The Great Aussie Housing Bubble - Reality or Fantasy?

[prawn_86]

There must be rather more local investors surely. Aren't O/S investors restricted to buying new builds?
Also any O/S investor buying now must be taking on a currency risk unless they think the AUD cannot go down any further.

Technically yes, but there are dozens of ways to get around the new build law, and the FIIRB has never fined or punished anyone for breaking the rules (despite it happening on numerous occasions).

Investors are willing to wear the currency risk to diversify out of China, especially as most are buying all cash

 

[Bill M]

I don't think Aussie housing is in a bubble either. Prices as we all know depends on area, Sydney has a problem of very little supply and too many buyers. I sold a property in Sydney only 6 Months ago and the buying competition was fierce, why? Because when you got a well presented unit in Australia's largest city in a beach side suburb everybody wants it and they are willing to pay big bucks to get it. There is very little good stock in beach side suburbs.

That's Sydney, now I will move on to the Central Coast of NSW. People complain of foreign buyers but foreigners do not buy up in this area. How is it prices are going up here too? Again the Sydney flow over and retirees move up this way. Foreign buyers are not interested in this area but prices are steadily moving up. You can buy brand new 4 br homes with 2 bathrooms and double garage with all fences and turf supplied for under 500K and they all sell, no left overs.

Look at all the inclusions here: http://www.realestate.com.au/property-house-nsw-hamlyn+terrace-119545055

Moving on to the Gold Coast. My family is selling a free standing house at a beach side suburb of the Gold Coast QLD. I am overseeing the sale of this property. I can tell you that there are no foreign buyers interested in this area, they are all Aussie buyers, most of them are under the age of 40 too. Competition up here is nothing like Sydney, it is a slow moving game but properties are still being sold for good prices. The majority of buyers up here want location first and anything else after that, this property will sell too but we will have to wait for the right buyers. The younger buyers up here seem astute, professional and know exactly what they want. Most want to buy an older house and renovate it and turn it into Million $ properties.

Gold Coast housing is chugging along quite well and there are a lot of renovations going on up here, not to mention the massive redevelopment of the Pacific Fair Mall. When finished it will be the biggest mall in Queensland. There seems to be a lot of work going on in The Gold Coast and tradies are flat out. Gold Coast seems to be very alive and well and it is growing year after year.

 

[kid hustlr]

All the nay sayers have been saying the same years, yet prices go up. As I hear the smart people on this forum say all the time: "what has to happen for you to admit you are wrong"

I'm by no means a property bull but I can face the facts and can see what's going on in front my eyes. The short term direction for house prices is up.

Back of the envelope stuff but food for thought:

3 years ago you could buy a nice 2 bed apartment near the city of Sydney for say 600k. Rent 550 a week. Interest rates 6%

That's 27500 in rent a year, less property management and strata lets call it $22,500 for arguments sake. to have that 'flatly geared' (aka, washing its face) you would of needed about 200k deposit. the 400k in interest is covered by rent (give or take)

NOW:

Same 2 bed apartment lets call it 800k rents for 600 a week, interest rates 4%?.

That gives rent of 31200 less fees and strata lets call it 26,000 a year. to have this 'flatly geared' (aka washing its face) you would need a 200k deposit, the other 600k is covered by rent (give or take).

Once could argue relative pricing hasn't changed, in fact by numbers probably skew to the fact housing has got cheaper.

 

[wayneL]

By that argument any sharp rise in interest rates would see property waaaaaay overvalued.

 

[tech/a]

By that argument any sharp rise in interest rates would see property waaaaaay overvalued.

And what would see a sharp rise in interest rates?
I'm not seeing a sharp rise in inflation any time soon?
What do you see?

 

[Bintang]

And what would see a sharp rise in interest rates?
I'm not seeing a sharp rise in inflation any time soon?
What do you see?

Is there a scenario under which the banks would have to raise mortgage rates irrespective of what the RBA does with the cash rate?
Could such a scenario be caused by the cost of the banks offshore funding being increased?
I have no idea myself.
I am just asking the question because I don’t understand how the banks offshore funding works and what kind of risk it poses, if any.

 

[wayneL]

I wasn't making a prediction.

 

[kid hustlr]

I think talking about banks offshore funding costs changing leading to a rise in mortgage rates is drawing a long bow.

No one knows the future, but I've not seen an economic crisis where everyone knew it was coming.

 

[sydboy007]

Is there a scenario under which the banks would have to raise mortgage rates irrespective of what the RBA does with the cash rate?
Could such a scenario be caused by the cost of the banks offshore funding being increased?
I have no idea myself.
I am just asking the question because I don’t understand how the banks offshore funding works and what kind of risk it poses, if any.

The AAA rating of the Federal Govt backstops the states and banks.

With $50B deficits looming large, we've been told the line in the sand for a downgrade is 30% Government debt to GDP.

The banks get a 2 notch rating increase due to borrowing the Fed's AAA rating.

No idea what each notch is worth in terms of basis points, but would assume irrespective of the interest rates the RBA has set the banks would be paying more as they would be considered higher risk.

We then get into the issue of will the banks still be able to convert their foreign borrowings converted in AUD on a reasonable cost basis.

As the GFC showed the cost of borrowing can jump dramatically in a very short period of time, and if we have a run on the currency similar to what the Russians have experienced, then we're faced with either rationing credit to keep rates lower, or increasing them to punishingly high levels. being a serial CAD country, with not a lot going for us in terms of being competitive in the tradeables sector, it wont be pretty if sentient turns sour on Australia,

Below will help you understand how the financing works. About 6 or 7 pages.

http://www.rba.gov.au/publications/bulletin/2015/mar/pdf/bu-0315-6.pdf

this chart illustrates just how expensive borrowing can get for the banks



Our banks are basically giant building societies these days

 

[wayneL]

And what would see a sharp rise in interest rates?
I'm not seeing a sharp rise in inflation any time soon?
What do you see?

FWIW

I see an economy where propping up RE values is very important to preserve the viability of said economy. So I *expect* to see a continuation of low interest rates.... interest rate increases will blow the economy the f**k up.

 

[Bintang]

We then get into the issue of will the banks still be able to convert their foreign borrowings converted in AUD on a reasonable cost basis.

Thanks. That was all very helpful.
The RBA paper certainly answers the question about funding costs but it doesn’t examine total offshore funding liabilities and the risks associated with this. So I remain curious.

 

[kid hustlr]

The AAA rating of the Federal Govt backstops the states and banks.

With $50B deficits looming large, we've been told the line in the sand for a downgrade is 30% Government debt to GDP.

The banks get a 2 notch rating increase due to borrowing the Fed's AAA rating.

No idea what each notch is worth in terms of basis points, but would assume irrespective of the interest rates the RBA has set the banks would be paying more as they would be considered higher risk.

We then get into the issue of will the banks still be able to convert their foreign borrowings converted in AUD on a reasonable cost basis.

As the GFC showed the cost of borrowing can jump dramatically in a very short period of time, and if we have a run on the currency similar to what the Russians have experienced, then we're faced with either rationing credit to keep rates lower, or increasing them to punishingly high levels. being a serial CAD country, with not a lot going for us in terms of being competitive in the tradeables sector, it wont be pretty if sentient turns sour on Australia,

Below will help you understand how the financing works. About 6 or 7 pages.

http://www.rba.gov.au/publications/bulletin/2015/mar/pdf/bu-0315-6.pdf

this chart illustrates just how expensive borrowing can get for the banks

View attachment 62296

Our banks are basically giant building societies these days

View attachment 62297

Bolded is the key factor. I think a currency crisis is the only thing that could fathomly cause a collapse in house prices.

So the question becomes - Do you think we will have a currency crisis?

 

[McLovin]

Bolded is the key factor. I think a currency crisis is the only thing that could fathomly cause a collapse in house prices.

So the question becomes - Do you think we will have a currency crisis?

It also assumes that the government won't provide funding to the banks if there was a currency crisis. Short term debt is at 20% of bank funding these days, way down on where it was. No doubt a conscious decision to reduce that risk. More importantly, offshore short term funding is about 12% of total bank liabilities. The big rise in deposits share of the funding mix is a positive, IMO. Most bank funding is domestic, and given the entrenched oligopoly in the banking sector an increase in offshore borrowing rates will probably feed through to lower domestic deposit rates. Comparisons with Russia are a bit extreme.



FWIW, I sold all my bank shares over the last few months.

 

[Bintang]

It also assumes that the government won't provide funding to the banks if there was a currency crisis. Short term debt is at 20% of bank funding these days, way down on where it was. No doubt a conscious decision to reduce that risk. More importantly, offshore short term funding is about 12% of total bank liabilities. The big rise in deposits share of the funding mix is a positive, IMO.

According to Macrobusiness the total bank foreign liabilities has gone from around $500 bln in 2008 to around $750 bln now. So while the funding mix has changed the exposure to offshore funding has increased in absolute terms. And while the offshore short term funding percentage of total bank liabilities has gone down the total absolute amount remains about the same. So has risk really been reduced?

 

[McLovin]

According to Macrobusiness the total bank foreign liabilities has gone from around $500 bln in 2008 to around $750 bln now. So while the funding mix has changed the exposure to offshore funding has increased in absolute terms. And while the offshore short term funding percentage of total bank liabilities has gone down the total absolute amount remains about the same. So has risk really been reduced?

On a net or gross basis?

Either way, the run up in foreign debt generally is a problem. In a low/no growth world we can't keep funding our consumption that way. We have a huge savings pool in super that could be partially used to reduce this reliance on overseas debt.

 

[kid hustlr]

Good chat Mclovin.

Your thoughts seem to echo mine. As extravagant as our house prices are (and they are) I can still see an investment case for them.

Trying to predict crashes leads to years of low returns for an investor.

I'd argue that huge amount of cash held in deposits is a positive sign for the share market fwiw.

 

[craft]

Bolded is the key factor. I think a currency crisis is the only thing that could fathomly cause a collapse in house prices.

So the question becomes - Do you think we will have a currency crisis?

No because we will do whatever is required to fund the Current Account Deficit. ie the cash rate will be set at the level required to attract capital even if that means it is set higher than what is otherwise ideal for the current domestic economy requirements.

This is the nub of the housing risk.

Real estate for private consumption is not self liquidating - it requires income produced from the economy to service it. National income is falling and interest rates as an expense reduction shock absorber, whilst working at the moment (maybe working too well in the circumstances) are ultimately limited because of the CAD.

Check out Aus/US govt bond spread to see how much dampening may be left in the shock absorber before it bottoms out - USA is thinking about raising as we are thinking about easing but can we fund the CAD with a negative spread?

If the RBA plays hard ball on rates to suit the domestic economy over attracting capital then one saving grace is the nature of our exports and the make-up of our external liabilities/assets naturally acts to reduce the current account as the dollar falls. If the RBA won't give creditors what they want and they in turn won't lend the resulting currencies plunge would eventually see the CAD eliminated - but there would be plenty of destruction and the country as a whole would end up with a reduced GDP in purchasing power parity terms.

High valuations create high risk.
High leverage ratio's create high risk.
Non self liquidating structures for buying assets introduce the risk of requiring revenue form other sources.
Volatility in 'other' revenue adds to the risk.

Bubbles are identified after a 'range' of possible outcomes have gone 'one' particular way and produced a bad outcome ie a bust. Is it a bubble? depends on the future outcome - so you need to know the future to categorically say its a bubble, but you can tell in the present that there is some big risks that aren't being rewarded with adequate internal return - and more worrying point seems to be that most don't see the downside risk just the risk of missing out on short term capital growth. - that's the real warning sign that things could go very badly wrong.

 

[McLovin]

Good chat Mclovin.

Your thoughts seem to echo mine. As extravagant as our house prices are (and they are) I can still see an investment case for them.

Trying to predict crashes leads to years of low returns for an investor.

I'd argue that huge amount of cash held in deposits is a positive sign for the share market fwiw.

I'm not actually arguing an investment case for housing investment in Australia. I actually think it's pretty grim*, although a former colleague from London recently relocated to Melbourne "because we can actually afford to buy a home here". House prices seem pretty close to the envelope. It doesn't seem like much of a shock would prompt at least a correction.

I was more addressing the point of how the banks would cope under such a scenario of being frozen out of international debt markets.

I'm completely befuddled by home prices. Not just in Australia I might add.

*Grim as in at best I reckon you'll get inflation back over the next 10 years, in Sydney at least.

 

[kid hustlr]

ALlways enjoy craft/mclovin posts and I should add my currency crisis comment was more of a rhetorical question to spark discussion rather than a view (and it worked!)

To put my cards on the table - I was iffy several years back about property but felt at my age and situation the 'safe' play was to buy a PPR - I had the deposit and I just wanted to 'life hedge' for lack of a better term whilst I developed a plan. It proved to be a good move to the extent the hedge worked, now I wish I'd taken on additional risk lol.

Craft,

I'll need to read your thoughts again but they seem far to intelligent for a housing price discussion

'High valuations create high risk.
High leverage ratio's create high risk.'

Completely agree.

I also agree with your notion that the RBA will look after the CAD above anything else, although I think managing house prices would be on the agenda as the implications of a collapse would be dire.

Mclovin - I didn't think housing would beat inflation over the next 10 years, and that was 3 years ago (wrong). I believe it to be true now though fwiw.

Quite scary to think about the possible loss of 'wealth' for the average Aussie on an internation scale when the AUD is falling heavily and house prices turn.

 

[So_Cynical]

Last night, ABC the Business had a little smart story on housing, interest rates, the RBA etc.

http://iview.abc.net.au/programs/business/NU1504H029S00#playing

Starts at 1.30 and runs to 6.18 - love the coconut thinking, there really has been a tsunami of shells over the last 6 years.