The funniest part is that HIA, a natural permabull for obvious reasons, predicted that house prices will continue to rise when interest rate is PREDICTED TO RISE in the future and when the incentives are GONE.Whenever we think we’ve missed something, or are getting confused, we down tools and go back to basics. It’s not necessarily that we think we’re wrong, it’s just that sometimes when we read the mainstream press and commentators we can hardly believe what they are saying and writing.
When I write that I “go back to basics” it usually means paying a visit to the section in the economics text books marked “Supply & Demand.”
We find that usually settles things once and for all.
It was the following headline yesterday that caused us to down tools:
House prices down to 2002 levels
The opening line from the article states, “It’s the best time in seven years for first home buyers to get into the property market.”
The article continues with, “A combination of static house prices and low interest rates have improved housing prices, according to the Housing Industry Association-Commonwealth Bank housing affordability index. The index for first home buyers rose 22.3 index points in the March quarter to 175.8 points.”
This is being labeled as a positive sign. Today’s Australian Financial Review (AFR) follows suit with, “Home affordability the best in years.”
However, in their excitement to proclaim a new bull market for housing they’ve clearly glossed over an important aspect of the survey results…
Housing hasn’t become more affordable because house prices have dropped, it has become more affordable because prices are still being artificially inflated - low interest rates and the first home buyers bribe.
The claim that “it’s the best time in seven years for first home buyers to get into the property market” is completely wrong. It’s the worst time.
What this survey clearly shows is something that we’ve argued all along. That if it wasn’t for dangerously low interest rates and government bribes, the housing market would already have collapsed. The fact that it hasn’t yet, merely means the pain is being delayed.
And as more and more people are induced into getting into the market while prices are still at or near the peak, the end result will be worse.
As the AFR article notes, “Housing minister Tanya Plibersek announced… the total number of first-home buyers around Australia was up more than 30 per cent between February and March, increasing from 12,664 to 17,265.”
Even the HIA’s own comments point towards a crash in the housing market - although of course, they think they’re being bullish.
HIA chief executive Chris Lamont had this to say, “In the foreseeable future this is about as good as it’s going to get with the incentives and the low interest rates… with demand being the way it is together with the housing shortage, we’re forecasting an upward trend in interest rates and downward trend in affordability in 2010.”
So what the HIA is trying to tell you is that once interest rates rise and the incentives stop, house prices will rise.
We could be wrong, but surely the opposite is the case - no bribe and a higher cost of money will lead to lower prices and more “affordable” housing. Only houses will be more affordable based on the price rather than the cost of money.
Then there’s the old chestnut about the housing shortage. It’s the one constant in all the arguments put forward by the housing bulls - the “chronic” housing shortage means house prices can never fall.
Of course, this argument is complete nonsense, as it only factors in one element out of supply, demand and price. It’s also an unsustainable argument because it suggests that regardless of the price of housing, the “chronic” housing shortage will mean there will always be enough potential buyers who are prepared to buy - whatever the price.
If we take that argument to the extreme, every home owner and real estate agent could put their heads together and agree to not sell homes for less than $5 million? If we accept the logic of the HIA and others, the “chronic” housing shortage would mean there is still demand for housing at this price.
If the HIA agree that’s a ridiculous concept then they must agree that price and demand are equally important when determining a price.
And as for demand, the HIA are severely underestimating the impact of the first home-buyers bribe. Especially the misguided belief that things will return to “normal” when the bribe is removed.
So while we’re drawing on examples, perhaps the following illustration best explains the huge impact of the bribe, and how it cannot possibly be argued that it hasn’t had an influence on prices…
Imagine a housing auction where two couples (A and B) are bidding for the same property. Unknown to each other, couple A is able to bid until the price reaches $300,000 and couple B is able to bid until the price reaches $301,000.
As the auction progresses, bids are raised until couple B places the bid of $301,000. Couple B should be the winner of the auction.
However, at that point couple A is approached by a mystery benefactor offering to give them a voucher for $14,000. However, this voucher can only be used against the purchase of a house and cannot be exchanged for cash.
Suddenly, couple A is given a lifeline, they can now bid $302,000 for the house and win the auction.
Little does couple A realize, but the mystery benefactor now approaches couple B and makes them the same offer. They too have been given a lifeline and can bid higher…
What happens next?
Naturally, couple A is able to bid to a maximum of $314,000, while couple B is able to outbid them at $315,000.
Can there be any argument to suggest that the first home buyers bribe hasn’t had an influence on the price the bidders can bid to and therefore on the price paid? No.
If we extend the example further to early 2010, when the bribe is no longer available to buyers. And if we assume that couple B is now a distressed seller due to the rising interest rates predicted by the HIA…
Couple A returns to bid against new couple C, but because there is no mystery benefactor handing out vouchers, the maximum they can bid is $300,000 and $301,000 respectively.
Couple B is forced to sell at a loss.
We’ve stated before that we’re happy to be proved wrong on the emerging property bubble. But every argument put forward by the property bulls does not stand up to scrutiny.
The examples used above may be extreme, but it merely highlights the distorting effect of low interest rates, government subsidies, and the fallacy of a housing shortage that will supposedly assure ever higher house prices.
I'm at a total loss as to why the media keep printing it.I'm at a total lost at the kind of statement these vested interest stupid people can put out.
Aussie banks warned to reduce lending
Australia's big banks will join Canada's major lenders in the single A credit rating ranks and risk copping higher wholesale funding costs unless they pare back lending.
http://au.biz.yahoo.com/090519/2/26fam.html
"Relative to other advanced markets, the Australian banks still stand out as among the most reliant on wholesale funding," Citi said in a client note, adding that this reliance is symptomatic of bank failures amid credit crises.
Affordable housing strategy working: Stanhope
http://au.biz.yahoo.com/090519/31/26fbx.html
ACT Chief Minister Jon Stanhope says the result of a weekend auction is proof that there is now reduced demand for so-called 'affordable housing'.
Sixty cheaper house and land packages were offered for sale at the Brindabella estate at West Macgregor, but Mr Stanhope says only a third were sold.
The Chief Minister says the clearance rate proves the Government's affordable housing strategy is meeting demand.
"It has been successful, it's been an outstanding success, and I think just the results at West Macgregor this weekend show that," he said.
"Sixty house and land packages at under $360,000, and only 20 of them taken up at that, you know you can begin to think well, the pent up demand, the demand at the affordable end, is now being met."
Total returns for Australian property hit a 16-year low in the latest quarter as capital values continued to drop, property research firm IPD said.
Total returns, which include income and capital growth, for all property types tumbled to a negative 1.5 per cent for 12 months to March, the worst performance since December 1993. Annualised capital growth dropped to a minus 7.6 per cent, the fifth consecutive quarterly fall, compared with a positive 11.6 per cent return a year ago.
"When comparing Australia with other countries, we certainly entered the downturn later but we are catching up faster," Goran Ujdur, director of IPD Australia, said.
"There is a sense that there are further value declines ahead especially in the next major evaluation round, which is obviously at the end of financial year."
Capital growth for Australian office buildings also shrank, posting a negative 8.1 per cent in the March quarter, compared with a positive 16.3 per cent a year ago.
Retail assets saw a smaller drop in total returns with a negative 0.8 per cent, but their capital growth logged a negative 6.9 per cent.
Mr Ujdur said values of smaller neighbourhood shopping centres had overstretched and came down at a faster pace compared to major regional retail assets.
Australia prides itself on the fact that we have four banks with AA credit ratings. Yet Citi analysts say we are in danger of losing those ratings because our banks, led by the Commonwealth, have over-expanded lending, particularly in housing...
Sales statistics are derived from information provided on the ‘Notice of Sale or Transfer of Land’ form that is lodged with the Land and Property Information NSW at the Department of Lands.
A good article for the boffin’s amongst us.
If the banks get tougher, will prices start falling?
If you take a look at Robertson's graph below, you see that a $40,000 deposit can leverage itself into a $800,000 loan with a 95% LVR, a $400,000 loan with a 90% LVR but only $200,000 with an 80% LVR.
Quite a dramatic difference, don't you think?
Yes, but I think that graph is simply showing the maximum possible loan given a constant deposit amount against different LVR percentage.This analysis makes a simple, and very incorrect assumption that loan serviceability is not taken into account at all!
Try going to a bank, with say a $40k deposit, and an income of say $50k, and see if they will lend you $800k! Fat chance......
So, garbage in = garbage out.....
Cheers,
Beej
This analysis makes a simple, and very incorrect assumption that loan serviceability is not taken into account at all!
Try going to a bank, with say a $40k deposit, and an income of say $50k, and see if they will lend you $800k! Fat chance......
So, garbage in = garbage out.....
Cheers,
Beej
This analysis makes a simple, and very incorrect assumption that loan serviceability is not taken into account at all!
Try going to a bank, with say a $40k deposit, and an income of say $50k, and see if they will lend you $800k! Fat chance......
So, garbage in = garbage out.....
Cheers,
Beej
Reasonable enough if you use $40k deposit. But again and again, you are completely ignoring the UNDERLYING MESSAGE. (and again, there is a rational reason why you do so because you don't like what you are hearing anyway)
So let's ignore the 95% LVR Ratio on the same 40k deposit and only focus on 90% to 80%. The difference is still, nonetheless, dramatic right? $400,000 to $200,000. If LVR was further reduced to 75%, then it's only $160k.
You cannot argue against the maths.
I'm sure you can find instances in history, both in Australia and in developed countries around the world, that such LVR for residential property was THE NORM for banks.
Read up on the history of credit bubble, the introduction of securitisation, the role of central bankers in "regulating" the bank industry to take on more leveraging (therefore, giving the banks' CEOs the motivation to genereate more short term profit) and you will understand why LVR was significantly increased over the past 2 decades.
The ability to sustain the property bubble will largely depend on the availability of credit. The recent trend has been the gradual decrease in LVR amoung the major banks and smaller credit unions.
In response to Temjin above and others who responded to my comment:
No, I cannot argue with the basic maths, but I can argue with the use of the maths to suggest a little tightening of LVRs will have that big an effect on the property market. Here's why:
I'll start with a few facts:
1) LVR restrictions are usually only an issue for FHBs, as others have much lower LVRs to the extent that loan serviceability is the ONLY issue for them.
2) FHBs make up only ~25% of the market right now, and that's above the long term trend of ~20%. So really this discussion only concerns 1/4 of the total market in terms of any impact, albeit an important segment with respect to it's potential flow through effects.
3) Average FHB loan is currently $280k (RBA stats). Average FHB home purchase price is historically about ~85% of the median house price, so let's say that's about $350k. Therefore, AVERAGE FHB deposit (including grants etc of course) must be around $70k. of course SOME buy with less, and some more, but that IS the average figure.
A survey by Fujitsu Consulting (which has consistently produced realistic and empirically grounded reports on economic and financial issues) found that 30 percent of First Home Buyers had loan to valuation ratios of 95 percent (Australian Financial Review, March 21-22 p. 20). Only 12.5% of First Home Buyers had a loan to valuation ratio of under 80% (Fujitsu Consulting February 2009 Stress-O-Meter Update, p. 39). Together with anecdotal evidence that The Boost has ignited activity in the sub-$500,000 price range, this implies that the average First Home Buyer is relying upon the government grant for more than 50% of the deposit.
4) Therefore the average LVR for a FHB is around 80%
So you do the rest of the maths from there!
Cheers,
Beej
Unfortunately, this is not a fact. LVR restrictions, in an addition to other credit tightening methods, have been placed ACROSS for ALL BORROWINGS for ANY type of assets regardless on the creditworthiness of the borrowers.
No you are misunderstanding what I have written. People buying their 2nd/3rd properties etc, whether upgrading or buying for investment, already typically have loads of equity from their first purchase (which can be used to fund the deposit for an investment purchase, or pay for a big chunk of the new house). So they are usually on LVRs of 50% or less, certainly less than 80%. So therefore their ability to obtain finance is unaffected by a policy change by their bank to require a 95%/90%/85% etc maximum LVR.
Get it?
So you built a straw man and then used that to try and dispute my other facts, which ARE fact. The $280k average FHB figure comes from RBA figures published last week and discussed at length here. The median house price comes from ABS and other stats.
This government report here (http://www.aph.gov.au/library/pubs/rn/2006-07/07rn07.htm) has figures that show that the average first home purchase is around 85% of the median house price figure (partly because FHBs often purchase units which as we know aren't included in median house price figures).
So therefore the average FHB deposit IS about $70k, perhaps even slightly more.
So those ARE facts. My analysis stands - try again after understanding my first point properly.
EDIT: And PS; re your credit growth chart - how about posting the one that shows lending growth for residential housing only?? The banks have been rationing in the commercial sector while the residential housing finance sector has been GROWING for the past 6 months right? Do you dispute this? (See http://www.abs.gov.au/ausstats/abs@.nsf/mf/5609.0).
Cheers,
Beej
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