I am seeing rapid changes that will soon lead to a correction in the Australian housing market. These are the steps to watch out for:
Step 1. Recognition that the Australian housing market is overvalued becomes mainstream, rather than just recognised by perennial bears.
This phase just happened. In the past month we have seen statements from “The Economist”, NAB, Westpac and the former CEO of Commonwealth Bank all recognising that housing is overvalued. This is as mainstream as it gets.
Step 2. Japan, China and other nations that have been funding debt not just for Australia but the rest of the world, wake up and realise that the debt funding to Western nations can’t continue. Treasury auctions will have no bidders and interest rates will skyrocket.
This is backed up by the following facts:
1. The US dollar has just started taking a huge hit, with record devaluations against many currencies, including AUD and JPY. The world’s largest bond fund, PIMCO (with 1.2 trillion dollars in funds!!) has just announced that the US is a basket case and have exited their entire portfolio of US Treasuries. http://www.interest.co.nz/opinion/52880/fridays-top-10-10-nz-mint-pimco-says-us-plans-default-stealth-goodwill-anzs-national-c2. Japan, one of the largest funders of international debt now has a crisis on its hands, which will require it to not only stop funding international debt, but actually have to bring money back into the country to rebuild. The demographic nightmare in Japan (far worse than any western nation), was bad enough,the huge earthquake, tsunami and now radiation have brought forward the tipping point for a country which has by far the highest debt to gdp ratio (ahead of other basket cases Ireland, Greece, Portugal , Italy etc). http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt
3. China’s property bubble is command driven rather than demand driven. There are numerous newly built ghost cities in China and 64 million empty apartments that chinese people cannot afford to buy. It is crunch time in China. They will no longer be able to continue to fund western debt. http://www.sbs.com.au/dateline/story/transcript/id/601007/n/China-s-Ghost-Cities
4. When no-one else will bail out USA and Europe with interest rates near 0%, US dollar will rapidly devalue further, as it is recognised that they are a huge default risk and interest rates will have to rise rapidly both to stabilise the US dollar and encourage people to buy US treasuries
5. Australia will be competing with every other western nation, (think USA, Spain, Greece, Portugal, Iceland, Ireland) for debt funding to try to keep the housing bubble propped up. The debts that Australian house owners have taken on due to weak credit requirements from the banks (at 7-8 times income and 5% deposits for mortgages) has all been funded by overseas debt, from nations that can no longer afford to do this and will see Australia as high risk. This leads us to step 3….
Step 3. RBA drops interest rates close to zero and is very surprised when the banks increase interest rates at the same time, as international debt funding becomes very expensive, especially as the major banks’ treasured AA credit ratings have just been downgraded.
Step 4. Since Australian banks can no longer fund their debts on the international market, they restrict credit to home buyers.
The current 7-8 times income offered for mortgages is now reduced to 4-5 times income. 95% lending becomes 80% lending. This creates a viscious spiral as buyers on $100k combined income that bought a $700k house with a $35K deposit now find that other couples on $100k income they were planning to sell to now require a 20% saved deposit and could only borrow enough to pay $500k for the house.
The predicament is even worse, as the original buyer purchased when interest rates were 6% and they are now over 8%. They are struggling to meet payments and must sell to clear their debts. Everyone else in the same position has their house on the market at the same time.
Step 5. Suddenly investors that purchased properties with 3% yield that is costing them 8% to hold realise that this really isnt the investment they thought it would be. If property prices aren’t going to keep going up, then it is time to sell asap.
Step 6. The huge exposure of the companies that provide Lenders Mortgage Insurance to the banks is recognised just at the time that they declare bankruptcy.
Genworth Financial has exposure to 1.4 million LMI policies in Australia. Their financial exposure is twice what it was to the US market and is their largest market internationally. When the US housing market dropped, Genworth’s share price dropped from $35 to $1.22. All that kept them from going under at that time was the irrational strength of the Australian market and the number of premiums paid by first home buyers desperate to get into the market while interest rates were low and insane incentives of up to $30k free money were offered by the government.
Step 7. Big 4 banks in trouble. The big 4 bank’s modelling which told them they could survive a significant drop in house prices, relied on the first 20% of any losses being taken by the Lenders mortgage insurance. Now that they are getting no money from the LMI providers which have declared bankruptcy, there is a huge hole in their ability to stay solvent. This is further compounded by the performance of other parts of the bank, credit cards are all maxed out and no-one is repaying bad debt. Wealth management is making huge losses due to the inevitable share market collapse and super funds are reeling.
Step 8. Baby boomers have to sell their properties now that the value of their super has halved and they need something to live off. This adds further downward pressure to the viscious spiral
Step 9. The Australian government guarantees the massive bank debts (just as has happened in Japan in 1990s and more recently Ireland and USA) to try to keep the financial system from collapsing.
Step 10. Australian government suddenly has a debt to GDP ratio over 60% and rising. State governments have huge deficits as they are no longer receiving their huge stamp duty money which was previously keeping them afloat.
Step 11. Australian QE 1 is announced. Faced with huge debts and a massive budget deficit, Australia thinks they should go down the same path as USA and Japan before them.
Australia is no different to any other country and the huge debts to finance our property bubble will catch up with us some day. Lets just hope that we learn from it this time and stop easy credit in future generations to avoid it happening again.
Did you use your own crystal ball,some old issues of Nostradamus, Dianetics or perhaps some Pseuddopygrapha, Apocrypha or the Gnostic Gospels. I haven't read this much "possible" future real estate negativity since reading a L.Ron Hubbard's "Battlefield Earth"!
This is an absolute doom and gloom scenario and totally implausible, placed by someone who has absolutely no idea how the whole financial circle works.
First, the US is a basket case for the moment .. because .. it hasnt actually changed anything from what it was doing before the GFC hit. The same people who made bad loans to bad clients are STILL doing that … to the same sort of people. If I was anyone who thought the US has sorted out its finance grief yet, I would want to know why it is still continuing on the same dead road. The only way you get off the railway tracks is to change direction … not run headstrong into the oncoming train.
The US has nothing to do with Australian dependancies, reliances .. and long term financial failures. Take a good look at where most of our money .. trade and income comes from .. its not the US .. which accounts for less than 10% of that. Most of our business is done with east Asia and provinces. We have little to no exposure to most of the countries that are suffering at the moment.
Our current finance issues are compounded by the reality that the big four have hammered down on lending criteria to almost ridiculous levels. I had a friend who has over 20 million in assets and was lending on a property worth 5 million for 60% of the total value (unencumbered previously). The banks actually turned around and asked for more security !!!
The reality is .. unless you got a solid job situation .. zero issues with repayments and a saved deposit, banks arent lending anywhere near what they used to. So .. EXPECT that to affect your housing situation in the near term. Less available money means less buyers. Its really that simple. No big bubble .. just a slide.
The other major criteria is .. we somehow expect that having plunged a couple of hundred billion in stimulus out of the economy, it has to have an effect. And it is having that effect … its moving the lines and prepping this country for an inflationary hit .. of massive proportions. Not the nice growing business kind either .. the 'money is changing' kind. Thats not usually the good type. You are probably feeling it or seeing it in food prices .. labour prices .. and goods. Its there and happening now.
So between these two real conditions .. you will have money moving upwards .. and housing coming down. Thats all part of a normal cycle. And at some point where the money moving downwards meets the housing coming down, someone in their 20s perks their nose up and says .. wow .. property is cheap !!! And .. off the property clock goes again …..
I'm sorry .. i've lived through the 73 oil crisis .. the 82 recession .. the one we had to have in 90 and the dot com collapse. And the only consistant thing they've all said is .. THIS ONE IS DIFFERENT.
Its not .. the people are all .. talking the same.
Just the result of a huge amount of research and an understanding of what is happening internationally.
There is no point making predictions of a sequence of related events after they have occurred.
xdrew wrote:Our current finance issues are compounded by the reality that the big four have hammered down on lending criteria to almost ridiculous levels. I had a friend who has over 20 million in assets and was lending on a property worth 5 million for 60% of the total value (unencumbered previously). The banks actually turned around and asked for more security !!!The reality is .. unless you got a solid job situation .. zero issues with repayments and a saved deposit, banks arent lending anywhere near what they used to. So .. EXPECT that to affect your housing situation in the near term. Less available money means less buyers. Its really that simple.
It seems you clearly believe we are at step 4 already then!! It may be worse than I originally thought. Thanks for your contribution.
matt .. you are treating property as a house of cards or dominos. Sure there are impingent effects that come from crisis in one economy that ricochet off onto other economies .. its inevitable. But then you've got to work with how the country handles itself in that situation.
Australia remains at this point a relative safe haven for a lot of money .. simply because just like gold .. we are so far away from most of the major action. And one of the things we have had that influenced our housing prices .. was always having a below par dollar vs the US. Now .. with a 1-1 ratio or better .. of course our housing looks overpriced ! We were based on a 1-1.3 ratio .. now we are not .. of course we look expensive in comparision.
There are effects in play that must be dealt with. Dont sit there and tell me what sort of housing problem we have when most of our country towns sit there under-let and underserviced. If there are houses that are empty out there .. why is there a rental issue? There are obviously places to rent … just not near your favorite shopping centre .. or your local nightclub. And there are real financial concerns brewing in the near future for Australia .. one of which is where it gets most of its business from. Because the mining 'boom' doesnt last forever .. it never does.
xdrew wrote:Take a good look at where most of our money .. trade and income comes from .. its not the US .. which accounts for less than 10% of that. Most of our business is done with east Asia and provinces. We have little to no exposure to most of the countries that are suffering at the moment.Our relationship with USA, Ireland, Iceland etc isn’t in a reliance on trade with each other, it is that we are equally reliant on funding outstanding debt. For our big banks, they rely on refinancing debt in these related markets. If they can’t refinance, they cut lending to customers, and reset the risk parameters under which they will lend. Restricted credit guarantees the debt driven bubble will burst.
Btw I have a Masters in Applied Finance, work in middle management for one of the big 4 banks and have spent hundreds of hours researching to get to these conclusions. I have a very good idea of how everything works.
xdrew wrote:I'm sorry .. i've lived through the 73 oil crisis .. the 82 recession .. the one we had to have in 90 and the dot com collapse. And the only consistant thing they've all said is .. THIS ONE IS DIFFERENT.Its not .. the people are all .. talking the same.
Petty we don't have any one left around who lived through the 30s depression also.
You do realise that the west never got rid of the bad debt after the dot com collapse don't you? And that most of that debt was just transferred to RE.
We never really let the 80s recession run it's course either.
And the 70s oild crisis was the start of peak oil – it's taken 30 years to curve the hump.
What is brewing now is a pattern that occurs outside of normal human lifespans.
Here is an article which explains the situation and clearly demonstrates NAB think Australian house prices don’t represent fair value using the words of their CFO.
http://macrobusiness.com.au/2011/04/did-nab-just-give-up-on-housing/
It is interesting to note the similarities to this post of mine last month https://www.propertyinvesting.com/forums/property-investing/general-property/4335857?&page=1#comment-232198. Nice to know the CFO of NAB was listening. Here was my post then before he said anything in public….
Rents reflect the supply and demand for accommodation and what the average household can afford to pay for it. The significant premium of 8% per annum holding cost vs 3% rental return of the average house reflects SPECULATION that a greater fool is willing to pay even more than you did for a poor investment.
When the USA market dropped in 2006-7 everyone on this forum was saying “its different in the USA, they have non-recourse loans”. Since then we have seen collapses in Ireland, Portugal, Spain, UK, all markets that have full recourse loans. Don’t forget that Japan in 1990 had house prices that were higher than they are 21 years later, due to property speculation, the same as is currently happening in Australia.
NAB’s subsidiary BNZ recently advised that they were aware that NZ house prices were overvalued by 30% in 2008, based on a house price to income ratio of 6 in NZ. You have to wonder what NAB are saying behind closed doors about the even higher ratio in Australia, which must reflect closer to 50% overvaluation.
If you think that house prices in Sydney are realistic, have a look online at what you could purchase in a similar sized US city like Houston. It will really put things into perspective of what a gamble you are taking, loading up with debt on overvalued “investments”.
Matt, instead of trying to justify your position and knowledge based on an undergraduate degree in Finance and that "i know these things', why not take your wordly knowledge and invest in something better than property like, say shares, managed unit trusts, orworm farms and pine plantations i'm told are good alternatives(sic).
Yes, you have the right to your opinion on this forum but you are going against the grain of over 175 years of Australian property stability which encompasses the Great Depression, WWI and WWII, Korean and Vietnam War, all the recessions and oil crisies from the 70's to the 90's and enduring a Global Financial Crisis ta boot at the end of the first decade of the new millenium! Yes the bubble can burst so what does that leave you? Instead of all the doom & gloom why not provide this forum with solutions or alternatives with your acute and astute financial brain?In a crash like this, cash is king. Opportunities willl present themselves in property if you have no debt and are cashed up. Such opportunities exist in USA today.They are in step 12 – QE2.
btw Masters is a post-grad degree.
NO, you are wrong again Matt! Cash is NEVER king. During WW2, when the proverbial hit the fan a whole suitcase of cash in Germany wouldn't buy you a loaf of bread. GOLD and precious metals are truly king my friend and I guess this does prove that a single post grad in Finance doesn't make one the Master Guru of Australian and World Economics. Oh, I forgot, you didn't do economics, just finance. Perhaps a PhD might be of benefit Matt?
ALF1 wrote:Yes, you have the right to your opinion on this forum but you are going against the grain of over 175 years of Australian property stability which encompasses the Great Depression, WWI and WWIIWhat?
Property in Australia crashed big time in the 1890s (which is within 175 years) and it also crashed to lesser degree in the 30s.
ALF1 wrote:NO, you are wrong again Matt! Cash is NEVER king. During WW2, when the proverbial hit the fan a whole suitcase of cash in Germany wouldn't buy you a loaf of bread. GOLD and precious metals are truly king my friend and I guess this does prove that a single post grad in Finance doesn't make one the Master Guru of Australian and World Economics. Oh, I forgot, you didn't do economics, just finance. Perhaps a PhD might be of benefit Matt?It actually wasn’t during WWII. Hitler only came to power after hyperinflation in 1923. He promised to solve their economic problems.
In a credit shortage crisis, causing deflation of asset prices, cash is definitely king and the last thing you want is debt against those assets. Just ask a person living in Florida, if they had the chance to sell their house in 2006, clear the debts and retain their equity and then buy back the same house in 2011. They would jump at the chance. Houses have declined by as much as 80-90% in many areas!! This is the event we are discussing, even though it may be on a lesser scale. This also applies in every other country i have mentioned, Ireland, Spain, Portugal etc.
Althought I am quite new to the property world but I will put some words to extend my knowledge indeed.
I will not compare everything with US because we don't run in the same way as they do. The way our eco. works does not matches with them at all. We don't have 10-15 % unemployment problems; the $$ incomes are not same as Australian gets paid. We don't get credit from the banks if I cannot show enough evidence that I can pay them back. But in US you can.
I am not from the finance background but I've been analysing these things since 2006 and found that one can go to property only to make million; but only if we can hold the investment for the long time.
If at all the bust is going to happen, we will see the following actions from govt.
* more immigration
* more demand for houses – rental increase; bank will lend you more because of good rental income (I doubt if 80% rule will still apply?)
* easy investment rules for foreigners.I think the whole cycle for individual would depends on the following:
* Rental income and property to be in best place to rent quicker.
* Saved funds for bad days
* Full time job?!Property is same as any other investement like gold , share .. that float around in variations. In 2008 RIO shares were 17-28 $ (down from 110 $) and now it is back to 80-90$ .
I would not say RIO was over valued at 110$ because as I see that during that the demand was high for RIO so the shares were too. Same is with property, if it goes down today by 10% , it will go up by 15% soon; Again the same rule; long term investement will not let you down in property investment.
Love this forum and aggresive thoughts that one may make you think twice.
ALF1 wrote:Instead of all the doom & gloom why not provide this forum with solutions or alternatives with your acute and astute financial brain?Good point. Furthermore, Matt should write a book with all the predictions in the first post and get it published. It'd be a bestseller when these predictions start to play out.
btw I was also recommending silver as an investment this time last year here https://www.propertyinvesting.com/forums/community/opinionated/4331698?highlight=mattnz%2Csilver#comment-208893
Since then the price of Silver has doubled!!
ummester wrote:Property in Australia crashed big time in the 1890s (which is within 175 years) and it also crashed to lesser degree in the 30s.
My knowledge doesn't go back that far to the 1890s. However whether there was a 'slide' or a 'crash' in the 30s is subject to debate. Prices didn't 'crash' 50-, 40-, or even 30%, if I remember correctly. Pity my short-term memory, and lack of access to a book I just returned to the library yesterday. Going further however, rents soared during the same period.
There's a wonderful graph in the book titled 'Mastering the Australian Property Market' by John Lindeman which shows exactly that: when house prices slide, rents increase. The more drastic the slide or 'crash', the more exorbitant the rents become. Presumably its the tightening of credit during periods of falls in house prices that forces even more people to rent than to buy, because a FHB simply cannot borrow enough to buy themselves a place.
A property 'crash' isn't all bad, fortunately.
fWord wrote:My knowledge doesn't go back that far to the 1890s. However whether there was a 'slide' or a 'crash' in the 30s is subject to debate. Prices didn't 'crash' 50-, 40-, or even 30%, if I remember correctly. Pity my short-term memory, and lack of access to a book I just returned to the library yesterday. Going further however, rents soared during the same period.Rents didn't sore during the depression:) You are reading spruik in a book, it seems.
Prices in Australia deleveraged around 25% during the depression (they were lower than the rest of the world due to the extreme nature of the 1890s crash). Looks like what happened then is set to happen again this time around.
During the depression, Australia crashed later, harder and faster than the rest of the world. Because we were a commodity exporter (as now – just more livestock than metal then) it took a while for it all to hit us. When it did, UE here reached almost 30% (which was one of the highest). House prices were already in decline before the UE growth but really hit the skids when that happened.
fWord wrote:There's a wonderful graph in the book titled 'Mastering the Australian Property Market' by John Lindeman which shows exactly that: when house prices slide, rents increase. The more drastic the slide or 'crash', the more exorbitant the rents become. Presumably its the tightening of credit during periods of falls in house prices that forces even more people to rent than to buy, because a FHB simply cannot borrow enough to buy themselves a place.That's not really true – generally when property crashes unemployment becomes high. Rents are entirely wage dependant. Do you really think in times of high unemployment that people will have lots of money to spend on rent?
I think you will find that in a housing crash, rental returns are much higher just because the house price is so much lower. The nominal rent however doesn’t change much.
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