For the rest of the year all eyes should be on housing. It’s the key to inflation, interest rates, and the performance of Australia’s $400 billion mega-banks.
Significantly, Melbourne house price growth has outstripped the rapid double-digit pace of Sydney properties over past three months in what could be the next chapter of the great Aussie housing boom of 2013 and 2014.
Contrary to optimistic forecasts that the boom was over after a temporary seasonal blip, the market has recovered with gusto in the final two months of winter, as we anticipated.
Australian dwelling values are 25 per cent above the record reached in March 2008 before steep mortgage rates and the global financial crisis induced a slump. They have also fully recovered the 8 per cent peak-to-trough losses realised over 2011 and 2012 to be 9.5 per cent dearer than the previous high-water mark set in October 2010. In fact, total house price appreciation in this cyclical upturn, which officially commenced in May 2012 and sums to 19 per cent, is about to exceed the cumulative gains captured in the last boom that gave the Reserve Bank of Australia the willies (in 2009-10).
Sydney’s auction clearance rate has averaged a high 76 per cent over the last four weeks of winter. The peak registered during the seasonally stronger 2013 spring period was 81 per cent. Melbourne’s winter auction clearance is also only off a touch from the levels it achieved last spring. There is every chance this spring will come close to emulating the extraordinary conditions witnessed a year ago.
The issue is that leverage is already at near-record levels.
In contrast to the United States and United Kingdom, Australian households hardly deleveraged during the global financial crisis. The current household debt-to-income ratio of 150 per cent will soon exceed the 152 per cent level hit in June 2007.
Likewise the ratio of house prices relative to incomes is about to breach the records attained in 2007 and 2010, if it has not done so already.
A final interesting dynamic is the de facto rate cuts lenders have been bequeathing borrowers out-of-cycle. We first highlighted this news months ago. The RBA has done the same in its August minutes, which revealed that “cumulative movements in interest rates since the start of the year amounted to a noticeable easing in financial conditions”. It seems those calling for RBA rate cuts are already getting them.
A key driver of this surge, particularly in the three biggest markets (Melbourne and Sydney in particular) is foreign investment, with developers increasingly marketing their product to overseas investors. Indeed, apartment construction is becoming a key defacto export industry for cities like Melbourne and Sydney, which is helping to keep the construction sector ticking along.
Many foreign investors do not care about local conditions, such as rental demand and supply, and instead invest in Australian real estate in order to transfer their wealth into what they perceive is a safe asset in a stable country. This poses risks to local investors that purchase apartments alongside foreigners at over-inflated prices. Many are now stuck with a crappy investment that is competing alongside a bunch of other similar crappy investments. Accordingly, these investors are unlikely to yield a decent return or achieve capital growth.
All of which is great news for inner city renters, who now face a smorgasbord of apartment choice (albeit of the generic ‘dog box’ variety), reasonable (and stable) rents, and the ability to negotiate favourable rental returns from increasingly desperate landlords.
Moreover, with all levels of government seemingly keen to keep foreign investment flowing in, the apparent glut of inner city apartments is unlikely to abate anytime soon, which should continue to see downward pressure placed on apartment rents and eventually prices too.
Anyone want to venture their thoughts on timelines from here?
I figure that the RBA will let things stew – as in Sydney RE blows off and nothing is done about the dollar for now – I would have thought they would still have to move (to an easing bias if RE blows off completely and is looking at the downward slope, or a raise if they were ever to think they needed to address it without macroprudential)
But I would reckon there will still be gigs going out the door – we have the rest of Alcoa, the car makers and presumably much of the car parts sectors for sure going out the door over the next 18 months.
On the retail consumer sentiment side I would have thought the rising unemployment (which I don't see how they get around – I don't think they can) would continue to pare sentiment, and that the budget (and I think everyone will be hanging right out to see how they recalibrate the budget) would not have to include some form of goodies to get traction.
And that brings us back to the AAA narrative for the taxpayers supporting the banks borrowing offshore to lend for mortgages with the most heavily privately indebted people going – who are already up to their eyeballs in mortgages and en route to the worlds most expensive real estate. At what point do banks think the gig may be up, the international lenders think the game is up, or the government remove the taxpayer guarantee, or the taxpayer twig to their being sold a pup?
Joye was actually strongly in favour of reform of urban planning to restore stability and affordability to Australian housing markets, back in 2003.
I can’t believe he would have changed his mind about the clear role of urban planning in all this, however, he is probably genuinely astute enough about the subject, that he could see that if no-one was going to listen to him on urban planning, he might as well get on with making a living out of the inevitable bubble. To give him due credit, he has not been silent about the role of urban planning all along, listing it as a reason that prices can go higher.
There would have been reasons to regard the situation as a paradigm shift from low rent to high rent; i.e. a shift from traditional Aussie housing market conditions, to UK ones where land rent is many times higher and houses many times smaller. But I can see that what worries Joye in addition to the foregoing, is over-stretch in the debt and households ability to service it – and indeed speculators ability to service it.
I don’t think it possible that a market like Australia can transition to a UK type market without a severe speculative over-reach and crash. But “timing” could be something that will very much test the bears credibility (and I am one of the bears).
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