Australian Property

Australian property is one the widest and deepest asset bubbles in the history of capitalism. Any objective assessment of this “market” can lead to no other conclusion.

With a long history of commitment to home ownership, Australians have always been prepared to structure their finances around property. This showed up in a total dwelling stock to GDP ratio that persisted around a very high 150% from 1960 to 1990. In the late 1990s that shot up to 200% and then embarked on near ceaseless climb to 360% today.

There are many other guides to the extreme overvaluation of Australian property. The ratio of household debt (overwhelmingly mortgages) to disposable income is the highest in the world at 186%. Median price to income multiples are anything from 12x in Sydney, to 10x in Melbourne, down to still immensely unaffordable 6x in smaller capitals, up from 3-4x times in all over the long run for all. The extent of overvaluation is plain.

What makes the Australian property bubble unique is the degree to which it has warped the nation’s political economy. Once a diverse and vibrant resources and manufacturing economy, over the twenty years that the Australian housing bubble grew that shape changed completely. An huge proportion of the debt underpinning Australian property is borrowed from offshore, almost $1 trillion, mostly by its big four major banks. This perpetually inflated the local currency, as well as input costs like land prices, which dramatically diminished Australian competitiveness and drove tradable sectors like manufacturing offshore. From 14% of output in the 1970s, manufacturing hit 5% of output in 2016, the lowest in the OECD.

Moreover, the centrality of Australia property to the wealth of the national polity increasingly distorted policy and even elections. In the 2008 global financial crisis, the then Labor government bailed out the the big four banks with guarantees to their offshore loans, rewriting the entire rule book for Australia’s financial architecture in one panicked afternoon. Public subsidies poured into demand-side stimulus, as well as RMBS markets. Any notion that Australian property was a “market” evaporated. Australian property was, and remains, a kind of asset quango, a public/private partnership in support of the retirement plans of its pre-dominant Baby Boomer generation.

MacroBusiness cover all elements of Australian property daily.

These guarantees exist to this day and reached their peak distortion to the political economy in 2016 when the ruling Liberal/National Party Coalition government fought and won an election in the singular defense of “negative gearing”, the principal tax policy most responsible for investor’s favouring property over other asset classes.

Contemporary Australia does not just have a property bubble, it has morphed into Propertocracy in which the primacy of house prices determines who leads the country, what policies are chosen and which generations prosper.

26

Property Council demands migrant meat for grinder

The mask has slipped and the reason Australia has had such high immigration rates has been revealed: The Property Council has called on the Federal Government to extend its successful HomeBuilder stimulus program for new housing construction for a further six months to July 2021. The Property Council has also recommended a ‘Welcome to Australia’

47

Banks brace for tidal wave of mortgage defaults

According to Richard Gluyas at The Australian, Australia’s major banks have deployed more staff to their financial hardship units as loan deferral periods for mortgage and small business customers begin to wind down. The banks are also anticipating a sharp rise in loan defaults as government stimulus measures begin to be scaled back. National Australia

24

Fitch: House prices sucked into immigration black hole

Some sanity after last week’s bonkers house price push: Fitch Ratings-Hong Kong/Sydney-21 September 2020: Australia’s house prices are set to decline by 5%-10% over the next 12 to 18 months, as net immigration weakens sharply, says Fitch Ratings. Price declines on this scale would be unlikely to have a ratings impact on Fitch-rated residential mortgage-backed

25

McKinsy: Virus not lockdowns kill economy

Another one for the virus psychos, via McKinsey: On March 23, 2020, McKinsey introduced the twin imperatives of safeguarding our lives and our livelihoods and a nine-scenario framework to describe potential economic and COVID-19 outcomes (Exhibit 1). At the time, we wrote that the best combined outcomes depended on a rapid and effective public-health response that controlled the spread

28

Immigration bust slices housing demand

New research from the National Housing Finance and Investment Corporation (NHFIC) claims the COVID-19 pandemic could cut demand for Australian housing by up to 232,000 dwellings over the next three years: The organisation found that international border closures had effectively shut down net overseas migration, which accounted for 59 per cent of population growth since

18

Sydney’s auction market gathers steam

CoreLogic’s preliminary auction clearance rate surged, with 72.4% of reported auctions cleared versus 67.3% last weekend: Sydney’s preliminary clearance rate strengthened again with 72.4% of reported auctions sold, up from 70.4% last weekend. However, Melbourne had too few auctions to even report a clearance rate. According to CoreLogic: This week, the combined capital city preliminary

3

CoreLogic: Inner-city rents hammered

The latest rental data from CoreLogic reveals that apartment rents across Sydney and Melbourne have been hammered since the onset of the COVID-19 pandemic, falling by 4.2% and 4.4% respectively between March and August: CoreLogic’s head of research, Eliza Owen, has released additional data showing that properties closer to the city are more likely to

33

RBA: “unprecedented shock” ravages rental market

The latest RBA Bulletin contains an interesting report on COVID-19’s impact on Australia’s residential rental market, which it claims is experiencing “an unprecedented shock” with “reducing demand for rental properties at the same time as supply has increased”: The COVID-19 pandemic is an unprecedented shock to the rental housing market, reducing demand for rental properties

14

Sydney’s auction market solidifies, Melbourne’s dies

CoreLogic has released its final auction clearance results for last weekend, which reported a final auction clearance rate of 63.0%, up on last week’s 60.5%: Sydney’s final clearance rate firmed to 65.9% (from 62.3% last week), whereas Melbourne’s bombed to 25.0% (down from 32.1% last week). As noted by CoreLogic: The final clearance rate came

18

Mortgage lending booms!

According to CBA’s internal data, Australian mortgage lending surged again in August: New lending for housing rose again in August. A recovery in lending is one factor behind our view that dwelling prices will fall only modestly over the next 6months. And we expect dwelling prices to rise solidly in H2 21 (see here). The

7

Property investors poleaxed as apartment market implodes

The apartment market in Sydney is reportedly imploding, hammering landlords via falling prices and rents: Parramatta, Mascot and Rouse Hill in the northwest have topped a list of Sydney suburbs “oversupplied” with apartments. These suburbs each have more than 1500 units in the pipeline over the next two years, which will increase the current supply

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Revenge of the mortgage ghosts

Australian Bankers Association (ABA) CEO, Anna Bligh, last week announced that banks would commence “the largest ever customer contact process in the industry’s history” as it seeks to contact around 400,000 customers that have deferred repayments on around $167 billion worth of mortgages. According to The AFR, one in five deferred mortgage customers have “ghosted”

26

Property investor confidence shattered

Via Martin North: We have released the latest edition of confidence measures based on our surveys.  The overall index recovered a little in August, but remains well below the 100 neutral setting at 76.56. Within the cohorts, more affluent and mortgage free households are best placed, thanks to continued strength in stock markets. Those with

1

RortBuilder triggers new home sales

Via HIA: HomeBuilder Keeps December Quarter Afloat “New Home Sales data released today confirms that HomeBuilder will support building activity and protect jobs in the December 2020 quarter,” commented HIA Chief Economist, Tim Reardon. The HIA New Home Sales report – a monthly survey of the largest volume home builders in the five largest states

5

Sydney and Melbourne rental markets collapse

SQM Research has released rental vacancy data for the month of August, which recorded a 0.1% decline nationally but ballooning vacancies across Melbourne: As shown in the next chart, the rental vacancy rate has hit a seven year high in Melbourne at 3.4%, whereas Sydney’s retraced to 3.5% but remains near record highs: Commenting on

26

Australian property valuations hit a double top

The ABS yesterday released its property price data for the June quarter, which valued Australia’s dwelling stock owned by households at $6.82 trillion, whereas the total housing stock was valued at $7.14 trillion. As shown below, the total value of Australia’s dwelling stock owned by households was 7.2 times employee incomes as at June 2020,

15

Property listings collapse to new low

According to CoreLogic, property listings across Australia have collapsed to around 8-year lows: As shown above, new listings are tracking 23.9% lower year-on-year across the combined capitals, whereas total listings are 20.0% lower. Obviously, the numbers have been dragged down by Melbourne, which is in lockdown. Nevertheless, total listings have fallen significantly everywhere except Sydney.

5

ABS: Property prices fell 1.8% in Q2

The Australian Bureau of Statistics (ABS) has released its property indices for the June quarter, which recorded a 1.8% quarterly decline across the combined capital cities led by Sydney (-2.2%) and Melbourne (-2.3%): It was the first quarterly decline in property values since June 2019: The ABS’ quarterly decline is worse than CoreLogic’s results for

53

The mortgage repayment cliff “will be devastating”

Economist Jason Murphy believes that the mortgage repayment cliff will hurt the housing market and economy in one of two ways: It will drain the economy of household disposable income; and It could lead to a significant number of forced sales, driving property prices lower. From News.com.au: In the next few weeks 450,000 Aussies will

31

Labor: HomeBuilder not big enough

Labor’s shadow housing minister, Jason Clare, believes the Morrison Government’s HomeBuilder policy is not big enough and wants the government to fund social housing to “save tradies jobs”: For months Michael Sukkar has been peddling the line that the HomeBuilder Scheme would “keep hundreds of thousands of people in jobs”. He has said it in interviews. He

17

REIV’s war on tenants may be illegal

On Friday I reported that the Real Estate Institute of Victoria (REIV) had effectively declared war on tenants, advising landlords to “refuse to negotiate rent reductions, forcing every request into the dispute system” in a bid to guarantee no resolution for months or even years. This action has been deemed potentially illegal by legal experts,

61

“More downslides to come” for Aussie property

AMP chief economist, Shane Oliver, continues to hold a bearish view on Australian property prices, where last month he forecast “average capital city prices falling 10-15% from their April high out to mid-next year with Melbourne most at risk and likely to see a 15-20% decline”. Talking to Domain’s Property Unpacked podcast, Shane Oliver warned

60

400,000 households peer off mortgage cliff

The Australian Prudential Regulatory Authority (APRA) has updated its loan deferral data, which reveals that repayments on $240 billion worth of loans were deferred in July, including $167 billion of mortgages: In numbers terms, repayments on 414,430 mortgages (7% of housing facilities) were deferred in July, representing 9% Australia’s outstanding mortgage stock. This is a

5

Sydney auctions lift, Melbourne’s dead

CoreLogic’s preliminary auction clearance rate retraced slightly, with 67.3% of reported auctions cleared versus 67.5% last weekend: Sydney’s preliminary clearance rate firmed with 70.4% of reported auctions sold, up from 69.5% last weekend. However, Melbourne’s preliminary clearance rate bombed to just 27.3% from 33.3% last weekend from only 14 auctions. According to CoreLogic: This week,

39

Will Aussie property plunge off mortgage cliff?

CoreLogic’s head of research, Eliza Owen, believes concerns surrounding the ‘mortgage cliff’ are exaggerated: COVID-19 exacerbates the risk that high housing debt has to the Australian economy. In the March quarter, the ratio of household debt to annualised household disposable income sat at near-record highs of 142.0%. With widespread unemployment, there is increased likelihood borrowers

2

Auction market fails to launch

CoreLogic has released its final auction clearance results for last weekend, which reported a final auction clearance rate of 60.5%, up slightly on last week’s 59.8%: Sydney’s final clearance rate softened to 62.3% (from 64.2% last week), whereas Melbourne’s bombed to 32.1% (down from 40.6% last week). As noted by CoreLogic: There were 866 capital

13

WA Government backs tenants over landlords

It’s been an appalling six years for Perth landlords. Dwelling prices in Perth have collapsed by around 22%: And rents have collapsed by 23% over a similar period: Thus, Perth landlords have been hit by a double whammy of falling wealth and income. In a move that is certain to infuriate Perth landlords, the Western