Late last month we reported that global rating agency Finch Ratings would stress test Australian banks after an avalanche of inquiries questioning the sustainability of Australia’s housing bubble.
Fitch today has reported banks could manage a 40 percent plunge in house prices and a home loan default rate of 8 percent. According to the briefing, banks would loose a maximum of $10 billion, while insurers would only lose $7 billion.
This will come as welcome relief to the government considering if it should bail out the residential property market again.
Two years ago, tomorrow, the Australian government announced a $10.4 billion economic stimulus plan including a doubling of the First Home Buyers Grant. This came after mortgage approvals plunged 25% to September 2008 pushing house prices into reverse gear.
Two years on, after stimulating an unsustainable market the government has nothing to show for it. Mortgage approvals are now down 28 percent from peaks in June 2009 and house prices are once again falling. It’s been feared, our bubble, one of the biggest in the world is too big to fail – if it popped, it would take down banks which have as much as 60 per cent of their loan books secured by residential property.
Bring it on. Revolutions can’t occur without shedding blood.
It won’t happen. The government will step in and stimulate the Ponzi just like they did in 2008. Negative Gearing isn’t going away so investors will always have an incentive to stay in the Ponzi and prop it up. China will keep buying our resources until the end of time so the Government will always have money for Ponzi Stimulus and Negative Gearing.
Nothing can continue forever, esp. a Ponzi type scheme. The longer they delay it, the worse it will be when it eventually pops. Already the housing market is driving up inflation in Australia. Prices are unlrealistic. People are in debt way over their heads. This can’t continue. Something has to eventually happen and re-balance the market. The question is when?
AverageBloke may be correct in that the Government could step in and stimulate the market again but it would have little result if any as the main problem that is going to drag prices down is that cheap credit has been drying up.
Interest rates would need to fall quickly because at the current rates people have hit peak debt vs incomes, its no good offering people money ie FHB grant if the interest on the debt is too high to service. IT’S THAT SIMPLE PEOPLE!
Investors are going to look at cashing in what profits they can befor the market drops too much because Neg Gearing is no good in a falling market.
The best outcome for the Government and the banks from this point forward is a slow decline in prices over the next few years maybe 20% at most if they are lucky?
Hey I could be wrong, but do you to bet your house on it?
You have to love the irony of our banks being rated by the same crooks who gave a rubber stamp “OK” to the toxic crap (structure products – mortgage backed securities) that created the entire GFC mess!
I wonder how much Fitch got paid and by whom to write what they wrote….
the end is nigh! hold on for a rough ride people!
As much as I would love to see the property market crash 40% realistically I don’t think it will happen due to very low unemployment and a strong demand from China for our resources. One thing is for sure we have reached dept levels never before seen in this country, therefore the average mortgage holder is more exposed to severe “shocks” in our economy. The biggest threat to Australia is if the Chinese bubble collapses, but I am sure the communist party will never let that happen.
Domenic, people really should look into just how the unemployemnt rate is calculated, determined more realistically, talk to people from Not-For-Profit organisations like Mission Australia, Salvation Army, or CentreLink, to see what unemployment here is really like. Starting from the common sense point of view, I know, as many other know, what an economy with low unemployment, especially one with 5.1% looks like. This isn’t one of them, it doesn’t even look like an economy with 7.5% unemployment. Whether I or anyone agrees or not, some folk who claim to know what methods are used to determine unemployment put the figure at between 17-18%. Whether true or nowhere near it, it does note something equally important to the current stated rate, Unemployment 5.1% prove it, demonstrate it, back the claim. I run my own business, if I want to see a few hundred resume (good ones too), all I need to do is advertise a mediocre job. That’s not an economy with low unemployment.
China does have a strong demand for (NOT) our resources but, are any of us the beneficiaries of this business? With so much private/personal debt, approaching $1.4T would we see the benefit, what would happen if creditors wanted their money back? Or some back? I’m sure that would bring the party to an end too. I get the feeling when the RBA lifts interest rates, its’ not because the economy is good, but more like, “Hey Gringo… Pay up!”
July 2009, Australians had $1B worth of credit card *cash* advances (not total credit card debt, just the cash component), its’ stuff like this that can bring things to an end when someone says, “Hey Gringo… Pay up!”, and one can’t any longer honour their debts. Its’ not just a fall in the Chinese Economy that can bring this house down, I’m sure we Aussies can do it too.
Look into how Inflation is calculated (again determined) for a real jaw dropper.
Trying to relate it back to this topic, there are many factors involved, but one thing I’ve really noticed is that there is a lot less money being spent.
The biggest threat is credit contraction. It is credit expansion/increase in money supply causing malinvetments and rampant speculation that caused this bubble as with all asset bubbles in history.
Those who think a so called “booming” economy means house prices won’t fall, think again. All booms come to a bust. Here’s a link to a Bloomberg article from today on Seoul’s (Korea) housing collapse amid very strong economic growth etc.
http://www.bloomberg.com/news/2010-10-13/seoul-property-owners-watch-real-estate-prices-sink-defying-growth-trend.html
Regards
Chris
http://www.mises.org
http://www.lewrockwell.com
BotRot, Investors are the key and are what may drive and/or crash the property market. Anybody who buys realestate for investment in Australia relies on Capital growth not rental yeild which in most cases is negatively geared and people outlay (lose) money to keep the property afloat with the “hope” that prices will rise one day. With prices at their peak I don’t think investers are foolish enough to invest in places like Sydney, Melbourne and Adelaide where realestate is completely overvalued and rental yeilds are poor.
You are lucky to get 4% nett with all that work and risk involved when you can put your money in cash and get 6.5% with no work involved and less risk.
Re unemployment: bang on! I believe that to be considered ’employed’ one must only work a couple hours per fortnight! Seriously. The americans also ‘fudge’ unemployment numbers … their actual on the ground levels are in the teens.
@Pete One only needs 1 hour a week as not to be counted as unemployed. I had that explained to me too, its’ not literal, any work you’ve done your hours are distributed over a period, which come out to 1 hour a week over how ever long whatever formula that is used results in. You still receive the benefit, but are not counted. For the first 13 weeks of your benefit (maybe longer now) you’re not counted, as that is considered a kind of grace period where you’re likely to find work, again if its’ temp or low paid, you may still receive the benefit and your hours are put through the formula again. Then comes the coarses, are you attending a “improve myself” for a job coarse? Well you will still receive your benefit and not be counted as unemployed for that period. There is adjustments, weighting, and data adjustments techniques which you could claim to be statistically competent to apply, but these methods all seem to sku the rate towards a low figure.
Then comes the Birth-Death rate model. This is a killer (as in funny), it works kind of like this (very simply), Let’s say the unemployment rate last year was 5%, and small business in Australia (we know say the assumers) employes 120,000 people per year, given the unemployment rate small business this year we assume will employ 114,000 people. Apply that to all industries and sectors and you’ll see unemployment is not just or necessarily calculated, it is determined. They assumed employed are counted as 114K, so the unemployed must come to 6K.
Then commonsense approach, when people tell me, or hear them on the radio how half their street is unemployed, their kids can’t find work, and they know what an economy with 5.1% unemployment looks like, and they also what an economy with an unemployment rate of 7.5% looks like, and this is *not* one such economy.
So people who say that unemployment rate is 17-18% aren’t just saying it, they demonstrate it, when it was explained to me it was like, look this how the unemployment rate here is calculated, let’s include the 1 hour per week people, drop the Birth-Death model, now look. It starts to rise very quickly, then lets’ take out some more assumptions, it doesn’t take long to hit 17-18%.
I don’t dismiss claims that unemployment is 5.1% as stated, but I ask, please explain it, demonstrate it, prove the claim, don’t speak to me in slogans, eg. There are green shoots everywhere.
Also I know (knew now) a CentreLink employee that told me that this year they put some people on 12 week (yes 12 week) reporting-application submission periods, from the typical 2 week ones. They’re overloaded I guess.
The way unemployment and inflation are calculated are not the way you would expected. The figures are dramatically understated. The increase in house prices is not included in the inflation rate!
I agree with everyone here.
But I have to point out to people who say “Its better to invest your money in a bank, no risk 6%” and I see this often enough, that property investors dont have that much cash to invest. Its all borrowed. So for them, a renter in a house, paying back most of the loan plus whatever capital gains they get is not comparable to investing in a bank.
Bank investments are done with cash you have in hand.
Say an investor has 100k, he can buy 2 rentals via mortgages and tenants or invest in a bank. Buying the houses leverages his 100k to say 500k, then add the capital gain of say 4% for the year plus the tenants rent and hes way ahead of investing in the bank.
But I do believe the crash is coming, we didnt upgrade our home because we feel waiting a while may get us a bigger home with a smaller mortgage than we would have if we did it a year ago. In the meantime weve paid off our mortgage and renovated our current house.
just paid my bills for the month/quarter. Interesting to see a sharp increase in my water, electricity and gas. I can pay it, as I’m not mortgaged to the hilt. I’ve had to make a sacrifice, though, a house far from the city, even though I work in the city. I know for a fact many aussies will start defaulting soon !! That, plus increase in interest rates, and inflation in other areas. Good luck people. My only advice, if you’re geared up sell up, because if it’s not the bank knocking on your door, it will be the electricity company.
Chargin, I agree with what you’re saying. Take note that is the US after the GFC house prices crashed and in certain areas house prices had dropped to values equal to what people paid for them 20 years ago. Therefore, there is no guarantee of capital gain it’s just people’s perceptions that property “always increases in value”. Smart investors know when to buy and sell.
I think you will see a lot of properties owned by investors on the market this spring as they will be trying to get out now while the prices are relatively high. Once we scare off investors out of the property market then this will also influence property prices reducing.
@Peter,
If you have a spare 15-16 minutes check out;
‘Crash Course: Chapter 16 – Fuzzy Numbers by Chris Martenson’
http://www.youtube.com/watch?v=zPkTItOXuN0
It is U.S centric, but applicable to us here too. Kind of like a hitch-hiker’s guide to inflation statistics and calculations.
@Domenic,
Spring time has come alright, I see the For Sale, For Lease signs already in full blossum, as colourful as the flora all around, I;m just trying to figure out which is making me sneeze and eyes watery. Have you seen what its’ like out side of Sydney? The South Coast of NSW looks like Spring in full bloom alright, some places look like the entire street is for sale.
Sorry, fauna should be flora.
BotRot,
I live in Sydney and there is an abundant number of properties 4 sale. People have to be smarter and less gullible when purchasing property, but unfortunately it has to get much worse before it gets better.
I think in this economy interest rates are the key, and if they increase in November, which is forecast then you see more investors come out of the woodwork trying to sell their properties as well as home owners who will be defalting on their mortgages.
If interest rates keep rising then you will see the domino affect and things will slowly start tumbling. Demand will slow, consumer sentiment will decrease and away we go….
I doubt many investors will sell up in the short term.
Given the stubborn nature of people when it comes to property (and the short term memory that the Government will intervene), there will be many baby boomers that will most likely hold the properties at a loss for a few years in the hope something will trigger a price rebound. The professional investors have sold out to mums and dads over the last 12 months.
I actually think that the biggest impact of all this will be the 40-55 age bracket, who thought buying an investment property would help to offset them not having enough aside in superannuation for retirement. But if they have an investment property that is worth less then they purchased it for by retirement, then it will prove to be a dud. If they can afford to support the property, then many will keep them until retirement in the hope the price rebounds and they receive a solid capital gain by then.
The baby boomers retirement over the coming 10 years will probably provide a soft trigger, as opposed to a needle popping the balloon.
J Hill, I think you are wrong about mum and dad investors they will bolt for the door and move all money into cash. most of them have seen property values crash at least one time over the last 25 years and they are not going to hang in for long if prices keep falling. This will all unfold over the next 2 or 3 years.