Monday, September 1, 2014

Banks are to blame for Australia's housing bubble

Australia's housing bubble is real and banks are to blame, says author
But in his mind, it's everyone else who is living in a "Disneyland" delusion by failing to spot a bank-led property bubble that shows no sign of deflating. "No one in the Western world has ever done what we are doing." It's "the sheer size of the loans relative to the incomes here" that troubles Mr David.
The median house price to income of Sydney is nine times, compared to 6.2 times in New York and 7.3 times in London. Even Adelaide is more expensive than New York on price-to-income basis. He is particularly troubled by the surge in asset values in his Sutherland Shire neighbourhood, where land is changing hands for more than $1 million. "I have never seen so many Range Rovers in the Shire. It's a small world out there and you know they haven't become millionaires overnight. It's eerily similar to Miami [in 2005 before the sub-prime crisis]. It feels like Groundhog Day," he said.

Thursday, July 24, 2014

Distortion of negative gearing adds 9% to the cost of houses in Australia

Negative gearing adds $44k or 9% to the cost of houses. Negative gearing pumping house prices, but they're not overvalued yet

Moody's compared house prices with long term valuations – taking into account rents, income and the costs associated with borrowing, including interest rates and other charges – to assess whether the 10 per cent year-on-year rise in house prices in Australia's eight largest cities means property prices were overvalued.

Its analysis shows that 18 months ago house prices in all states were undervalued.

But rising house prices, which have not been accompanied by rising incomes or rents, have now pushed property values in most states to "fair value".
Taking into account the costs of borrowing. That means that if you have cash, the absolutely last thing you should do with it is jump in and compete with supercharged leveragers in the housing market. Hard-earned, long-saved cash doesn't suddenly get any more easily earned just because emergency interest rates are kept in place for years and years.
When Moody's calculated the impact of rising interest rates, ''the story begins to change, with nationwide prices trending towards overvalued under normalised interest rates'', the report says.
Short term thinking rules the financial world.
The report said negative gearing costs the federal government about $4 billion in lost revenue a year and noted economists had labelled it "an unfair and unproductive distortion".

Sympathy for the Doomster Devil

Three reasons bears predictions have not come true for Canadian housing:

Extremely easy monetary policy
Demographics (the echo boom)
Foreign Buying
Three ‘unusual’ reasons you should have sympathy for Canada’s housing doomsters
Over the past 11 years average housing prices have doubled despite the recession, mortgage debt has topped $1.23-trillion (a record 60% of GDP) and Canada’s housing market is fully valued by price to rent and price to income measures.
But he points out that this remedy [demographics] has a short shelf life. BMO economists expect demographics to turn against the housing market by the turn of the decade, just when rising interest rates really begin to bite, creating a “potential double-whammy” for housing.

Sunday, July 20, 2014

The Haves and Have-nots of Canadian Real Estate Market

How the housing market has cooled in most of Canada
Canada overall up 7% year on year.
Up 5.2% ex-Vancouver and Toronto.
Vancouver is 10x income.
Toronto is 7x income.
"We really haven't seen a national market like this where we have such sharp regional differences."

In provinces like Manitoba and Saskatchewan, sales continue to be reasonably strong, Rabidoux said, but there is "unprecedented inventory" on the market.

"Especially in places like Winnipeg and Regina, you have these extremely soft markets. and that's going to keep prices very weak for probably another year."

Ontario is a bit of mixed bag, he said. Sales are strong in Toronto and Hamilton, but weaken once you head east.
"I think the low interest rates have become a curse, not a blessing for the economy because it's encouraging people to pay even higher prices for housing relative to their income," Madani said. "And when interest rates start to creep back up, affordability will become an even greater problem."

Friday, July 18, 2014

Fitch: Canada 20% Overvalued Overall

Why Fitch is sticking to its 20% Canadian home price overvaluation
The 20 per cent is derived from our sustainable home price model for the Canadian market, where we compare changes in home prices historically to changes in five major macroeconomic indicators that we consider to drive the housing market, which are income, employment, interest rates, housing supply and population growth.
I don’t think we’re the first to draw connections between the Canadian market and the Australian market. They’ve similarly benefited from positive home price growth, even throughout the financial crisis. So where we are with Canada at about 20-per-cent overvaluation for the country, and up to maybe 25 or 26 per cent for provinces like British Columbia and Ontario, we have similar market value decline projections for the Australian market in the range of 25 to 30 per cent. And it’s a similar story, you’ve got low interest rates that have supported affordability, again limited supply in the big cities like Melbourne, Sydney, Perth, and also you’ve had in that market population growth that’s been above historical averages that’s also supporting house prices on the demand side.
They also say the U.S. market is 10% overvalued.

Sunday, June 15, 2014

IMF's most overvalued housing markets around the world

Era of Benign Neglect of House Price Booms is Over

Theory asserts that house prices, rents, and incomes should move in tandem over the long run. If house prices and rents get way out of line, people would switch between buying and renting, eventually bringing the two in alignment. Similarly, in the long run, the price of houses cannot stray too far from people’s ability to afford them––that is, from their income. The ratios of house prices to rents and incomes are thus often used as an initial check on whether house prices are out of line with economic fundamentals. 

Hence we also need macroprudential policies aimed at increasing the resilience of the system as a whole. The main macroprudential tools used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements (Figure 4). Hong Kong SAR has imposed caps on loan-to-value and debt-to-income ratios since 1990s, Korea since 2000s, and during and after the global financial crisis, over 20 advanced and emerging economies have followed their example.
Another macroprudential tool is to impose stricter capital requirements on loans to a specific sector such as real estate. This forces banks to hold more capital against these loans, discouraging heavy exposure to the sector. In many advanced economies—Ireland, Norway, and Spain— and emerging market economies— Estonia, Peru, and Thailand— capital adequacy risk weights were increased on mortgage loans with high loan to value ratios.

IMF have posted several graphs. (Yes, they let a graphic artist go a bit wild with them…)

According to the blog, Belgium is an exception to being in trouble, despite the higher than average price to income and rent. That leaves Canada as the most troubled country on both measures with New Zealand and Australia not far behind. Also flirting with a worrisome bubble are France, UK, Sweden, Norway.

IMF have also launched a new site to pull together all their data on world housing markets.

IMF's New Global House Price Watch

Thursday, June 12, 2014

Why Australia is floored by sky-high house prices

A nice summary of the situation. Why Australia is floored by sky-high house prices
I find that many Australians don’t truly appreciate how expensive housing is in Australia. Two simple examples might shed some light on the subject.

Sydney dwelling prices, for example, are around 50 per cent higher than prices in New York, despite New York being home to more accumulated wealth than anywhere in the world.
We shake our heads at the US over their lending practices leading up to the global financial crisis, but banks in Australia routinely lend two or three times as much to couples who need support from their parents simply to make the deposit.
Have to point out a gem in the comments (unless it's satire, hard to tell sometimes)

John, June 13, 2014 10:01
You anarchists are really funny. So the economy is extremely fragile but you want the RBA to jack up interest rates to crash the property market so you can buy a house on the cheap ? So, so funny. Like most anarchists, yourself and Steve Keen haven't really thought this thru have you ? According to such geniuses, Australian Banks are so highly geared to property that if there is a predicted 30 to 40% fall in the value of property, the Big 4 banks will be bankrupt. In other words your funds will be frozen, not only by your Bank but by the government as well. So please enlighten us, trying as hard you can to keep a straight face, how are you going to actually to buy that cheap house if you can't access your savings, or do you just have a very very very big mattress ? …
You know it's over when the bulls are pre-blaming the bears for the fallout from the market correcting. Markets that don't get blown into bubbles by bull cheerleading of bad regulation don't run the risk of devastating corrections, do they?

Wednesday, June 11, 2014

Australian housing boom "doesn't have long to run"

The big hole in Australia's housing market
On a trend basis, growth in the value of loan approvals to owner occupiers slowed to 0.1 per cent in April (compared with 1.7 per cent in October) while for investors, growth slowed to 0.5 per cent (compared with 4.0 per cent in September). This should come as little surprise, though to the best of my knowledge it has received little emphasis elsewhere, and is a trend that we should keep an eye on. Low interest rates have encouraged owner-occupiers and investors to bring their purchases forward, but that eventually creates a void that must be filled. If it can’t be filled — and it is unlikely that anything can replace investor speculation — then loan approvals will tank and house prices, which are demand-driven, will inevitably follow suit.

Monday, May 19, 2014

Australia's neighbors are taking measures to cool their housing markets, but not Australia.

Australia’s Central Bank Not Interested in Targeted Steps to Cool Housing
But capital city home prices are up about 11% in the past year, according to the Australian Bureau of Statistics, largely driven by property investors. The sharp run-up has prompted the central bank to remind the public that property prices can also decline.

Ms. Ellis said house prices were expected to rise after the RBA cut interest rates repeatedly in recent years, reaching an all-time low of 2.5% last year. That response is “a natural part of the ‘transmission mechanism” of monetary policy, she said.

Ms. Ellis acknowledged that the rise in prices has been hard on new-home buyers. The percentage of new-home buyers in the market has fallen dramatically in the past year.
You know who it is really unfair to? Cash buyers. There is no "real" market for housing, as far as the central bank is concerned. No one who has saved up their money to pay all cash should be crazy enough to compete with a negatively geared investor working with leverage.

Sunday, May 18, 2014

What happens if sellers refuse to lower their prices?

Vietnam's housing bubble is an especially over inflated. Average prices to average incomes are at a 25x multiple. 25! In contrast the median multiple (not exactly the same measure, but similar) in Vancouver is 10x. Sellers have not lowered their prices in the face of plummeting demand. Since 2010 they have been stubborn. The result? A Frozen Market. No thaw expected in Vietnam's frozen housing market
Dang Hung Vo said a paradox in the property market is that supply of high-cost housing units has overwhelmed demand, leading to high inventories and bad debts, while there is a severe lack of low-cost housing units. Only 1,500 condominiums were sold in Hanoi in the first quarter, according to property firm CBRE. While that’s a five-fold increase from the 279 sold in the same period two years ago, it’s still down from the peak in 2009, when more than 15,000 units were sold in the capital city.