The Business does the Australian property “powder keg”

By Leith van Onselen

In the wake of Deloitte Access Economics’ report yesterday claiming that the RBA sitting on housing “powder keg”, ABC’s The Business last night ran a segment examining the issue, featuring SQM Research’s Louis Christopher and the REA Group’s chief economist, Nerida Conisbee.

As expected, Ms Conisbee played down the prospects of a housing correction, claiming that “we’d have to have pretty rapid rises in interest rates for there to be a dramatic decline in house prices”.

Louis Christopher was a little more circumspect, noting that “all it takes is one trigger and sentiment can change, and then you have a correction in the market place, though I think we need to take into account a number of factors that are driving the market right now. One of the main ones is actually population growth and that’s been driving underlying demand…” Christopher goes on to explain that Australia would need to experience both rising interest rates and unemployment for a housing correction to occur. The recent first home buyer incentives will also juice the market in the short-term.

Neither commentator believes that interest rates will rise significantly, with Christopher arguing that “if we had some kind of crisis… the Reserve Bank would respond by aggressively cutting interest rates once again or potentially doing something even further”.

On this point, Nerida Conisbee notes that the banks are already raising mortgage rates out-of-cycle, in part due to the rising cost of wholesale funding.

I will add that with the cash rate at just 1.5%, there is possibly only another 1% that could be cut by the RBA (given Australia must maintain a positive spread to fund the current account deficit). How much of this would be passed onto mortgage holders is debatable, however, given the banks would likely keep a large chunk for themselves.

Comments

  1. “…all it takes is one trigger and sentiment can change, and then you have a correction in the market place…”
    Coming to us live from Toronto. Either way, only a matter of time.

    “One of the main ones is actually population growth and that’s been driving underlying demand…”
    Will not save us if a correction kicks off; see Ireland.

    • kiwikarynMEMBER

      If FOMO on capital gains is what drove prices up, then FOMO on keeping capital gains will drive prices down. When people realise that their paper wealth is disappearing before their very eyes, they will seek to convert those gains into real $$$. We see it every day in the stock market.

      • 100% kiwi. It is why I feel the immigration narrative is overblown in regard to housing. It is mostly an oversupply of specufestors, not an undersupply of places to live; LF Economics recently did a great job of debunking this myth.

      • I’d say its the leveraged capital gains.
        Using credit with very little of your own capital, to make solid capital gains. In a low or falling interest rate environment, this was a great investment over 5-10-15 years.

        But the leverage will cause the market to snap back most violently. We have more than 10 times as much mortgage debt as we did in 1990. 60% of all lending in this country is for mortgages.

        When interest costs are greater than rental yields and property is no longer appreciating in value YoY, then leveraged speculators will jump ship and the price crash begins.

        So this is just another example of credit-fueled asset bubbles caused by fractional reserve lending and central banks.

    • BubbleyMEMBER

      Ireland was like the Great Potato Famine during the GFC. The Irish were fleeing the country in their thousands and a lot of them ended up here in Darwin because there was work available.

      Many of them have now gone home and Darwin has negetive population growth. Speculatively, this is what could happen to the rest of the country if unemployment goes up. All those nice fresh immigrants will go home or to another country with better employment prospects. We have already seen this happen with the Kiwi’s in Perth.

      If there is a spike in unemployment then we may see what happened to the Perth property market spread to the rest of the country like a contagion.

  2. simpeltonMEMBER

    you dont need rising rates, a GFC event or rising unemployment. All you need is falling wages which puts upward pressure on costs and a stagnation in capital values. No one is going to hold the debt to term and so you will get selling, as soon as the market reports falling prices, you will get a snowball effect. This is the case if rates go to zero, negative or you have zero % unemployment via government funding using the keynesian analogy of digging holes. Everyone might be employed at a dollar. Thats not going to pay a 500k debt let alone anything larger and that’s it. Game over. Simples – it’s called deflation.

    • Know IdeaMEMBER

      “No one is going to hold the debt to term …”

      That, I believe, is the problem, at least for PPOR.

    • BubbleyMEMBER

      And the next thing you know your bus driver is on strike because he’s not making enough to live on….

    • https://youtu.be/wMykYSQaG_c

      Updated lyrics….

      Panic on the streets of Melboourne
      Panic on the streets of Packenham
      I wonder to myself
      Could life ever be sane again?
      The Kilsyth side-streets that you slip down
      I wonder to myself
      Hopes may rise on the Gruyere
      But honey pie, you’re not safe here
      So you run down
      To the safety of the town
      But there’s panic on the streets of Coburg
      Humevale, Toorak, Collingwood
      I wonder to myself

      Burn down the RBA
      Hang the blessed Guv’nor
      Because the policies with which they play
      It does nothing for my but crush my life
      Hang the blessed Guv’nor
      Because policies with which they play

      On the Kilsyth side-streets that you slip down
      The lifeless estates you jog ’round
      Hang the Guv’nor, hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor, hang the Guv’nor, hang the Guv’nor
      Hang the Guv’nor

  3. [email protected]

    Funny how Canada had everything going for permanently high prices too, ah? Fancy listening to those two, totally dependent on real estate income, muppets spruiking their wares. Every friggin market that ever cratered had perennial population growth. What a bunch of self serving hogshit!

  4. kiwikarynMEMBER

    Everything is connected, its like a pack of dominoes set up in a circle. Topple one of them over, and they all fall. The thing is that most people think that the trigger event will be same trigger as last time, when usually its a different one that no-one is expecting (well some smart people who look beyond the obvious will see it). So maybe last time it was interest rates and unemployment, this time could be withdrawal of the marginal buyer (the Chinese) and massive over leveraging on debt (only a small drop in prices will be enough to make a lot of owners panic) like in Canada. It could be oversupply of new homes combined with a decreasing population (Perth/Christchurch). It could be withdrawal of credit and macroprudential restrictions. Thinking that everything is okay because the most obvious trigger hasnt happened yet is naive, and stupid.

  5. Entities which should be legally able to buy residential property:
    * Australian Citizens
    * Australian Permanent Residents
    * Australian super trusts which are tied entirely and directly to one of the above
    * Companies with 100% of the above approved shareholders and an absolute limit on the ownership tiers to 3. Company > Trust > Citizen/PR. List of shareholders to be attached to their annual tax filings.
    * Short term exemptions for foreign developers of projects over $5m. If necessary, they will pay the state to hold the asset (kinda like escrow or an option) pending development appproval and construction *start*.

    Entities which *could* be considered:
    * Foreigners who will pay a fee to convert freehold land to 90yr *lease-hold*.

    Fair?

  6. Toronto housing news …

    Toronto housing takes sharp turn into buyer’s market – The Globe and Mail

    https://www.theglobeandmail.com/real-estate/the-market/toronto-housing-takes-abrupt-turn-into-buyers-market/article35709009/

    By one metric, the Greater Toronto housing market has quickly shifted from a seller’s market to one favouring buyers.

    The area’s sales-to-new-listings ratio dropped to 39.4 per cent in June, according to seasonally adjusted figures released Monday by the Canadian Real Estate Association. In January, it topped 94 per cent.

    A ratio between 40 and 60 per cent is generally thought to reflect balanced market conditions. A reading above 60 indicates a seller’s market; a reading below 40 indicates a buyer’s market. Prior to June, Greater Toronto was last in buyer’s territory in 2009. … read more via hyperlink above …

    A Third Of The Money In Toronto’s Housing Market Has Disapeared … Huffington Post

    http://www.huffingtonpost.ca/2017/07/17/canadian-home-sales-drop-by-the-most-in-7-years_a_23033866/

    Google search … Toronto Housing News

    https://www.google.co.nz/?gws_rd=ssl#q=toronto+housing&tbm=nws&spf=1500339544072

  7. [email protected]

    From Bloomie; “bubbles are like avalanches, the longer the snow
    builds up the harder they hurtle down the mountain!

    https://www.google.com.au/search?q=canadian+housing+bubble&newwindow=1&source=lnms&tbm=nws&sa=X&ved=0ahUKEwjF7-nOkJLVAhVBEpQKHXXEAkAQ_AUICigB&biw=819&bih=530