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.

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Flammable cladding fears to burn high-rise investors

By Leith van Onselen The AFR reports today that recent fires in high-rise apartment buildings, along with London’s Grenfell disaster, have made tenants of such buildings nervous about remaining there. This, in turn, is making potential investors in high-rise apartments reluctant to purchase them: Frightened high-rise tenants are imploring their landlords to move them to

11

Home ownership collapses for younger Australians

By Leith van Onselen The New Daily has produced an interesting analysis showing the collapse in home ownership, especially among younger Australians arising from the latest Census data: …home ownership among the classic ‘first home buyer’ demographic – those aged 20 to 39 – declined again in the 2016 census. It showed that only 36

11

CoreLogic weekly Australian house price update

By Leith van Onselen In the week ended 6 July 2017, the CoreLogic 5-city daily dwelling price index, which covers the five major capital city markets, surged another 0.90%: The surge in prices was driven by Melbourne, Sydney and Brisbane: So far in 2017, values have risen by 5.24% driven overwhelmingly by Sydney and Melbourne,

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Mortgage stress rises across the country

Can’t vouch for the data but it ain’t pretty from Martin North: Digital Finance Analytics has released mortgage stress and default modelling for Australian mortgage borrowers, to end June 2017.  Across the nation, more than 810,000 households are estimated to be now in mortgage stress (last month 794,000) with 29,000 of these in severe stress.

85

Vancouver blocks AirBnB as Sydney unleashes it on renters

Via Bloomberg: Vancouver has tightened its restrictions on Airbnb, Expedia’s HomeAway unit and other short-term rental operators as Canada’s priciest housing market seeks to ease its near-zero supply of homes to let. “Housing is first and foremost for homes, not to be operated as a business,” Mayor Gregor Robertson told reporters on Wednesday. Under the new rules, residents will only be able to

40

ATO targets negative gearing tax dodgers

And pretty much everyone else as well, from Tax Commissioner Jordan: In his Wednesday address, Mr Jordan said approximately 6.3 million Australians claimed a $150 tax deduction for clothing expenses, totalling $1.8 billion. He questioned whether people knew they were not simply entitled to it. “That would mean that almost half of the individual taxpayer

32

Goodbye real estate agents

Poor buggers: The residential real estate sector recorded its first revenue fall in five years this past financial year as estate agents battled low listing volumes, the end of the housing boom and competition from low-cost operators. Researchers IBISWorld estimated total fees earned by real estate agents fell by $83.5 million or 0.7 per cent

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Thousands of high-rise to be tested for flammable cladding

By Leith van Onselen With high-rise apartments having sprouted like mushrooms throughout Melbourne: And the growing concerns around flammable cladding in the wake of London’s Grenfell Tower disaster, which killed more than 50 people. The Victorian Government has announced a new taskforce to investigate the pervasiveness of flammable cladding used throughout Melbourne’s high-rise apartment projects.

33

Morrison returns to negative gearing lies

By Leith van Onselen Here we go again. Australia’s real estate treasurer, Scott Morrison, appeared on ABC’s Report last night whereby he repeated the lie that Labor’s proposed negative gearing reforms – which would restrict negative gearing to newly constructed dwellings – would reduce the rental stock and force-up rents: “You’ve got a quarter of

17

Confessions of a real estate Treasurer

By Leith van Onselen With the latest Reserve Bank data showing Australia’s household debt has soared to an all-time high 190.4% of household disposable income: Which followed separate Bank for International Settlements data showing Australia’s household debt is the second highest in the world and easily the highest in the Anglosphere when compared against GDP:

9

Mortgage arrears climb again

From Moody’s Moody’s Investors Service says that delinquencies for Australian auto loan asset-backed securities (ABS) and prime residential mortgage-backed securities (RMBS) increased in April 2017 from March 2017. Specifically, 30+ day delinquencies for Australian auto loan ABS transactions rose to 1.66% in April 2017 from 1.53% in March 2017 and 1.60% in April 2016. Delinquencies

3

Dwelling approvals continue to retrace

By Leith van Onselen The Australian Bureau of Statistics (ABS) has released dwelling approvals data for the month of May. At the national level, the number of dwelling approvals fell by a seasonally adjusted 5.6% to 16,448. The overall decline was driven by the volatile unit & apartment market (-12.1%), whereas house approvals rose slightly

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The endless debate over Australia’s ‘housing shortage’

By Leith van Onselen Last week, LF Economics released a report challenging the oft-used claim that Australia has a chronic housing shortage: Today, The ABC’s Michael Janda has produced evidence that arrives at a similar conclusion: For at least a decade, an Australian housing shortage has been a gospel truth amongst economists and policymakers, fingered

9

CoreLogic: rental growth rebounds on strong immigration

By Leith van Onselen Following on from Friday’s post on CoreLogic’s daily dwelling values index results for June, CoreLogic has released its full results, which also cover the smaller capitals and regional areas (see next table). As shown above, the smaller capitals and the regions had a mixed month, with Hobart (2.8%) and Canberra (+2.6%)

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From towering infernos to exploding glass

By Leith van Onselen Over the past few years, there has been multiple reports decrying Australia’s poorly designed and built apartments. Last year, there were several reports (here, here and here) about how cheap combustible cladding had been used to cover potentially thousands of buildings across Australia, which in November 2014 sent a Docklands building

13

Credit growth to stall out completely

Via Macquarie: We estimate that out-of-cycle interest rate hikes announced over the last 12 months reduced overall households’ incomes by ~$5bn. Furthermore a gradual shift from IO to P&I would take off additional $5-10bn from discretionary incomes or savings. However, given the distribution of debt, we estimate that ~60% of the reduction in discretionary incomes