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SQM Research: Housing market to climb "Wall of Worry" - Sydney looking very strong; And listings Abnormally Fall In September
Topic Started: 9 Oct 2013, 09:05 AM (874 Views)
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The Wall Of Worry

Here is another chart taken from our recent conference and a modification from our recent Housing Boom and Bust Report. It shows the Sydney market at least has been in this type of premium territory.

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Indeed, back in 2003 the Sydney housing market was at a 55% premium to National GDP. Right now Sydney is just at a 5% premium and if our forecast for 15-20% proves right, the market will just move into a 20% premium. I agree this method of measurement of fair market value is not perfect but I think it is one of the best out there.

Such a price rise in one year is certainly not without its precedent. It recently occurred over the 12 month period to March 2010 when the ABS recorded a 19.5% increase in house prices for Sydney – something of which the Doctor decided to leave out of his facts in a recent write up. That time the rise was driven by a massive surge in First Home Buyers. This time, it is investor driven as has been well documented.

In all this talk, you might be forgiven for thinking we have turned into outright property bulls with no sense of the risks in the market. No way! Let me be clear on some points in this regard.

While Steve Keen has, rightfully or wrongfully taken a lot of criticism over the years for his 2008 40% crash call, he needs at least to be paid the respect of raising the issue that household debt to GDP levels in this country are very high, making the market susceptible to changes in the supply and subsequent cost of credit.

Where Stephen went wrong was underestimating the power and determination of both sides of politics plus board members of the RBA to stop a large scale house price crash – something which, when tested again in future, the same, active participants, will likely intervene again unless they have run out of resources to do so.

But for the purposes of the here and now, while household debt to GDP levels are high, they are off their highest levels which was 153% back in 2007. Currently we are at 148%. I note that commentary around a 160% threshold is a point that no one thinks would be a good idea to break through. Assuming that 160% is a key threshold what type of increase in debt (and then translated into dwelling price rises) would it take over a 12 month period to reach that point once again?

Well, we have attempted to roughly work this out. See our chart below:

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The answer is there is some runway left at current levels. But not much runway. So if our forecasts come within range next year, we think that could translate into about a 7% increase in total household debt for the year. Assuming nominal income growth of 4%, the market still would not have breached the 160% point, but it would have breached the 2007 high by the end of the next year. Assuming another 7% rise in debt in 2015 and 2016 and then it would breach 160%.

Here is another chart you will find interesting. It looks at the change in household debt verses house prices. It seems roughly that changes in debt roughly lag house price changes. The correlation is about 53%. I have marked up in green what the chart would look like for next year assuming the mid-point of our range for house price rises comes into play (7-11)%.

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What would it mean if we breached 160%? The housing market would be, like no other time, more sensitive to interest rate movements and more sensitive to adverse movements in unemployment. Even now, the thought of having average home loan interest rates at 7+% (as they were in 2011) would certainly create a large correction in the housing market. As time goes on it just feels like that monetary policy setting is increasingly put in a corner. Lift interest rates back to what was once regarded as “normal levels” and the economy tanks.

What if we get to the point in future, that having a cash rate of 3% or even 2% is too much for the economy to bear? What then? What if there is another global choke on credit supply? Do we eventually go down the path QE for Australia?

Where does it all end? I don’t know.

But for the here and now, interest rate settings have been low enough to stimulate dwelling prices and they are going to continue to stimulate dwelling prices into 2014. The bubble talk will no doubt keep going too and that will create some worry out in the market. But the market will climb the “wall of worry” and it will likely keep climbing that wall at least until interest rates rise again.

Listings Abnormally Fall In September

Figures released by SQM Research reveal that the level of residential property listings around the nation fell during the month of September, with national stock levels decreasing by -3.4% and coming to a total of 342,979.

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Month on month, all capital cities recorded declines apart from Hobart, which increased ever so slightly, by 0.6%.

Year on year, the country also recorded a decline in stock, falling by –3.7% nationally, with every capital city recording yearly decreases, besides Darwin, which recorded quite a substantial yearly increase – 8.9%.

Sydney continues to take the lead in yearly declines with a staggering -17.6% decrease since September 2012 and as previously stated by SQM Research, we believe the housing market recovery will be led by this capital city, posed to witness 15-20% increases in house prices (as outlined in our most recent edition of Christopher’s Housing Boom and Bust Report 2013/2014).

SQM Research would however, like to point out that during the month of September, there were two weekends with events that would have affected the market place – the federal election on the 7th and the AFL Grand Final on the 28th of September. We note that during the federal election in 2010 (August) there was also a dip in stock levels, making it a likely contributor to a decline in stock during the spring selling season.
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Mister E
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Good article.

Open and relaxed discussion of driving household debt to 160% of disposable income and beyond was refreshing and quite possibly reflects the mindset at the RBA.

148% – 160% might be enough to get the fascinating but elusive ‘rising prices attracts buyers of new homes’ effect functioning.

The large drop from 153% to 148% just shows what a powerful driver of deleveraging the GFC was down under.

One might suggest that a measure of a good response to the GFC would have been the extent to which the height above sea level of the household debt mountain had been reduced.

But no luck on that front – too many interest rates doves and the bank protection league of extraordinary gentlemen.

No slowly edging back from the cliff edge for that mob.

It will be fun defusing 160% but by that time our aspirations may be 170%.

Keeping pumping Ben, Mr Abe etc. People would freak if the ‘fake’ savings were removed and had to be replaced by real ones accumulated by real people.
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CLS
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Quote:
 
Where Stephen went wrong was underestimating the power and determination of both sides of politics plus board members of the RBA to stop a large scale house price crash – something which, when tested again in future, the same, active participants, will likely intervene again unless they have run out of resources to do so.

Let me fix that paragraph for you Mr Christopher.....

Where Louis Christopher went wrong was over-estimating the ability of the RBA and political ass napkins to prevent a housing crash – when the ability of central banks & unrepresentative swill to prevent a housing implosion, even in powerhouse US economy, was limited.

In effect, the RBA and political chaff have insufficient resources (and intelligence) to prevent an eventual Ponzi-financed housing catastrophe, because asset prices are intimately linked to the second derivative of credit growth, and the lemmings (true demand in the way of FHB) are getting thin on the ground.


You're welcome.
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biltong
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If you look inside the auction performance in sydney you will see many investors and holders of property are just happy to sell to a greater fool and exit the game. No one really believes that prices anywhere are going to boom in the years to come. With the global economy reaching it's maximum servicable debt levels we are facing a protracted deflation, managed or otherwise, and a lot of personal and corporate bunkruptsy as the debt is reduced and the system reset.
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