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.

8

Auction market hangs on

CoreLogic’s preliminary auction report reported a slight retracement in the preliminary clearance rate (from 66.1% to 64.5%) off solid volumes: Once final results are received later this week, we are likely to see the weighted average clearance rate fall to around 60%. According to CoreLogic: This was the highest number of auctions held in nine

28

Westpac wins responsible lending appeal

Via Westpac: Westpac Banking Corp has won a significant victory in the Federal Court, where two judges to one have found in favour of the bank on its interpretation of responsible lending duties, dealing another blow to the corporate regulator in the prolonged dispute. The Australian Securities and Investments Commission had appealed the original ‘shiraz

23

Domain summons first home buyer patsies

You can see the desperation in Domain’s eyes, running articles like the one below urging first home buyers (FHB) to jump into the market before they miss out: Similar guff is being published at sister Domainfax publication The AFR: COVID-19 has opened up a six-month window for Sydney buyers to get into 139 middle-ring suburbs

14

Fleeing Chinese add to Aussie house price plunge

Via the excellent Damien Boey at Credit Suisse: The need to triangulate sparse housing data. Following the recent Freedom of Information Act (FoIA) release of internal Reserve Bank of Australia (RBA) files, we now know that Bank officials are quite concerned about house price measurement distortions in a low turnover environment. Indeed, property data vendors like CoreLogic share

11

QLD ‘Build-to-Rent’ scheme fails to produce a single affordable home

While 5,000 Brisbane households languish on the social housing wait list, the Queensland Government’s $70 million ‘Build-to-Rent’ scheme, which partners with the private sector to deliver low-rental homes, has failed to deliver a single affordable home: The multi-million-dollar ‘Build-to-Rent’ scheme was revealed by the Queensland Government in December 2018… Developers were asked to build properties

11

CoreLogic: Unemployment presents “sobering headwinds for the property market”

CoreLogic’s head of research, Eliza Owen, believes that high unemployment and falling incomes presents clear downside risks for the Australian property market. And unlike previous episodes, the market will not be saved by falling interest rates this time around: Comprehensive coverage of labour markets from the ABS highlights sobering headwinds for the property market. Job

14

Financial regulators demand banks lend at any cost

So predictable: Quarterly Statement by the Council of Financial Regulators – June 2020 The Council of Financial Regulators (the Council) held its regular quarterly meeting on Friday, 19 June. The Australian Treasurer attended for part of the meeting. The Council has been meeting more frequently over the past several months and will continue to do so

16

SQM: Auction market remains stillborn

SQM Research has released its auction report, which reported clearance rates for Sydney and Melbourne in the 40s: Last week, Sydney recorded a final auction clearance rate of 45.1% with Saturday auctions selling better than mid-week by some margin (46.2% verses 38.5%). Sydney volumes were steady at 526 properties. Clearance rates dipped on the previous

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Will someone think of the poor landlords?

“Average hardworking landlords” in Melbourne are apparently being slaughtered by falling rents and rising rental vacancies: Melbourne landlords are struggling under the burden of reduced rent payments and finding tenants during the coronavirus pandemic. Self-funded retirees without access to the pension are notably slipping through the cracks, with many of them reliant on rental income

12

NSW minister rages against property lobby machine

I noted last week how the NSW Government had effectively handed planning control to the Property Council. In addition to fast-tracking planning processes and development applications, the Government appointed deputy executive director of the Property Council of NSW, William Power, to executive director of the planning department’s COVID-19 response. And that response involved fast tracking

7

Crashing rents deliver handy stimulus

Via Domain: Figures released last week by Victoria University’s Mitchell Institute revealed there were 30,291 fewer international students in Melbourne in 2020 compared to last year, and 29,815 fewer students in Sydney. Juwai executive chairman Georg Chmiel said the company’s estimates showed that nationwide around $715 million of property-related income would be stripped from the

19

Banks and APRA kick can off mortgage freeze cliff

In noted yesterday how Australia was facing a mortgage time bomb given 485,063 mortgages valued at $175.6 billion have been deferred for six month by Australia’s banks, representing around one in fourteen borrowers: I also noted how the expiry of these mortgage deferrals would coincide with the expiry of the Morrison Government’s emergency income support

23

Australia headed for massive housing oversupply

With last week’s release of population data for the December quarter, alongside the estimated number of dwellings, it is once again time to examine how Australia’s dwelling supply is tracking against population growth. The below charts track the following, which are based on the latest available quarterly data: Dwelling approvals to March 2020; Dwelling commencements

4

Stockland demands extension of HomeBuilder

The CEO of Australia’s largest listed residential property developer, Mark Steinert, has urged the Morrison Government to extend its $25,000 HomeBuilder subsidy beyond six months: “I think HomeBuilder is great, I can’t knock that”. “Inquiries have more than doubled from last year’s average… Of course, it’s bringing demand forward, but at a critical time”… “So

10

Superannuation funds demand housing subsidies

Industry superannuation funds have demanded that state and federal governments provide cheap land and tax subsidies to encourage funds to invest in affordable housing: Superannuation firms and community housing groups have been in discussions for 12 months about lobbying the federal government together for subsidies that would make low-cost housing feasible as a long-term investment… [This

9

CoreLogic: Rental stock “piling up in Sydney and Melbourne”

CoreLogic’s head of research, Eliza Owen, has released research showing that rental stock is “piling up in Sydney and Melbourne” as immigration and international student numbers fall: The percentage of rental housing advertised rose over the month of May in Sydney and Melbourne, while declining across the rest of the capital city regions. 4.5% of

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Australia’s mortgage time bomb hits $176 billion

The Australian Bankers Association (ABA) has updated its loan deferral data to 19 June, which reveals that 779,458 loans have been deferred across Australia, including 485,063 mortgages: In value terms, $236.7 billion of total loans have been deferred, including $175.6 billion of mortgages: According to the ABA, one in fourteen mortgages are currently being deferred

7

Auction clearances rise from the ashes

CoreLogic’s preliminary auction report posted another solid rebound in the preliminary clearance rate (from 63.3% to 66.1%) off solid volumes: Once final results are received later this week, we are likely to see the weighted average clearance rate fall to the low 60%. According to CoreLogic: This week, as auction volumes increased across the combined

4

Auction market faces another big test

CoreLogic has released the final auction clearance rate for last weekend, which rebounded to 59.3% versus 56.2% last week off solid volumes: According to CoreLogic: Last week, the combined capital city final auction clearance rate increased to 59.3%, after the week prior saw the final clearance rate fall to 56.2%. Last week’s improved clearance rate

18

Mr Armageddon: No Armageddon

If you can be bothered, John Adams has returned to declare there’s no armageddon imminent: I remain bearish property and even more so now that Mr Argmageddon is not: high unemployment; permanently lower migration; plunging rents, and bank tightening. I see no end to any of these at this stage.

2

Victoria faces housing shortage… Not!

The federal government has forecast that migration will fall by 85% in the two years from 2019 because of COVID-19. Consultancy m3property has tipped that this will lead to an oversupply of housing in all mainland states with the exception of Victoria, which is forecast to have an undersupply of 7,391 properties in 2021: “We

35

Banks kick can on mortgage repayment cliff

I noted earlier this week how Australia was facing a mortgage repayment cliff in September given 480,700 mortgages have been deferred for six months by Australia’s banks worth $173.5 billion: That equates to around one in 14 mortgage holders, according to the Australian Bankers Association. Now, it’s been revealed that the banks will extend relief

23

Chinese buyers repulsed by Australian property

The diplomatic spat between Australia and the Chinese Communist Party (CCP) has reportedly crashed Chinese interest in our property market: Chinese buyer enquiries for Australian homes fell to their lowest in almost three years in May… Data published by international property portal Juwai IQI shows enquiries slumped by more than 65 per cent in May

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Property investors slaughtered as rental market busts

Property investors are being slaughtered by rising vacancies and falling rents, according to The AFR: Soaring vacancies and widespread rental discounting have squeezed investors’ cash flows to the extent that almost two in every five landlords are in a position of financial stress. The closure of Australia’s international borders in March that cut demand from