FHOG bust redux

Back in mid 2010 when I wrote for Business Spectator, I compiled a column on the turning point in Australian housing and the likely shape of the coming bust:

This column concludes that the RBA has busted the first home-buyer bailout bubble, as it should. Now, we will see just how strong supply and demand fundamentals really are. This column expects a rerun of Sydney 2003 gone national: a fringe bust in all major capitals stalling the move-up ladder and flat-lining inner city prices. Not catastrophic unless global growth also hits commodity prices and wholesale bank rates climb.

The conclusion was drawn from both research and personal experience. The research was a part of writing the book The Great Crash of 2008 with Ross Garnaut. The personal experience was watching the gob-smacking buyers panic that siezed Melbourne in 2009. Both offered the identical conclusions: that when you entice buyers into a market with a First Home Owner’s Grant (FHOG) you get a huge rush for previously affordable outer suburban property. Prices spike almost instantly. Those who sell shift closer in to the city with their unexpectedly fat pile of equity. And so on and so forth as a wave of property buyers and price rises sweeps inwards.

What happened after that in Sydney 2003, of course, is that the outer suburbs that inflated first, deflate when the subsidy is removed. Those who bought houses at goosed prices, and stretched themselves in doing so, are under water with negative equity. The move-up ladder of first home buyers seeking to get closer to the city suddenly stalls because those holding new properties in outer suburbs can’t sell. Inner city prices stall.

Evidence for the thesis that this pattern is now playing itself out nationally comes today from the Fitch Australian Mortgage Delinquency by Postcode report. First to the home of FHOG bust, Sydney:

Next, to Melbourne, which is earlier in the cycle:

And Brisbane, which is further along:

Similar patterms, though less obvious are apparent in Adelaide and Perth.

So, is that the end of it? No. There’s another pattern this time around. The Fitch report also paints a clear picture of distress in holiday home districts. Around Sydney, it’s the Central Coast stretching up to Nelson Bay, the Blue Mountains and Kangaroo Valley, all red hot Sydneysider getaways. In Brisbane, as we know, it’s the Goldie and Sunshine Coasts. In Perth, it’s the popular South Western tourism region that takes in substantial “coastal unrbanisation”, according to Fitch. The arrears in Melbourne’s holiday home regions are still decent but I know from experience that prices are under pressure in Barwon and the Mornington Peninsula. Melbourne will catch up.

All of these are no doubt partly a result of the depressed tourism sector but I’d go further. These regions are all the concentrations of baby-boomer retirement plans. Plans which seem to have changed.

So, what’s it going to take to turn this around? In 2003, national unemployment was 6% as we entered commodity boom round one. Today it’s 4.9% and the terms of trade are much, much higher. In 2003, interest rates didn’t budge for almost a year and a half from the late 2003 hikes that triggered the bust. Then they only rose .25% in the subsequent year. And we had none of the post-GFC caution about debt that is at large now. The RBA has shown a willingness to take into account the suffering housing market and services economy this time around, but it has less room to move.

Even with this support, in 2003, Sydney went sideways and down for five years:

I wouldn’t buy a property I wasn’t going to live in for some considerable time now unless you paid me.

Houses and Holes


  1. In Brisbane, as we know, it’s the Goldie and Sunshine Coasts.

    The banana benders invade here as well every weekend. There are more QLD plates than NSW plates around town most weekends.

  2. You speak of the “coming bust” and the word “bust” appears 5 times in your blog. What do mean by the term? Lower volumes? Lower prices? How much lower? A euphemism for “crash”?

    • You will note that all five references are to the Sydney 2003 experience.

      Does it matter? If prices go sideways for five years, housing will be a shocking investment in real terms. If prices fall, returns will obviously be worse still.

      It’s clear to me that the risk reward is better in a simple term deposit.

      • No, the references are not to 2003 Sydney. The references are to a “coming bust” and “a fringe bust in all major capitals”.
        And in answer to Julius, “Bust, crash, correction, sideways, soft, downward shift, slower growth, retrench” are not much of a muchness. Slower growth and a crash have nothing in common.
        Use of the word bust implies far worse than sideways or slow growth. I’ll be honest and say again what I think. I think there is an editorial policy at MB to refrain from predicting a “crash”. A bust is a euphemism for a crash. It’s common English usage.

        • Read the response again, Sinbad:

          “….all much of a muchness really if you’re up to your arse in debt”.

          Little bit of selective quoting going on there – not surprised though.

          Is the best you can come up with a semantic argument about “bust” and “crash”? Believe me, the people who have been suckered in to piling into the housing market leveraged to their eyeballs won’t know the difference.

          Sort of “What hit me? Was it a train, or a B-Double?”

        • “I think there is an editorial policy at MB to refrain from predicting a “crash”.”

          Sinbad, we are a collection of bloggers, not an organised media machine. We just happen to all believe that housing is a terrible investment currently. There is no editorial policy (or policies of any kind). Hell, we don’t even have advertising. Your hysteria is bordering on ridiculous.

    • Bust, crash, correction, sideways, soft, downward shift, slower growth, retrench modestly (a personal favourite) – all much of a muchness really if you’re up to your arse in debt.

      But you are right, David has been very loose with his words.

      Thank the stars that those in the real estate industry choose their words so much more carefully and ensure that they portray the reality of the situation so succintly and accurately.

  3. michael francis

    Living on the Mornington Peninsula, properties around us under $750K are selling like hotcakes.
    Apparently the spruik in the property lobby are that prices are expected to surge when the new Peninsula Link Freeway opens in 2013.

    • Michael, I was living in Adelaide in 1999 when they said the same thing about the new freeway into the Adelaide Hills. Having returned there last week I can see that it certainly encouraged heaps of people to move to Mt Barker but I’m not sure the locals would be happy with the resultant strain on all the other roads services etc.

  4. “These regions are all the concentrations of baby-boomer retirement plans. Plans which seem to have changed”.

    Agreed. Holiday destinations and holiday homes are excessive and a luxury for people and as a consequence, are always going to be the first market affected in tight times. People purchased these type homes on debt/equity built up on previous strong growth. The effect of this is when they go to sell this asset and there is a reduced market for it, less willing to buy, they are going to have to take a reduction in price. If this reduction produces a loss, this loss will roll over on the primary asset, their home, increasing LVR and reducing their flexibility. Hopefully this does not make these people too susceptible to interest rate movements or increases in costs of living.

  5. Rent assistance for the coastal poor keeps a floor on the holiday home prices, homes can stay listed for sale for years, but if they have a tenant pay 300 p/w, less incentive. The other issue was the changes to the government asset test limits, less incentive to sell a cash strapped asset when you can still have 900k worth of assets excluding the family home and still get the part pension

    • Jack,

      You are absolutely spot on.

      Rental Assistance is a hidden subsidy that puts a floor under many otherwise non-performing properties, and it rarely rates a mention in the ongoing discussion about investment properties. If anyone ever did an analysis of its effect (how about it, MB?) I think we might be surprised at the extent to which it supports some otherwise dodgy markets.

  6. Hard to see the property market going anywhere but down from here. I’m see a huge number of sales and rentals coning onto the market in my part of Sydney, and I’m seeing landlords dropping rent as units sit idle. IMHO all this talk of a shortage or a rental crisis is a load of BS. As landlords become more desperate, stories like
    this one will become more common – i.e. LLs losing tenants and being forced to sit on empty loss making investments because they were greedy and couldn’t cope with interest rate rises. Don’t buy property until there’s blood on the streets, that’s the old saying, and it holds very true today.


  7. For overseas investors, of course, because of the appreciation of the AUD, Aussie housing has been a great investment over the last few years.

    That said, because the AUD is so high at the moment it is likely to reduce current interest from overseas investors. In relative terms Aussie property is expensive and the risk to the AUD would seem, to me, to now be on the downside.

    I think the level of the AUD is an underestimated factor in how real estate market, especially the luxury market, performs in Australia.

    As far as I am aware, it is quite difficult to get completely accurate figures about the number of overseas investors (especially Aussie expats) in Aussie property. But happy to stand corrected here.

  8. “I wouldn’t buy a property I wasn’t going to live in for some considerable time now unless you paid me.”

    H&H, a deceptively simple statement that for me raises some questions.

    I am curious as to your rationale (not that I disagree with it). To challenge the accepted wisdom of home ownership, if it’s not worth investing in, why would it be worth buying to live in?
    If we are talking about buying after a correction, then I concur, good for living perhaps not good for investing if house prices continue sideways thereafter.
    On the flipside, would it not be better to rent out a mortgaged property now, than have a mortgaged home with no tax benefits? Let’s assume you don’t plan to sell either so CGT is not a factor. Even discounting -ve gearing, you can rent a McMansion for less than it costs to pay off a unit.

    Rent is far more affordable

    • Let’s try that last sentence again…

      Renting can be more affordable if you want to “upgrade” your residence, though it’s not the traditional viewpoint.

    • Owning a home implies an “ownership premium” for valuation purposes.

      e.g I recently purchased a house (on acreage) that is approx. 15% above what I think it’s worth, based on a rental yield/risk free rate of return valuation method.

      Since we don’t plan on moving for about 10 years, I was comfortable with the slight premium – considering it was discounted by over 20% from the original ask (which is also down about 20% from historic highs)

      It was a mortgagee repossession – I was one of those “vultures” that RE agents hate – cashed up and ready to pounce during these “busts”. Gross rental yield is around 6%

      I’m factoring that it will likely the same price in 5 to 10 years (i.e 40% drop from nominal high) but since repayments are less than rent (for that particular property), the cost is fine.

  9. Queensland just introduced a $10k “new(ly built) home owners grant” combined with slapping another $6k or so on stamp duty for people buying existing real estate as their principal place of residence. Assuming developers will raise prices accordingly that should turbocharge the debt mountain nicely.

  10. I am selling my existing property and buying a nicer one at the end of the year. Why because I want to live in a nicer house. I am buying for lifestyle reasons. Period. Then again I am in my earlier 30s, single and want to impress girls 🙂

  11. Unemployment measuring techniques were different in 2003 compared to today. If you take that difference into consideration it adds even more weight to your argument.