The coming Australian property crunch

The vast majority of immigration into Australia is permanent migration, so it is not causing short term demand. The government controls the immigration rate and the demand to migrate to Australia* far *exceeds the supply of available visas, which is why there is a strict points system in place to control & restrict the numbers that are let in. The government is highly unlikley to constrain inward migration as it promotes economic growth. The biggest challenge is infrastructure investment has not kept pace with inward migration which is leading to a reduction in the quality of life.

Although they’d want to keep a sharp eye on Australian companies exporting jobs to Asia, or there’ll be no bloody jobs left in Australia for migrants.

Yeah, right. Like that’s going to happen.

Um, their customers will just refinance into cheaper mortgages from the main banks? They went non-bank in the first place because non-bank was cheaper than bank as non-bank lenders were able to access competitive wholesale money markets without the big cost overheads of the main banks. That advantage is now gone.

This is a very real risk to the Australian economy. While employers reaping record profits have been incredibly stingy with wage increases, the cost of living has escalated dramatically in recent years. 12 years of the poison dwarf Little Johhny’s & his boss mates privatising, outsourcing & offshoring everything in sight has not helped either.

The Boomers have equity, not debt. Most of them are sitting pretty at the top of the property pyramid with mortgage free prime inner city property. They are the demographic group under the least pressure. The new working poor, battler suburbs on the outer fringes of the big cities (west sydney and north/west melbourne) is where the real pain is at the moment.

The ECB is running a real interest rate of +0.25%, the US Fed -2.5%. The RBA is at +3.0%, so inflation could increase substantially and the RBA would not necessarily have to take action. If they do put them up any more, then Aussie households will start falling over in droves. And the RBA knows this.

The RBA seems to be the one of the few Central Banks in the world actually making an effort to tackle inflation, as opposed to paying lip service to tackling it like the ECB.

Rather bearish article in the Telegraph

**Australia Facing ‘Once-in-100-Year’ Housing Slump **

bloomberg.com/apps/news?pid=20601068&sid=aViK6htPFKgM&refer=home

Six year’s earnings eh? Paddy couldn’t give a Belmayne xxxx for anything less than a multiple of 12.

The RBA policy level is currently 12 interest rate rises ahead of the ‘inflation busting’ ECB, and 21 rate rises ahead of the ‘strong dollar policy’ US Fed.

Rental yields in Sydney are awful and rents are beginning to fall from what I can see.

Rental yields in Australia are skewed by negative gearing. Investors are quite happy to lose money hand over fist and offset their losses against other income. Social welfare for the landlord class.

The subsidy makes prices artificially high and rents artifically low.

Australian interest rate cycle seems to be turning. They were threatening further rises until very recently.

RBA expected to hold at 7.25% tomorrow, but signal shift towards an easing bias, with rumours of a 50bps cut in September if economic data continues to be crappy.

How much, if any, of any RBA cut will be passed on to mortgagees by the banks is the next question…

news.com.au/business/money/s … 10,00.html

Typical SVR is currently about 9.6%.

It’s good to know the same questions are being asked all over the world. In this globalised knowledge society someone must know the answer? :wink:

Consumption/retail spending has stalled because of the cumulative effect of 12 consecutive interest rate rises by the RBA, plus the equivalent of another 3 levied on borrowers by the banks themselves.

There is some political pressure being brought to bear on the banks to pass on any official interest rate cuts.

All the losses/writedowns announced by Australian banks to date have been related to bad investments in US RMBS or the domestic corporate sector, but the domestic mortgage borrowers are getting it in the neck as a result.

If the RBA cuts rates and the banks dont pass the cut on, there’s going to be a backlash.

Banks profits to rise with rates
Banks getting fatter as customers struggle

Davy comments on Aus…

Surely at this stage its when not if. Check Steve Keen:FHB Boost is Australia's "Sub-prime Lite" - Steve Keen's Debtwatch

Anyone disagree? What kind of srops will we be seeing I wonder.

The five major markets (Perth, Melb, Syd, Bris & Adelaide) all operate fairly independenty of each other. Large scale increase in unemployment would be a big risk factor.

Still plenty of positive spinning going on

news.com.au/business/money/s … 51,00.html
news.com.au/business/money/s … 51,00.html

So that’s 150k new builds for a population of over 21 million. Puts Ireland’s 90k for 4 million people in 2006 in perspective.

Australia engineered it’s own recession to a certain extent by excessively raising interest rates in 2007-2008. They’ve dropped them back by 4% to 3.25% now, but consumers got a fright and are using any excess cash they have to reduce their debts. No matter what the Aus government does to stimulate the economy, people are more focussed on debt reduction than consumption, primarily due to the overly restrictive monetary policy pursued by the RBA until late 2008. Then there is the whole GFC palaver, the negative wealth effect of a stock market down 50%, pension funds down and the end of the mining boom.

So in other words you are saying that there is no over supply and that providing unemployment does not skyrocket we are in for a soft landing?

What about the extordinary levels of mortgage debt?
What about the high ratio of house prices relative to earnings?
What about the empties that other commentators say do exist and the drops we have already seen? 9% in Perth yoy.

What about the Morgan Kelly rule of there never being a soft landing once house prices go so far out of whack with rent and earnings?

Well, there is no oversupply. I don’t think anyone would argue that the Australian property market is oversupplied, even Steve Keen. So it’s all about affordability/repayment capacity which is determined by income, taxes & interest rates. The negative gearing landlord subsidy is partially responsible for the price/earnings anomaly, and there’s no appetite to address that - too much of a political hot potato.

Perth was due for a fall because it went mental in a very short space of time. Perth was the most expensive housing market in Australia for a while, it didn’t take a rocket scientist to work out that that wasn’t going to last very long.

I don’t see a crash in the other cities unless there is a substantial increase in unemployment. Perth is most exposed as it was the bubbliest market in recent years.

Xman, these anecdotes you speak of make Australia sound like it could do well enough for itself. Especially the whole issue of people concentrating on reducing their debts.

I am becoming more of the opinion that nominally Oz prices will not crash but that the AUD will devalue over time.

The Ozzy dollar depreciated quite rapidly against both the $USD and EUR in Q408.

From 0.98 US cents down to 0.60, and from 1.60 to over 2 against the euro. In effect Australia quickly became 20-30% cheaper in relative terms and no-one in Oz had to take a pay cut. They just lost some purchasing power. The effects of this currency devaluation have not fed into inflation, which is falling.

They also have their own currency, control their own interest rates which are still relatively high at 3.25%, have an unemployment rate of 5.2%, have a very low government debt and were running a budget surplus until this year.

Here is a VI response to Steve Keen’s predictions, he makes some valid points.

anz.com/documents/economics/ … t%2008.pdf