it was never meant to help first home owners. It’s simply not tenable to throw good money after bad to maintain asset prices for part of the population.

    The RBA and government have painted themselves into a corner in my opinion.

    Would someone please tell me how I’m wrong, please?

  10. Louis Christopher “wise”? That’s the first time I’ve disagreed with Leith.

    I moved back to Australia two years ago with a very healthy deposit but will wait. In that time I’ve read many SQM articles and the only conclusion I came to was that SQM must be in the pockets of banks and/or real estate institutes because they predicted that RE is safe, a good investment due to housing shortages and recent performance – arguments that the rest of us knew didn’t hold water.

    Only now, when it is plainly obvious to everyone that buying now or soon is a grand mistake, does Mr Christopher swap sides. Welcome to the bandwagon, SQM. The good seats were taken years ago.