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The future of Australian property prices

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Here it is from Mish after a 30% drop in home sales Vancouver and 42% drop in Calgary.

http://globaleconomicanalysis.blogspot.com/2010/07/vancouver-home-sales-drop-30-percent.html
Housing Collapse Cascade Pattern

* Volume drops precipitously
* Prices soften a bit
* Inventory levels rise slowly
* High-end home prices remain relatively steady for a brief while longer
* The real estate industry tries to convince everyone it's "business as usual" and homes are affordable because rates are low
* Bubble denial kicks in with media articles everywhere touting the "fundamentals"
* Stubborn sellers hold out for last year's prices as volume continues to shrink
* Inventory levels reach new highs
* Builders start offering huge incentives to clear inventory
* Some sellers finally realize (too late) what is happening
* Price declines hit the high-end
* Increasingly desperate sellers get creative with incentives, offering new cars, below market interest rates, trips, etc
* Gimmicks do not work
* Price declines escalate sharply at all price levels
* The Central Bank issues statements that housing is fundamentally sound
* Prices collapse, inventory skyrockets, and builders holding inventory go bankrupt
Click to expand...

So how about the property bulls and bears, right now, stop their arguing and we use the above model to quantify where we are as a country.

I will use tonight to try and compile charts for
1. Major city home sales
2. Major city home prices
3. Major city inventory levels
4. High end home prices in major cities

so we can update these at appropriate intervals over the coming months.

It would also be wise to keep an eye out for articles about:
* "Business as usual" spruiks by the RE industry
* "Solid housing fundamentals" articles by the MSM
* Developer/Builder incentives to get people into properties
* Distressed seller incentives to get people into properties
* Central bank comments on housing

I think that way everyone on this thread can agree on a set of quantifiable metrics and sentiment indicators. We can use these to gauge "the future of Australian property prices" without arguing so much.

Now (new financial year/quarter, RBA rate decision just passed, most financial data up to date) is a good time to start this sort of analysis and this thread is as good a place as any to follow it.

Charts to follow...
 
Interesting article there Sinner, would say we are at about step 5 as an average across our sector.
 
Last time I checked we are not in the USA with the non recourse loan and toxic debt situation where banks were unloading that kind of debt to "others" :banghead: Last time I checked we still had Lenders Mortgage Insurers and APRA taking the moral high ground as well as adding another layer of safety to the industry.

http://www.apra.gov.au/Statistics/upload/MBS-May-2010.pdf go here to check out the May statistics of how "fiscally sound" our banks are compared to what happened in the good ol USA.

Also note that people will eat brown rice and kerosene before they will have the "shame" of having their house sold.

Still waiting for this naysayer trainsmash to occur. Must be going on 8 years now. Slow moving train I am thinking. :banghead:

All for pie charts and demographics and PDF files and navel gazing analysis. Bring it on. Time is going to be the telling factor. You can pear hunt all the financial data you want.
 
While conducting some research today in regards to Australian homeowners equity as a % of mortgage value (if anyone was curious the value is roughly 50%) - I came across this Feb 2009 paper from RMIT:

I will include the conclusion here, readers are encouraged to view the full paper and draw their own conclusions. Anyone with half a brain would see that a 10% decline in prices is not unreasonable in even a healthy bull market but if the numbers on this paper are correct (and from my understanding, they are) then the consequences of a 10% decline in house prices could be huge for Australia. Certainly puts to rest the rubbish that Battellino was spouting about those taking on most of the debt being the most able to service it "if you average it out across the whole country". Boo Battellino! At least Glenn Stevens has his head screwed on.

http://mams.rmit.edu.au/jq98xwbgf0fpz.pdf
Concluding Comments
Price declines of 10 percent could leave over 300,000 Australians with negative equity in their homes. The majority of those with negative equity own their primary residence and have no other property investments. They are typically younger couples who have taken out large mortgages to establish themselves as home buyers during a period when house prices were booming. Though most are employed in either full time or part time jobs, they lack savings that they can fall back on in times of financial stress,
and will have to repay relatively high credit card balances and other loans (e.g. car loans) that jeopardise their financial position. These findings suggest that there is a group of young home buyers vulnerable to default and repossession if labour markets deteriorate. Loss of employment with such high levels of debt and negative equity in their homes could be devastating. Policy makers might be advised to consider emergency measures to help these people stay in their homes. There are good economic reasons for such intervention in addition to the social policy concerns raised by the danger of default and repossession. Evidence from the United States suggests that mortgage foreclosures have particularly adverse impacts on housing market activity and prices. Substantial declines in house prices at a time when households have already suffered large wealth losses due to falling share prices, could seriously weaken domestic
consumption, and increase the prospects of serious recession. In the longer run governments might consider ways in which mortgagors might insure their housing equity, and avoid the kind of risks that now threaten the wellbeing of tens of thousands of younger Australian homeowners.
Click to expand...

It is worth remembering an argument I had with a cousin of mine (working at Macquarie Bank at the time as someone who allocates rich peoples money into assets) in 2008, post Lehman but pre AIG where she emphatically stated to me that:
"subprime is only a tiny tiny portion of the US RE market, and of that tiny tiny portion only a tiny tiny portion are in negative equity".

"Well true" I said, "cousin o mine, unfortunately the real estate trade has been leveraged to the eyeballs so all that's required for a shock is a tiny tiny decline". I was discounted as nothing less than a fool at the time - but reality didn't take long to catch up with euphoria in the end.
 
LOLOLOL Sinner. Your "cousin o mine" voiced an OPINION and you have taken this and turned it into how clever you are at picking the RE market?

PMSL ..... 18% - 21% is hardly a tiny, tiny portion of subprime lending. Let's not forget the lending also had a ratchet involved called an "adjustable rate" whereby the banks can increase interest rates at will. LOLOL

You are funny ! WE DO NOT HAVE SUB PRIME LENDING OR NON RECOURSE LOANS IN AUSTRALIA. If you have any CRAA the banks will not give you a loan. If you do not meet criteria set by APRA and the banks as well as LMI's YOU DO NOT GET THE LOAN. Don't get me started on VALUATIONS .. all part of the CRITERIA to get a loan to buy a house.

Get some facts. Try here for a start ... http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

P.S. ... Have been in the RE industy as well as a MORTGAGE ORIGINATOR for over 20 years. (you know the guy that goes to the bank on your behalf to get the loan so you can buy the house of your dreams so technicaly I have no freaking idea what I am talking about)
 
trainspotter said:
LOLOLOL Sinner. Your "cousin o mine" voiced an OPINION and you have taken this and turned it into how clever you are at picking the RE market?
Click to expand...

Mate, I didn't "pick" anything, nor do I view my thoughts on the RE market as clever, just plain commonsense. In any case, she did not voice an opinion, she voiced what she believed to be fact as a professional: "tiny tiny portion of subprime is in negative equity therefore there is nothing to worry about". It might interest you to know I saw her about a month ago and her attitude has changed vastly.

PMSL ..... 18% - 21% is hardly a tiny, tiny portion of subprime lending. Let's not forget the lending also had a ratchet involved called an "adjustable rate" whereby the banks can increase interest rates at will.
Click to expand...

Errr 18-21% was not the number of homes in negative equity when the house price collapse started in the US. The number was far far lower than that. Negative equity ratcheted up only once house price declines kicked in.

LOLOL

You are funny ! WE DO NOT HAVE SUB PRIME LENDING OR NON RECOURSE LOANS IN AUSTRALIA. If you have any CRAA the banks will not give you a loan. If you do not meet criteria set by APRA and the banks as well as LMI's YOU DO NOT GET THE LOAN.
Click to expand...

Trainspotter, please calm down. I did not claim we have subprime in Australia or that the quality of our loans is subprime. I was merely trying to illustrate using an example that in once leverage levels are extremely high in any trade then only a small % downmove has the ability to do severe damage. In any market.

Get some facts. Try here for a start ... http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

P.S. ... Have been in the RE industy as well as a MORTGAGE ORIGINATOR for over 20 years.
Click to expand...

Please show which statements I have construed as fact which are not. Or calm down. Either would be good.

Fact, from your own wikipedia link: In March 2008 roughly 10% of US homeowners had negative equity. Not 20%.

But we can also find another great quote from your wikipedia link:
Economist Stan Leibowitz argued in the Wall Street Journal that although only 12% of homes had negative equity, they comprised 47% of foreclosures during the second half of 2008. He concluded that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, credit worthiness of the borrower, or ability to pay.
Click to expand...
 
Nope ... go back and read your post. "subprime is only a tiny tiny portion of the US RE market, and of that tiny tiny portion only a tiny tiny portion are in negative equity". 18% to 21% of ALL the loans in America were of a subprime nature ...... is hardly a small figure IMO.

From wikipedia "As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit around the world."

My hypothesis is that due to the likes of APRA and LMI like Genworth and QBE underwriting the banks for losses for deafults it is extremely unlikely to see the negative downward spiral the naysayers are so willing to spew forth.

Using leverage and negative equity as your thesis to predict this catastrophic "oncoming decline" of RE in Australia then what percentage do you believe are in negative territory and at what leverage rate?

The LMI will have to fork out to the banks thusly saving the capital of the lenders from becoming toxic therefore decreasing the risk of interest rates being increased from the lenders to cover this shortfall.
 
Moreover, since the dawn of RE and buyers and sellers this same "conclusion" has been around like an albatross around ones neck. I remember when I bought my first house at the tender age of 21 in 1991 .... the block was 20k and the house was 50k. Everyone and I mean everyone told me not to buy it as I will go broke because I am too young (FHB) I will lose my job, prices will crash, my car loan would break me ...... sound familiar? BTW ... it was a Government loan and I borrowed 100% of the money. Leveraged my @rse off to get in there.

Sure ..... some of the people I know did a similar thing and had to sell their homes due to marriage breakdowns, loss of job, having only one income due to babies etc. ad infinitum. Sound familiar?

History never repeats ...... or does it?

Using the American model you can clearly see that the lenders were their own worst enemies by ratcheting the interest rates to cover the toxic debts they carried. Whooooooooopsies. You can see it now can't you ? :confused: Kinda like a snail cam effect or even better a knock on effect. Get me?
 
What will happen if or when interest rates goes up another 2% or more, how many home owners and or investors will be in financial trouble?
How many of them will have to sell?
How big a proportion of the real estate market is that?
What is a safe level of leverage in case of a 2%, 2.5% or 3% increase in interest?
 
trainspotter said:
Nope ... go back and read your post. "subprime is only a tiny tiny portion of the US RE market, and of that tiny tiny portion only a tiny tiny portion are in negative equity". 18% to 21% of ALL the loans in America were of a subprime nature ...... is hardly a small figure IMO.
Click to expand...

Is this a joke? I was quoting something that was said to me, as an anecdotal example. I did not make the claim that subprime was a tiny portion of the market.

My hypothesis is that due to the likes of APRA and LMI like Genworth and QBE underwriting the banks for losses for deafults it is extremely unlikely to see the negative downward spiral the naysayers are so willing to spew forth.
Click to expand...

Right. Insurance companies will always pay out in full on RE blowouts no worries.

Using leverage and negative equity as your thesis to predict this catastrophic "oncoming decline" of RE in Australia then what percentage do you believe are in negative territory and at what leverage rate?
Click to expand...

Sorry, where did I predict a catastrophic decline? You use quote marks as if that is actually something I said?

Right now the negative equity rate is extremely low as to be negligible in Australia. The paper I posted was to model what would happen in case of a hypothetical 10% decline in house prices. It is for interested parties to examine, that is all!

I want to have a discussion, repeating myself is extremely boring.

The LMI will have to fork out to the banks thusly saving the capital of the lenders from becoming toxic therefore decreasing the risk of interest rates being increased from the lenders to cover this shortfall.
Click to expand...

I am going to have this framed.
 
No joke ... you placed the conversation forward and I remind you she is a MACQUARIE EXPERT ! "It is worth remembering an argument I had with a cousin of mine (working at Macquarie Bank at the time as someone who allocates rich peoples money into assets) in 2008.

Worth remembering for WHOM??? I wasn't there at the time ... ROFL.

Your words not mine. It was HER opinion "cousin o mine" that led you to your conclusion.

Do you know anything about banking regulations in Australia? APRA for example, LMI to underwrite LVR as well as surplus incomes?? DSR's ?? LOLOL do you actually knbow what you are talking about?

YOU admit that "negative equity" is extremely low in OZ but you throw up US as the example?? HENNY PENNY THE SKY IS FALLING .. PMSL ...This is the basis for your posts for "examination" ??????

I would love nothing better than to have a conversation as to what is ACTUALLY happening in OZ ... it appears that your "hypotheticall" research paper is nothing more than that.

I want to have a discussion also ... based on fact ... not some grab bag of bovine extreta that is thrown up here for the masses to be taken as fact because you have an OPINION because a "cousin o mine" had an epiphany.
 
finnsk said:
What will happen if or when interest rates goes up another 2% or more, how many home owners and or investors will be in financial trouble?
How many of them will have to sell?
How big a proportion of the real estate market is that?
What is a safe level of leverage in case of a 2%, 2.5% or 3% increase in interest?
Click to expand...

Yeppers finnsk .... when do you believe this will happen? What are the indicators for this to happen? If interest rates go down in the same magnitude what will be the same result? More excessive borrowings? Which is the more likely to happen?

How many will have to borrow more? Or less as the case may be? It is more likely due to GLOBAL macro economics (there is that naughty words again) that it is unlikely for our market to overheat to the levels you :Dare describing.

Ahhhhhhhh welll ...... property is bliss. How I wish for the 17% of the Keating years........ lolol
 
Yadda yadda yadda ........ more white noise ........ we aint seen nothing yet ... blah blah blah ..... Banking confidence down in the minors like Bank of Queensland !! Pffffffffffffft ..... What is the loan book worth?? I will toss you for it and I still wont be late home for dinner. Get a grip.
 
explod said:
Interesting article there Sinner, would say we are at about step 5 as an average across our sector.
Click to expand...

* Volume drops precipitously
* Prices soften a bit
* Inventory levels rise slowly
* High-end home prices remain relatively steady for a brief while longer
5* The real estate industry tries to convince everyone it's "business as usual" and homes are affordable because rates are low
* Bubble denial kicks in with media articles everywhere touting the "fundamentals"
* Stubborn sellers hold out for last year's prices as volume continues to shrink
8* Inventory levels reach new highs
* Builders start offering huge incentives to clear inventory
* Some sellers finally realize (too late) what is happening
* Price declines hit the high-end
* Increasingly desperate sellers get creative with incentives, offering new cars, below market interest rates, trips, etc
* Gimmicks do not work
* Price declines escalate sharply at all price levels
15* The Central Bank issues statements that housing is fundamentally sound
* Prices collapse, inventory skyrockets, and builders holding inventory go bankrupt
Click to expand...

Yep, could be or maybe IMO we are at point 7 or 8.

The RBA deputy governor Ric Battellino might have us at point 15. :eek:
http://au.biz.yahoo.com/100615/2/2dmvv.html
 
trainspotter said:
Last time I checked we are not in the USA with the non recourse loan and toxic debt situation where banks were unloading that kind of debt to "others" :banghead: Last time I checked we still had Lenders Mortgage Insurers and APRA taking the moral high ground as well as adding another layer of safety to the industry.
Click to expand...

Yep and basically so does Canada. Guess they shouldn't be looking at any list gathered from US data either. Point of the article? Canada (like Australia) had not experienced property falls. The article reports how some Canadian cities are now showing property falls.

The list appears based from the US, as pointed out, some of those items should not be included for Australia or even for Canada. You want to edit it?

So what was the point to "cus Macquarie"? Was it, like you, cus Mac' laughed at others opinions? Don't we all have a story or two like this? Point is "on property" YOU along with others ARE STILL RIGHT.

Or is the table turning and that's what has fired you up so much?

I have watched for months property volumes drop even with higher investment property sales.
Prices have a good chance of following lower.

trainspotter said:
Yadda yadda yadda
Click to expand...
 
I just hope none of you leveraged dudes go on strike. If you do, then we are all in for a world of hurt. If you don't go on strike, then maybe it won't hurt as much. Taking one for the team is so much better for the unleveraged. We'll just sit back and help you out in your time of need. :)
 

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