No Housing Bubble in Australia…is there?

http://bubblepedia.net.au/

Here is an article in which the chief economist at BNZ, fully owned by NAB advise that they recognised the NZ market was 30% overvalued in 2008 when the ratio of house price to wages were at a multiple of 6 in NZ.

In Australia they are much higher now, Sydney has a multiple of 9 and Melbourne 8. You have to wonder what NAB's economists are saying behind closed doors about how overvalued the Australian market is. If NZ was 30% overvalued at 6 times, Australia must be 30-50% overvalued by the same measure at around 8 times wages.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10705683

"The BNZ reckoned in early 2008 that house prices, then averaging about six times average disposable incomes, were overvalued by about 30 per cent. By now about half that overvaluation has been relieved, Ebert said, through declines in house prices and a "reasonable" increase in disposable incomes."

The whole purpose of LMI is to protect the banks. They are covered for the first 20% of any losses by the insurer. In NABs case this is Genworth Financial. It isn’t a bank decision, but the LMI provider. They need to keep receiving premiums to stay afloat and cover their costs, so they keep offering insurance.

It raises an interesting point though. The mortgage insurers are only set up to cover a few defaults, not for a market collapse. While the banks assume they are covered in such an event, I would be surprised if the LMI providers survived a significant drop in house prices. If the LMI providers collapse, the banks which have relied on insurance to bail them out of trouble in their risk modelling, will also face serious unforeseen issues.

Just looking at Genworth’s financial position and exposure.

In 2008 their share price dropped from ~$35 to $1.12 due to their exposure to the US housing market. The scary thing is their exposure to the Australian market is far larger and any significant drop here would almost certainly cause insolvency.

Of their 3.8 million LMI policies internationally, 1.4 million are in Australia compared with 1 million in USA. Given the much higher house prices in Australia, the dollar value exposure would have to be at least twice that of USA.

Auction clearance in Sydney ~70% this weekend… up from December 50%… but there is NO BIG NEWS…
if auction clearance dropped to <50%… Doom and Loom… starting from Fairfax again..
No wonder.. Fairfax FXJ… tanked for the last 3 years time… (lucky didn't buy any FXJ shares)

The AV Jennings release is particularly interesting. I often see the media accusing developers of land banking. It is the first time I have seen them defining this as a strategy. There is definitely something wrong with the model when a business strategy is based on having 5 YEARS of inventory!!!

In any other business in any industry, having a stockpile of 5 years of inventory would be a surefire way to go broke due to its cashflow implications. Certainly not a just-in-time inventory system and not a sustainable business model.

It is no wonder that land prices are very high, all the key players buy up all the available land in the areas which are being rezoned and limit the amount for sale. It is similar to how oil cartels worked in the 1970’s to force oil prices up by 300%+.

Land Development is nothing like others businesses that can easily control inventory. A car manufacturer can stockpile steel in a just in time manner. A volume builder cannot. Land is a scarce resource. You have to buy it englobo, rezone it, get development approval and then produce the lead in works(roads sewer etc) This can take 5 years plus! You must have this avialble stock to enable a clear production line of houses. Otherwise you would be putting off your builders every year and have a lumpy profit and loss without sufficient cashflow. So this is why a 5 year land bank would give me confidence in a volume building company compared to one who had none!

Regards

Steve

House price to average (or median) wage is a useless statistic that means nothing. It looks good in scary newspaper articles, but that's about all the good it does. If you are going to argue house prices are too high, then go right ahead, but don't waste our time or insult our intelligence with 'house price to wage' rubbish.

Thanks.

Aww Dan, missed you on here .

I read Andy's blog and it was well put together with excellent points. Pity it was a rehash of what many, many others had written before. In fact, it really seemed a lot like articles I have already read. Also the comments by all his bear buddies beggared belief, when you're glad you haven't bought property so that you can have a great life…..

The date was narrowed down for us in another thread! Oct 09 crash…..!

Oh….. no wait, it didn't happen. Ooops.

2011. We are seeing 95% loans back, banks are advertising on billboards and tv to get customers. Slight lull here in Vic until July when the stamp duty cut comes in. After that Melbourne will be a joke.

I have to find my previous post where I put it out there that the median house price will become well and truly over $500k and no one will bat an eyelid.

My first home buyer brother and GF are scrambling to buy in now. Imagine what will happen in July.

D

Thanks for the feedback DWolfe.  Can you point me to sites that are saying the same thing – it sounds like I'd like them