RBA's view

The RBA governor said future economic shocks that would hurt Australia could happen in a number of ways, such as a severe economic slowdown in China and a collapse in dwelling prices.

"The ingredients we would look for as signalling an imminent crash seem, if anything, less in evidence now than five years ago," he said.

"By the same token there are things we can do to improve our prospects or, if you will, to make a bit of our own future luck," he said.  "Some of the adjustments we have been seeing, as awkward as they might seem, are actually strengthening resilience to possible future shocks.  Higher more normal rates of household saving, a more sober attitude towards debt, a re-orientation of banks funding, and a period of dwelling prices not moving much come into this category," Mr Stevens said.

Read more: http://www.news.com.au/business/we-should-build-on-our-luck-rbas-stevens/story-e6frfm1i-1226433865255#ixzz21XBd1kh4

Unemployment

I like this quote from the Chief Economist from Morgan Stanley:
"Traditionally what has hurt people has not been rising (interest) rates but rising unemployment. I don't care what rate you're paying, if you have a mortgage five times your income and you lose your job, you're toast.''
See Daily Telegraph from 2009.
Easy credit followed by high unemployment rates is a good indicator of whether there will be a residential property bust.  Look at Spain, with 25% unemployment for example.  So at present, Queensland should be safe.  But if the mining and construction boom ends....

Negative Equity

The share of homes with mortgages worth more than the property's value increased at the end of last year as the housing market stalled and prices turned lower. The rise suggests an increase in negative equity, where a mortgage can be worth more than the value of a house. Property information group RP Data said that 6.4 per cent of homes were valued at less than their purchase price in the December 2011 quarter, rising from 4.9 per cent of the market in the September quarter. By city, Brisbane fared the worst with 9.2 per cent of property deemed to be "underwater" in financial terms, followed by fellow mining state capital Perth at 7.4 per cent.
See Brisbane Times, Smart Company and Business Spectator

A Reader's Response

Here is a note from a reader:

I read with interest your article “Positive sign for Brisbane Property market.”. When an individual or some organisation with an interest in selling real estate starts telling the world (or anyone else that will listen for that matter), that race is on again and property sales are going just short of gangbusters, you can bet they are not.  

The sellers and marketers of real estate need to understand that the market of potential buyers has changed and we are not fools this time round. We’ve all seen someone close by with mortgage stress trying to pay for something they paid an inflated price for in the first place.  And those properties that have now become liabilities as they continue to fall in value. Just go and ask your bank for a loan to buy “off the plan”, you won’t even get an interview. What does that tell you?

About 24 months ago, a New Farm/Valley real estate agent told me he expected 2006 prices by Jan 2012.  Now he’s revised that to saying year 2000 prices and dropping. That’s no gain in 12 years.  A really good investment isn’t it.  

Take a drive around at night to any of the big new apartment complexes now on the market. Either they can’t afford electricity or they are empty, take your pick – the lights are out on half the block or more, every night. To say the rental market is tight  - well I disagree.  Down Teneriffe and Newstead way, the signs are out day and night offering 1, 2 and 3 brm apartments to rent.  There’s no shortage and dozens to choose from.

Your writer may indeed have seven positive signs to offer from a seller perspective.  Let me offer rule Number One in commerce: The smart money is made upfront during the purchase process, not at sale time 30 years later (if one is lucky enough to be able to keep up the payments with interest for all that time and, by sheer luck, the market is up at the time one wishes to sell).  

In simple terms, it’s made upfront buying at below market value. Real estate in Australia is grossly overpriced and regardless of the spin put by real estate marketers, developers the Treasurer et al, let me say to you all, stop wasting your breath, we know the joke.  Money in the bank on-call earning interest with no risk and renting beats buying at inflated prices and a life time of serfdom paying off a mortgage for an overpriced piece of real estate.  When prices fall by at least another 40%, then perhaps a property may be a consideration. Now that’s a more positive outlook.  

Please don’t come back with “investment” property with rental income or negative gearing.  Rents are already at their peak, the ability to pay will set the market, not the owner’s idea of what rent should be.  It doesn’t take too many weeks of no income to ruin an investment.  Rent is insufficient to fund an investment property. I’ve done the sums dozens of times recently. It doesn’t stack up unless you can exclude the ATO’s share of the deal, and that’s not recommended. And let’s not forget CGT later on. Need I continue.  

As mentioned, when prices fall by at least another 40%, then perhaps a property may be a consideration. The smart money unloaded in 2008 and now rent. We’re laughing at the property market now days.

Academic Says Housing Market is Ponzi Scheme

According to Soos, the tipping point for the mark will come when “the household sector is so overloaded with debt there exist no more ‘greater fools’ willing to commit to a lifetime of debt serfdom to purchase property”.

“With few buyers and many sellers, prices stagnate then rapidly fall as assets are unloaded en masse onto the market. With demand falling in the housing sector, coupled to an inevitable increase in unemployment, a vicious deflationary spiral occurs. Economy activity grinds to a halt.”

See article in Property Observer

Busting Bubble?

According to contrarian economist Professor Steve Keen, it was accelerating debt that drove house prices up and it is decelerating debt that is causing the fall.

Keen has argued the significance of private debt in the economy - something which mainstream economists largely ignore. In a recent post on his blog, debtdeflation.com, Keen reveals the debt to disposable income ratio for Australian households has been rising until recently. Now Australians are saving and paying off debt rather than spending and this has a negative impact on house prices.

The end result, Keen argues, is that house prices will fall 40 per cent over the next 10 or so years, or 5 per cent to 10 per cent for 2012.

See Courier Mail and Property Observer

But see a contrary story here and story by Matusik.  Chris Joye from Rismark takes the opposite view.

Spotting a Bubble

An excellent article by Bill Moss, who was very senior at Macquarie Bank, has been published recently.

"I have always believed that no one should ever invest in anything unless the fundamentals are right. If the people who pay the rent or borrow the money to purchase a property cannot afford to keep up repayments, then a property investment fails. After a global financial crisis, the concept of keeping vacant real estate as an inventory item, as the sheiks of Dubai did or as the Chinese and Russians tried to do, is doomed to end in tears."
Read the full article at Property Observer.

Good or Bad Times?

Here are two conflicting articles, published on the same day in Property Observer.

1.  Next year could be the best year in a decade to buy property.

2.  Australia's housing bubble will eventual burst.

Who should you believe?  Who knows?

My view is that, at least for Brisbane, now is a good time to buy established, well located residential apartments, if you plan to buy and hold for the long term.  In my view, not a good time to buy off the plan, but some off the plan developments seem to be doing well.  For example, it is reported that in the first stage of the first building in the Showground Hill development, namely The Green, all the available apartments sold out in about 3 hours.  Not sure how many apartments were actually available -- they may have actually only sold ten apartments!  In any event, there must be some buyers signing contracts.

Property Bubble in Australia is a Myth?

"It is true that real estate agents have a vested interest in not wanting to see the market portrayed as total doom and gloom. Such predictions can really be a dampener if you are trying to sell your home.

But are we really about to suffer massive house deflation? It is very unlikely. And it's unlikely because in many places deflation has already occurred and values have steadied. And while it is true that the markets that are rising are few and far between, which suburbs are these big reductions being calculated with? Which houses?

Places like south-east Queensland have certainly been hit hard and not seen increases for years. In prime inner city suburbs in Melbourne and Sydney, to claim that prices will plummet is nonsense - demand is so still so high, that its just not conducive behaviour for a price plunge."

Full story here.

Up or Down or Flat?

According to Chris Joye, Australian housing prices are unlikely to crash, but will more likely tread water.

"While the Aussie share market is still nearly 40% below its 2007 peaks, Australian house prices are about 10.3% above their pre-GFC highs. Notwithstanding this, we have had effectively no house price growth in nearly one and a half years while household disposable incomes have, according to the ABS, raced ahead at an 7% to 8% per annum rate.

The next major marker will be the August house price index data. This will be a crucial guide to whether Australia's housing market is experiencing an accelerating decline, as folks like the perennial doomsayer Steve Keen would have us believe."

See note by Chris Joye

Michael Yardney reckons property prices are likely to increase, in the next decade!

Property collapse talk is taken out of context

"RPData’s index suggests that maybe the worst is behind us, with the monthly and quarterly results starting to trend upwards. This recovery, however, is likely to be slower than those in the past, as many markets are now priced over $500,000, which presents an affordability barrier to many households and especially investors and first home buyers. It will take some time before wages grow enough to start pushing dwelling prices."

Source: Matusik

Bumpy Ride in Residential Sector

"PROPERTY developers with an exposure to the residential sector are in for a bumpy ride in coming months, with Morgan Stanley analysts predicting a drop in home values of between 5 and 10 per cent.

Stockland and Mirvac have the biggest exposure to the home market but their earnings will be protected from big falls by the strong office market."

See SMH

Growth or Bust?

"Potential home buyers hoping for Brisbane's property market bubble to burst may have to wait another three years, says a leading economic forecaster. BIS Shrapnel has predicted the market will turn around this financial year with an impending mining boom, but warns aggressive interest rate rises could see property prices fall in 2014. BIS Shrapnel analyst Angie Zigomanis said Brisbane's median house price was tipped to increase 15 per cent from $440,000 to $505,000 over the next three years."

See Brisbane Times

China's Property Bubble Deflating?

According to Dragonomics, sales volume in the nine cities it tracks fell by about half since the start of the year.

In Beijing, that has meant rising rents, say real-estate agents.

Zhang Kai, an agent at Home Link in middle-class neighbourhood Tuanjiehu said the number of sales had dropped by half since February and monthly rents for small apartments jumped to about 3000 yuan in June from 2500 yuan a month earlier.

Many apartment owners don't want to sell, he said, because they are waiting for prices to turn around.

The Australian

Too Much Debt

"These figures show a substantial shift in the indebtedness of Australian borrowers, who are now significantly more sensitive to moves in interest rates than they were 20 years ago," Fitch said.

"For this reason, Fitch believes any downturn could be significantly worse than the recession of 1991, on which the current mortgage default criteria is based.

See Brisbane Times

Joye's Myths

An extract from an article by Chris Joye:

"A third myth is the popular claim that luxury, or more expensive, properties outperform cheaper ones. This is just not supported by the empirical data. Analysis produced by Rismark proves that mid-priced homes have actually delivered stronger capital growth than their dearer counterparts. And this also comes with considerably lower risk.

The luxury end of the market is “illiquid” – that is to say, it only attracts, by definition, a small number of buyers and sellers – and is afflicted by far greater risk or volatility. This is highlighted by RP Data-Rismark’s luxury property index, which is denoted by the red line in the chart below. Observe how during 2009 and 2010 the most expensive homes outperformed the broader market. Yet during the recent soft-landing, it has been this same cohort that has tanked, relatively speaking. ...

My sixth myth is that Australian house prices are massively overvalued and set to fall by 20 to 40%. You may recall that my regular sparring partner, associate professor Steve Keen, famously predicted in 2008 that Aussie house prices were “going to fall by 40% or so in the next few years.” Well, he could not have been more wrong. Dwelling prices in Australia’s capital cities are currently 30% higher than their March 2008 peak, just prior to the GFC hitting our shores.

Put differently, dwelling prices are nearly 70% higher than where Dr Keen expected them to be. My other mate, the economist Rory Robertson, challenged Dr Keen to a bet on this note, which the latter lost. As a result, Dr Keen ended up walking from Canberra to Mount Kosciuszko wearing a T-shirt exclaiming “I was hopelessly wrong on house prices” (or something to that effect). ...

Property Observer

When the Resources Boom is Over

"But the minerals boom won't last forever. The second phase of investment is now committed, ensuring strong investment over five years. The boom may last long enough to underwrite a third phase of strong investment in the second half of the decade, or even a fourth phase into next decade. I don't know how long it will last. I do know we need to secure Australia's future when it's over. It may be beyond the horizon of the current government, but our children will have to live with the consequences."

Source: BIS in The Australian

China's Ghost Towns

It is said that there are around 64 million empty apartments in China.

Have a look at SBS and BBC and Time.

So what will happen to the Australian real estate market and Australian economy when the Chinese bubble bursts?

Morning Money's view

Morning Money publishes a newsletter encouraging people to buy stocks and gold, and is adverse to investment in real estate in Australia. From a recent newsletter (not that I necessarily agree):

"we’d been invited to appear at a housing debate in June. According to the organiser of the event, there will be six people on the panel. On the housing-bubble side will be Professor Steve Keen from the University of Western Sydney, David Collyer from Prosper – the group organising the buyers’ strike – and your editor.

On the no-housing-bubble side will be AMP economist Dr. Shane Oliver, Mr. Harley Dale from the Housing Industry Association, and Mr. Christopher Joye from property index firm Rismark.

We’ve been told the date to pencil in is 7 June. When more details are available you’ll read about it here.

We’re looking forward to the debate for a number of reasons. But most of all we’re looking forward to the property bulls providing some original arguments.

It’s boring combatting the same old tired excuses. We’ve bashed down each argument as they’ve made it. Now their only option is to recycle the same old trash and hope they can get away with it.

I mean, after spending the past two years denying a house price crash was possible under any circumstances, we’d like to hear them explain the situation in Queensland. After all, they never made any distinction between Queensland and the rest of Australia...

If anything, Queensland was compared to Western Australia as a safe place to buy due to the resources boom.

But according to the Courier Mail article sent to us by Money Morning reader Bill:

“Housing slump falls to 2000 levels as access to finance cuts construction”

And don’t even think about blaming the slump on the floods. As many spruikers now admit, the Queensland property market has been dead for two years... not that they admitted it until recently."

This Time is Different

"The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. the old rules of valuation no longer apply. Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provoke a crisis of confidence that pushes it off."

From "This Time is Different"