The property crash we have to have?

By Martin North, cross-posted from the Digital Finance Analytics blog:

In past years we have been highlighting the misaligned policy settings which have allowed home prices to balloon, household debt to soar, interest rates to slide and investors to gain more than a third of the market, higher than UK or USA. As banks have continued to lend and inflate their balance sheets and bolster their profitability, despite some tightening of standards; households are massively exposed.

The high debt means households have less disposable income and banks choosing to lend for housing rather than for productive business investment; both growth killing. The current capital rules have also encouraged more home lending and despite some recent tweaks, are still very generous.

Here is a tracker of home price growth, working back from today’s prices. The problem is not just the Sydney and Melbourne markets.  Its just that Sydney and Melbourne came later to the party.

Wage growth is still slowing whilst debt continues to lift. This is a real problem.

Had the settings been adjusted several years ago, this was then a manageable problem, but I am not sure it is now.

If the RBA cuts the cash rate it will stimulate housing further, whilst if it lifts rates, then mortgage rates will rise (beyond the recent and continuing out of cycle uplifts) and move the ~22% of households in mortgage stress higher.  Some will default.  The international rate cycle is on the way up, not down.

If more homes come on the market they will continue to be snapped up by cashed up investors (often levering the capital in their existing property) and overseas buys, which account for perhaps 10% of transactions.

If first time buyers are offered incentives, be they stamp duty relief, money from parents, cash payments/grants or cannibalising their supper, the net effect will be simply to drive prices higher, it being a zero sum game. We know there are more than 1 million households who “Want to Buy”. Plus more arriving thanks to migration.

Investors still want property, thanks to the tax breaks and years of sustained growth, despite crushed rental yields. If lending standards are tightened, and a lower speed limit put on investor lending, we will see more investors going to the smaller lenders and the non-bank sector.  Also, some who already bought will be unable to refinance as they would now fall out of revised tighter requirements – about 9% of buyers fall into this category.

Switching away from stamp duty to a property tax may make more people trade, but that will just change the demand/supply curve, and perhaps drive prices even higher (as an artificial barrier is removed).

In fact, even joined up thinking which collectively attempts to cool the market whilst encouraging first owners into the market, is unlikely to succeed. Given the current political environment, this is even more unlikely.

Beneath all this is the financialisation of property, where it is seen as an investment class, not a source of shelter. This was called out recently in a UN paper, and is a global problem.

So, it looks to me as though we need a circuit breaker to kick-in, and that circuit breaker has to be a property correction, or even a crash.

A correction would scare off many investors, drop home prices to allow new entrants to purchase, and whilst many households would see paper profits falling, it was always funny money anyway.  Banks would take a hit, but then they have the capital buffers in place, and the RBA backstop.

In parallel, we still will need tighter rules of lending – especially for investment purposes, and the removal of the tax breaks which underpin the sector.  I think we need lending growth to track wage growth.

From here if we are careful, we can perhaps manage the settings such that such an explosion in prices wont happen again in the future.

But I wonder if we NEED a property crash. We certainly seen unable to manage under the current conditions.


      • What’s great about it? It’s just more of the same dribble that swamps this site on the same subject,

        – – — and the same comments from the same parrots. Fuck me — I might have to move on.
        I mean 11 articles & counting just today re Housing & I’ve been subject to this excess for years !

      • @ AuRules
        I thought I was the only one having these thoughts.
        These guys don’t admit that they got wrong times and times again.
        The real news today is that house prices keep going up, never down.
        This is a FACT, supported by government, agencies, home owners, construction industry, banks, media and about everyone else.
        Now Move on…

      • A crap article actually, nothing new to say, not well written and fundamentally flawed. “Debt has increased while wages are flat. That’s a problem.” – really? Who would have thought? And “Sydney and Melbourne came late to the party” – no they didn’t, a totally new party started. Finally, this corker “households would see paper profits falling, but it was always funny money anyway” – yeah, that’s correct for property owners in Sydney pre say 2012, anywhere after that and losses become real.

  1. proofreadersMEMBER

    Martin North is terribly unStrayan – how dare he talk in such blasphemous terms about Straya’s world-beating, gravity-defying residential property sector?

    Plus, he overlooks that Straya is surely one of the greatest money-laundering havens (read jokes) in the world and that alone will underpin Straya’s gold, gold, gold performance in residential property?

  2. Tassie TomMEMBER

    It all read very sensibly, but then I got to this statement.

    “Banks would take a hit, but then they have the capital buffers in place, and the RBA backstop.”

    Capital Buffers?! Ha ha ha ha ha ha! You forgot Genworth and QBE – they’ve got them and their capital too! Ha ha ha ha ha!

    • The buffers are window dressing. The real game is the RBA (/public) backstop.

      That is certainly there and it’s infinitely large.

      • Agreed. But i doubt it would be a one off, as criminals tend to return to the scene of the crime, statistics show.

      • Maybe depositors should start moving cash holdings elsewhere (I don’t know where).

    • We have a buffer–it’s legalised theft through bail-ins!

      The problem with our career politicians is that everything they do is for their own self-interest.

      Politicians have colluded with bankers and the real estate industry to create a huge property bubble because it has been financially lucrative for them to do so–personal fortunes have been made through huge salaries and generous bonuses but it is the taxpayer, savers and ordinary citizens who will be forced to deal with the consequences through legalised bail-ins and the economic collapse of our financial system, job losses and the introduction of austerity measures.

      I’m sure our politicians will have their money safely secured in The Cayman Islands and be well diversified into gold, fine art and prime agricultural land along with cash to buy cheap residential property when house prices finally crash.

      Easy credit, low interest rates, negative gearing, First Home Buyer Grants, foreign buyers, increase in immigration levels and generous tax concessions for property speculators is part of a deliberate policy by our government to drive up house prices.

      House Porn on television and in our daily newspapers has helped brainwash the masses into believing that real estate is always sexy, hot and desirable at any cost–nobody needs to worry about outdated concepts like value or ethics because our transactions have become casual and self-gratifying in the pursuit of personal short-term gain.

      The psychopaths in Canberra will screw the homeless prostitute living on the street and then claim it on their tax return as a business expense.

      When the crash happens the media and our politicians will blame the prostitute for spreading gonorrhea and demand that she and any children conceived through her employment be forced to pay for the medical treatment now required for our infected bankers and politicians who will naturally refuse to take responsibility for their own actions.

      Bankers and politicians covered by private health insurance will no doubt still insist that the poor uninsured prostitute pay for the clean-up on the principle that poor people be always held accountable.

      Everyone will blame the prostitute for spreading bacterium Real Estate Ponziria gonorrhoeae while ignoring the politicians, bankers and media tycoons who used their wealth, power and influence for their own personal gratification.

      Yes, where is the pimp? There is somebody making money from all these transactions who is hiding and lurking safely in the background. The pimp is making money without working–they certainly are not sleeping on the street and selling their own body. The pimp is also clear of gonorrhea as they make sure only to have free sex at the beginning of their business partnership when they appear all kind and caring.

      The pimp will tell you that a contract was signed and everything is legal.

      The pimp will tell you that they are only doing God’s work and that without them the prostitute and the rest of the population would starve.

      The pimp will laugh at the muppets paying taxes while they earn tax free money for nothing.

      The pimp is loyal only to himself and his own tribe–he will wash his hands of the exposed politicians and used-up prostitutes knowing full well that there are always more fish in the sea.

      The pimp has dual nationality and has a long history of quickly fleeing a country while crying buckets of tears to the media who will portray him as a harmless victim who has been unfairly persecuted. The pimp will proudly display his health certificate verifying that he does not have nor was ever treated for gonorrhea–it is those other racist sub-human people who are infected.

      • boomengineeringMEMBER

        House porn good one, may use that in future. The pimp families reside in USA most of the time and despite their elusiveness are well known to a few of us.

      • Fuck off and own it, boom. This is a purely and quintessentially Australian disaster from arsehole to nostril.

      • boomengineeringMEMBER

        kodiak, a lot of truth in what you say but who is laughing behind the scene facilitating it.

      • boomengineeringMEMBER

        Maybe no conspiracy but money lending has greatly exacerbated the disaster if not causing it.
        Another angle, how high would house prices be without finance.
        You tell me what extent the disaster would be without availability of credit, truly interested in you perception. Always willing to learn.

      • Perhaps it confirms that politicians are none too bright as they have a combined property portfolio of well over $300m. Its in their self interest to keep the plates spinning.

  3. “Beneath all this is the financialisation of property, where it is seen as an investment class, not a source of shelter. ”

    Martin hits the nail on the head there. This lies at the ultimate root of the problem.

    I received my annual land valuation from council last week – in this now busted-arse boom town (Gladstone), the value of my land has depreciated again, a further 20k. For me, the care factor is nil – my house and land upon which it rests has always been my family’s home, never an investment or an atm. I didn’t feel any richer when house and land values shot for the moon when they announced the now economy-leaching giant gas project just across the harbour and I don’t feel any poorer now that values have slumped back and continue to drift south.

    But a work colleague last week expressed dismay upon receiving her valution – her land had lost nearly 70k. She’s at Tannum Sands just south of Gladstone, which probably saw some of the highest growth in the area since it actually has a real beach and stuff. I know she has no children and thought about pointing out how our children and grandchildren could no longer afford to house themselves where much of the country’s population lives but decided to just leave it. In time, the scale of the mistake we have made will become clear to all.

    But don’t worry, if a crash occurs and the economy begins to implode all will be well, the RBA will just slash rates and……..oh wait….

  4. Houses won’t crash until the debased, fiat monetary system crashes. There’s no other way to make money in Australia right now. Any questions?

      • kodiac
        While I am at one with anyone wants to reform this thing it may not be what will happen. Understand that between the FED and the ECB they are tipping some 2 TRILLION dollars into the world economy every year. Aus seems to be a destination reasonably towards the top of most favoured for some of that. As long as the fiat keeps getting printed and accepted it’s hard to see how this stops. That’s why the MB calls on housing have been so way out over so many years.
        It may well be we will get massive very high inflation(yes! even much higher than current) in house prices before any crash would ensue.
        Note: I don’t have the necessary crystal ball to be definitive. However those who are definitive about any crash any time soon arfe not looking at the maths of money printing and where it flows.

  5. GunnamattaMEMBER

    Great read – because it is a question which needs to be posed.

    What we need is a clearly stated intention to ‘crash’ the market (for mine a mix of openly stated remove – to some degree – investors, upheld preventions on foreigners, mandated use of all new construction [rented], removal of negative gearing and CGT, and a clearly stated (and implemented) division between the social good and financialised asset class which Martin North (quite rightly) identifies housing has become.

    At the same time I would be identifying to Australia’s big 4 banks (and MacB) that a ‘bad bank’ will be created – and that the 4 big banks are competing not to be that big bank by the volume of economically productive lending they carry out over a few years.

    Those people paying mega mortgages get told that they can now have their (existing) mortgage payments made tax deductible – on the PPOR only.

    Superannuation should be removed and rules changed so that SMSFs are not allowed to either ‘negatively gear’ or accumulate more than 1 residence in a portfolio after a particular date.

    Those with 1 ‘investment property are told they have 1 financial year to offload it or to get it positively geared.

    Those with more than 1 ‘investment property’ are told caveat emptor.

    All real estate sales require provision of passport and visa. All foreign nationals selling RE after a particular date which has never been used should pay a premium of 15% of the sale price as a public service provision tax.

    Comprehensive audit of every last RE transaction for 30 years for FIRB, CGT, NG and Trust usage issues with all data and all subsequent RE transactions available on a public ‘real time’ database.

    State governments get told that they are competing (for large volume of Commonwealth funds) by how much housing land close to services is made available.

    Local council are told they are competing for funds on basis of how much developable land is made available close to services.

    Inner city landholders are levied to partly fund service in outer suburbs and country towns.

    federal government starts comprehensive and deliberate movement of public services out of Canberra to country towns – State governments are encouraged to do likewise

    Federal government commits to build major water pipeline from North West and North QLD to back of QLD, inner NSW, and Darling basin, and Flinders Ranges in SA and provide major upgrade of infrastructure/services (possibly as part of Defence planning) in Northern Australia, as well as major solar (maybe nuclear) power generation capability in central Australia.

    The ‘Gunnamatta Plan’ (broadly as above) should start to get things happening. Might be a bit of turbulence initially but it will get things happening.

    • Why let massively in debt folk tax deduct on PPOR? What about savers who have done the right thing?

      Nuclear? Sorry Gunna but the long-term externalities are too long term

      • Agree.
        It’s another form of positive enforcement for poor decisions. Assist all by improving the social safety nets like Medicare or introducing a UBI. Picking winners is what got us into this pickle in the first place.

        Edit: A Steve Keen style debt jubilee is another across the board option.

      • fishbulbMEMBER

        lessening the impact for those who screwed up may be necessary, but, if it were offered, the taxpayer would need to have compensation for this service. Perhaps significant part ownership of the property.

      • As explained many times the “Steve Keen style debt jubilee is another across the board option.” is simplistic BS.

    • Most banks have a maximum LVR for lending in SMSF’s.

      Most would be positively geared.

      • Used to be 70%.

        Need a gross yield of about 4.5% to break even on a cash basis (with a lending rate of ~4%). Not sure about most being positively geared, therefore.

      • Yes, and there is no benefit from NG inside a super fund in any event, the benefit is in making the principal component of the mortgage tax deductible through concessional super contributions i.e. salary sacrifice $25K pa and put all of that ($21,250 after tax) in to amortisation of mortgage debt. The aim in super funds is therefore to positively gear, as it should be outside super. Having said that, gearing of property should not be allowed full stop because it is too open to abuse by your average thick head investor and their complicit suburban accountant.

    • He’s awake. He just can’t stop laughing for long enough to dictate a reply to one of his favoured tenants.

  6. “cannibalising their supper”

    Best line in the whole piece

    when this crashes it’ll be a choice of shelter or food

  7. It’s a very well written piece with just the amount of hyperbolic imagery. This is the crash we have to have. The bubble is destroying everything productive around it.

  8. “The Never Ending Story” where what is coming to destroy the world as it is understood is the ‘Nothing’, a belief in something imaginary, a belief conjured by adults to soothe anxious children or the naive.

    But nothing can stop the ‘nothing’ except stopping time itself.

  9. Just raise interest rates to positive RAT levels with an appropriate incentive level on top. Solves all problems except that we have so totally screwed the economy over so long a period with wildly negative RAT rates that the dislocation involved in returning the economy to a productive level that didn’t require ever more debt, in all its forms, would be catastrophic.
    Screwing around with MP (bwahahahaha!) is just adding more distortion on top of the pile of stinking distortion we already have. However removong a few current distortions will be a start i.e. capital gains exemption, include houses in pension entitlement calculations.
    That said, if the RE market crashes, through any cause whatsoever, the reverbrations through our economic financial and social world are going to be horrific.

  10. Hoped to buy a house at auction on the weekend. Didn’t. It went to a nice foreign family with more resources than me. I resent this, which makes me a racist. I don’t want to invest, I want a nice place of my own that keeps the rain off my head, but in this ridiculous “market” that’s nearly impossible.


  11. bolstroodMEMBER

    The worm has turned. For the last two weeks the unthinkable is being thunk.
    The unsayable said , (except at MB who have been thunking and saying for yonks.)
    RE is a bubble…
    RE could crash…
    and now …
    RE must crash
    …and they say markets are psychological beasts

  12. Without it we muddle along, uncompetitive and dangerously dependent on the rest of the world. I don’t like forest fires or flooded wetlands either, but ultimately they both bring better outcomes. The inefficient hubris needs to be dealt with, the sooner the better. This is not a healthy society we’ve created and the sheep who blindly followed the rest of the flock and over leveraged themselves have no one else to blame. There’s always two outcomes in a gamble, you can’t feel sorry for them.

  13. If the RBA is eying the US reflation, it isn’t yettriggering defaults or NPA upics. Yet if we or they want to frontrun the global economy, read on:
    *A short sharp commercial debt default episode would be ideal medicine to cleanse an economy of poorly structured / planned / positioned businesses, which would then provide for investor certainty going forward. Can we play in Australia with 20% of the beneficial ownership of our T4 banks in US & UK bank hands, and who knows what additional control they have in the derivatives space. Can the RBA governorneven speak about such an important issue without having to ask someone in US or U.K. Go Aussie puppets.