Cross posted from The Conversation by Richard Holden Professor of Economics and PLuS Alliance Fellow, UNSW In a week that was fairly light on data releases, let’s return to Australia’s perennial favourite topic – house prices. Painful though it may be for existing property owners who are selling, we are witnessing what a bubble slowly deflating
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.
Via the AFR comes Charter Hall legand Cedric Fuchs: …”We have seen a very artificial thing happen with the central banks pulling interest rates down – I think the last time interest rates went that low was 500 years ago. It’s one big experiment. …”The debt has increased dramatically and I don’t think people have stress
Via UBS today: Major Bank investment loan approvals fall sharply. The release of APRA’s March quarter property statistics confirmed that bank lending had already begun to slow in 1Q18, even before the Royal Commission hearings commenced (13th March). In 1Q18 the Major Banks’ mortgage approvals fell 4.2%, driven by a 16% y/y fall in investment
By Leith van Onselen In the week ended 21 June 2018, the CoreLogic 5-city daily dwelling price index, which covers the five major capital city markets, declined 0.07%: Values fell across three major markets but rose in two: So far in June home values have fallen 0.10%, driven by Melbourne and Sydney: So far in
Canada may well be presaging the Australian property market with buying conditions in May falling well below expectations. And its the fault of the millenials of course: New mortgage regulations which are now in full swing have stymied fringe buyers, particularly millennials. According to new data from credit bureau TransUnion, new mortgage originations among millennials in Canada
From the AFR: “Broke” real estate agents are quitting British disrupter Purplebricks in droves as the fixed-fee agency’s low-margin, high-turnover business struggles to achieve enough sales amid a slowing Australian housing market. Research by The Australian Financial Review found at least 27 agents had quit Purplebricks Australia since March with overall agent numbers now down to
Meh: Home Values Across Australia Will Continue To Diverge Into 2019, Based On The CoreLogic-Moody’s Analytics Australian Home Value Index Forecast Moody’s Analytics has developed an econometric model to forecast the direction of Australia’s residential property market down to the Statistical Area 4 level, using historical data from CoreLogic’s Hedonic Home Value Index. SA4s are geographic
Ruh roh. Here comes the avalanche of new property listings as prices take a dive. From CoreLogic: With dwelling values now falling, led by a rapid slowdown in the Sydney and Melbourne housing markets, these two cities have also experienced a lift in listings. In most other cities the number of properties for sale
Via Morgan Stanley on macroprudential 3.0: An estimated 18 per cent of mortgage customers have a debt-to-income (DTI) ratio that is above six times, an analysis of 1836 mortgagors shows, which is unacceptable when seen through the lens of new lending rules. A correction of the “very high” debt-to-income segment of the mortgage market could
Via the ABC: As property prices in Australia have climbed over the past few years, thousands of Australians desperate to get a foothold on the property ladder have used interest-only loans. But the interest-only period on these loans doesn’t last forever. Over the next three years, interest-only loans worth a combined total of about $360
By Leith van Onselen The ABS yesterday released its property price data for the March quarter, which valued Australia’s dwelling stock owned by households at $6.57 trillion, whereas the total housing stock was valued at a record $6.91 trillion. As shown below, the total value of Australia’s dwelling stock owned by households was 7.66 times
By Leith van Onselen SQM Research has released its rental vacancy series for May, which revealed a steady national vacancy rate over the month but a 0.2% decline over the year: Over the year, decreases in vacancies were recorded in Adelaide (-0.4%), Perth (-1.0%), Brisbane (-0.6%) and Canberra (-0.2%), whereas increases were recorded in Sydney
Macquarie joins the party: Despite almost daily negative headlines in the mainstream media, the rate of adjustment has also been relatively orderly. Nationwide dwelling prices are currently falling at a 2.5-3% annualised rate, and Sydney housing prices have been falling for four quarters at a broadly stable 4% annualised pace. Some have suggested that the
By Leith van Onselen The ABS has released its property price index – incorporating both detached houses and units – which registered a 0.7% decline in home values nationally over the March quarter but a 2.0% gain over the year, a sharp slowing from the 5.0% annual growth initially reported in the year to December:
Via ANZ: We now expect to see peak-to-trough price declines of around 10 per cent in Sydney and Melbourne, with smaller declines elsewhere. This cycle is being driven by tighter credit, rather than higher interest rates. Higher interest rates in 2019 are expected to be an additional headwind, though rate hikes will only occur if the housing market has broadly stabilised. We note that
More excellent work from UBS today, this time George Theranou: What is DTI & how does it compare to LTI? In the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry there has been an increased focus on Debt-to-income (DTI) ratios, particularly in relation to responsible lending. DTI differs
As we know, Victorian opposition leader Matthew Guy yesterday hosed mega-Melbourne: Melbourne can’t afford to be an unlivable city of seven-plus-million people,” said Mr Guy, who was planning minister from 2010 to 2014. “That’s not the kind of city we should be leaving our children but it’s the kind of city we are headed toward.
More credit crunch porn at the AFR today: Mortgage brokers and buyers agents’ claim million-dollar property sales are collapsing as increasingly risk-averse lenders reassess their exposure and pull out, causing deals to collapse. Sales between $3 million and $5 million and settlements for off-the-plan apartments – where preliminary lender offers were made two-to-four years ago
Via CoreLogic: Auction volumes more than doubled week-on-week across the combined capital cities Auction volumes increased significantly over the week with 1,991 homes taken to auction across the combined capital cities, up from just 904 last week when auction volumes were lower due to the Queen’s Birthday long weekend. The preliminary clearance rate was recorded
Via S&P: Arrears on the mortgages underlying Australian residential mortgage-backed securities (RMBS) increased during the past year, according to S&P Global Ratings’ first-quarter 2018 edition of “RMBS Performance Watch: Australia.” Mortgage arrears continued to rise in resource states, where conditions for mortgage performance have remained more challenging. S&P Global Ratings has updated its arrears data
By Leith van Onselen CoreLogic’s Cameron Kusher has released interesting analysis looking at prior housing corrections, which saw some major capitals post double-digit peak-to-trough losses: This week’s blog presents the recent periods in which dwelling values have fallen across each capital city and how long values have taken following these falls for values to eclipse
By Leith van Onselen We wrote last week how home values have fallen fastest across the top 25% of properties by value. Now, CoreLogic has once again gone a step further and assessed home price growth across each decile, which confirms that values have fallen fastest at the premium end of the market: Across the
Via Domainfax: Banks would have to bluntly warn parents planning to guarantee their children’s business debts that they risk losing their home, and that many small businesses end up failing, under proposals to the royal commission. …However, the major banks are resisting further change, arguing current laws and the industry’s revamped code of conduct give
By Leith van Onselen With the release this week of the ABS lending finance data for April, it’s an opportune time to once again chart how capital city house prices are tracking against both investor and total housing finance. As readers no doubt already know, housing finance has historically been strongly correlated with values, therefore
By Leith van Onselen In the week ended 14 June 2018, the CoreLogic 5-city daily dwelling price index, which covers the five major capital city markets, rebounded 0.04%: Values rose across three major markets but fell in two: So far in June home values have fallen 0.03%, driven by Melbourne: So far in 2018,
By Leith van Onselen Back in October, REA chief economist, Nerida Conisbee, penned a self-serving article claiming that “cutting immigration won’t help housing” and would erode living standards: There’s no doubt that the more people there are living in Sydney and Melbourne, the higher property prices go. This has led to some commentary about migration
Via the AFR: A typical deposit on a $1 million residential property has nearly tripled from about $50,000 to $150,000 as borrowers commit to tougher standards demanded by regulators, increasing pressure on the Bank of Mum and Dad or unsecured loans to make up shortfalls, lending analysis shows. Deposits required for nearly eight-out-of-10 loans have