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.