RBA highlights Melbourne housing risks

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By Leith van Onselen

The Reserve Bank of Australia (RBA) Financial Stability Review (FSR), released earlier today, contains the below gem on the Melbourne housing market, which aligns with my overall view:

Although housing loan arrears rates are currently low across most parts of Victoria, the outlook for the Melbourne property market appears to be softer than for other large cities and some banks have signalled that they will be alert to any signs of deterioration in asset performance. The  current stock of land for sale is at a high level and building approvals data point to increases in the stock of housing, and potential oversupply, in some parts of Melbourne, particularly the inner-city apartment market (Graph 3.20). This is on top of previous strong supply of detached  housing in the outer suburbs. The increase in the stock of housing is consistent with Melbourne dwelling prices declining further and recovering less of their earlier decline than prices in most other capital cities have done.

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I am not surprised by the RBA’s assessment. Despite recent price growth, outer-Melbourne land supply remains highly elevated at a time when new house sales are tracking near 16-year lows. The apartment market also appears to be in oversupply, with the recent spate of approvals by the Victorian planning minister, Matthew Guy, likely to add to this glut. Moreover, the Victorian economy has weakened recently, with state final demand recording three consecutive quarters of negative growth.

In short, downside risks remain high in spite of the recent strong price growth and improving auction market.

Unconventional Economist
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  1. Unfortunately, the likely interpretation of this, especially after the coming crash, is that “tighter restrictions on fringe development are necessary to prevent bubbles like this”.

    This is pretty much the narrative in Ireland and California.

    Pity that undersupply is almost as bad in its effects, and the ultimate bubble-proof market is actually one with a totally unquota’d “supply”. It is “big quotas” that allows for the worst of all worlds: high planning gain, unaffordable housing, and oversupply.

    • Those people who think keeping housing supply in a relentless shortage situation will keep prices “stable” (at obscenely unaffordable levels, BTW) need to carefully digest Leith’s earlier posting today:


      And note:



      · 630,000 families have mortgages that are larger than value of their homes

      · Report warns that more people may fall into negative equity

      · Council of Mortgage Lenders estimates the number is actually closer to 800,000 people

    • If you had to make a call as to when the coming crash will occur when would you say it will occur? (not being a smart ass just genuinely wondering)

      Personally I think a crash is definetly in the future for Melbourne as easy credit and specuvestors have made sure that an orderly slow melt will not occur.

      When however is anyone’s guess, if Pettis is right and China does slow down in late 2013 then that could potentially be the external shock that could trigger the beginning of the end for the Melbourne’s property market.

      As I posted yesterday Melbourne’s stock on market is up 5.3% YoY and 6.9% MoM and is the only capital besides Canberra to record a rise Year on Year. So it is definetly in a bad place if an external shock does occur.

      Stock on market is close to all time high’s and if the trend from 2011 and 2012 is repeated we’ll see yet another all time high for stock on market. Rental vacanies are higher than any other capital city and have been quite some time.

      It really is a powderkeg just waiting for a spark and that spark may very well be a lower AUD, higher inflation and a heavily rebalancing China.

      SQM Press release for Febuary: http://www.sqmresearch.com.au/SQMResearchMediaReleaseStockonMarketFeb2013.pdf

      Stock on Market Graph: http://www.sqmresearch.com.au/graph_stock_on_market.php?region=vic%3A%3AMelbourne&type=c&t=1

      • It’s impossible to know of course when or if a crash would occur. But I see two prerequisites: 1) a sharp and sustained fall in commodity prices; and 2) a sharp fall in mining-related investment.

        • Well both of those are penciled in for 2H 2013 arent they

          Then again looking at Iron ore, and coal and the last RBA brief on investment maybe they are with us early…

      • Those are the conditions UE, but as for the timing, I’d say we will see the start of a big slide within the next 1-2 years.

        I think Europe is really on the edge and judging by the chaotic negotiations with Cyprus, it won’t be able to get past the next 1-2 bailouts. These might be brought forward and then be difficult to manage due to the deposit raid in Cyprus.

        The next time a country is close to needing a bailout, people will probably withdraw their savings. Rich people especially. I don’t think they will be able to manage a deposit raid amidst a bank run and if a large economy such as Spain or Italy were forced to implement capital controls, then the economy in question would go into a very rapid death spiral.

        • They don’t have the option of deflating their currencies (Spain and Greece especially would benefit from that). As such being in the single currency has this major downside that wasn’t really adequately foreseen or planned-for in the late 1990’s when they organised the Euro.

          I’m starting to think an EU exit for Greece and Spain could be a good thing for that reason – they can set their own policies again?

      • Tarric, Steve Keen was made to look quite stupid a few years ago by picking a crash in Aussie housing prices within 12 months.

        Something is going on that will need to have a new analytical approach devised to handle it – after the crash and possibly even after a couple more cycles like it (if the global economy survives). This is, that the RBA and the banking system (which are probably pretty symbiotic in their relationship) are desperately trying to keep house prices up by fair means or foul. This is proving quite successful, compared to a crash completely unanticipated as what came on the Greenspan/Bernancke US Fed.

        I strongly believe that just letting the crash happen on a similar time frame to the US one would have been the better approach. When the Aussie one does blow up, it will have to be far worse for the extra 30% or so of bubble inflation that the RBA has managed to get into it from the point at which it SHOULD have crashed (Steve Keen was not just stabbing in the dark, there was a good analytical basis for his prediction).

        The reason I believe that it is impossible for a first world economy to sustain a paradigmic shift in the relationship between urban land prices and incomes/production, is that inflated urban land prices are a COST to the productive part of the economy (even as zero sum rent-seekers score big), and erode productivity via a number of mechanisms. Australia is following this path “by the book”. The “tradables” sector of the economy has shrunk even as services and consumption (based on debt) have boomed.

        • In a paper, “The Business Cycle: A Georgist-Austrian Synthesis” published in an academic journal in October 1997, Fred Foldvary said (as “Austrian” economists do) that expansions in money and credit fuel malinvestments in higher-order capital goods and speculative cycles in real estate and land. He takes land values and real-estate trends to be particularly telling indicators of unsustainable booms and impending busts. He applies the ideas to the historical studies of U.S. cycles, building on the idea of real-estate cycles by Homer Hoyt (1933).

          From the final paragraph in Foldvary’s paper:

          “The 18-year cycle in the US and similar cycles in other countries gives
          the Geo-Austrian cycle theory predictive power: the next major bust, 18
          years after the 1990 downturn, will be around 2008, if there is no major
          interruption such as a global war. The Geo-Austrian synthesis provides
          a research agenda that can test historical cases in more detail. Much
          work needs to be done on empirical studies linking the money supply,
          real estate markets, and business cycle……”

          Steve Keen effectively tried to apply a similar sort of analysis to Australia’s bubble. But RBA strategy, involving unprecedented QE-style propping up of the mortgage lending market, has thwarted this analytical approach, for now.

        • “inflated urban land prices are a COST to the productive part of the economy”


          The high costs of land, energy, labor, currency (for exports), etc., need to be passed on to the pricing of the final products.

  2. Definitely looks very vulnerable to me now, stock is exploding. Quite hard to reconcile this with strong auctions and sentiment generally. I think vendors have become more realistic and the activity is all investors and upgraders. The revival will surely run out of puff, and when it does it will be obvious how poor of a state things are in.

    External black swans such as more EU troubles could trigger it by hiting sentiment

  3. The Demographia report shows that all of the Australian capital cities suffer from high prices indicating shortage. Reason for shortage has been detailed on MB.

    Finally one capital city has produced a supply response in fringe houses and in city units. There is hope that prices might fall in that one capital city.

    Surely this is a model for the other cities to follow.

  4. Is there a use it or lose it clause to the DA from Guy? Surely the supply will come to market ASAP /sarc