Tag Archives: Australia Housing

Australia Warned To Prepare For “Severe Housing Collapse” And “Banking Crisis”

Just weeks after ZeroHedge noted that Australia’s household debt to income ratio has ballooned to shocking levels over the past three decades as Sydney is ranked as one of the most overvalued cities in the world, Australia’s regulators have been warned to prepare “contingency plans for a severe collapse in the housing market” that could lead to a “crisis situation” in one or more financial institutions.

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Australia has transitioned from the lowest household debt-to-income ratio to the highest in the world, in just three decades.

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And now Australia’s News.com.au reports that The Organisation for Economic Co-operation and Development’s (OECD) latest in-depth assessment of Australia maintains that while the “current trajectory” of house price declines “would suggest a soft landing… some risk of a hard landing remains.”

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Wage stagnation and elevated home prices have turned into the perfect storm that will bring forward a housing crisis.

The Paris-based global forum recommends the Aussie Reserve Bank begin raising the cash rate from its record low as soon as possible to prevent “imbalances accumulating further”.

The RBA last cut the cash rate to 1.5 per cent in August 2016, following an earlier cut to 1.75 per cent in May. There has not been an official cash rate increase since November 2010.

Australia’s housing market is a source of vulnerabilities due to elevated prices and related household debt. A direct hit to the financial sector from a wave of mortgage defaults is unlikely,” the report says.

“However, if house prices collapse consumer spending could suffer, via negative impact on wealth, including from exposures to bank shares, which would encourage deleveraging. Together with reduced housing-related expenditures, this would put pressure on the whole economy.”

Additionally, News.com reports that while describing the housing market slowdown as “welcome” after a period where prices were overvalued by 5 to 15 per cent and noting current evidence pointed to a soft landing, the OECD said its research in the past “has found soft landings are rare”.

The OECD report recommends contingency plans in the form of “a loss-absorbing regime in the case of financial-institution insolvency”, including controversial “bail-in provisions”.

“… the possibility of financial-institution crisis should not be discounted entirely.”

Finally, the OECD notes, unlike in the US or EU, the law does not include provisions that would automatically convert some unsecured senior bonds and deposits from other banks into equity in the event of a crisis

 “The absence of explicit bail-in provisions could slow down the speed of resolution and risk encouraging financial institutions to gamble for resuscitation.”

Notably, OECD’s ominous warnings come after RBA deputy governor Guy Debelle raised alarms (after Q3 GDP dramatically undershot expectations at just 2.8%) by suggesting the next move in rates could be down, not up, and floated the possibility of controversial money printing policies known as quantitative easing in the event of a crisis.

As John Rubino recently noted, for the past few years, homeowners just about everywhere have been able to finesse life’s problems by thinking “at least my house is going up.”… But now that’s ending, and a reverse wealth effect is kicking in. Homeowners are seeing their home equity – aka their net worth – stop growing and in some cases drop by shocking amounts. In Australia it’s $1,000 a week, which is enough to darken the mood of pretty much anyone not in the 1%. A consumer with a dark mood is an unenthusiastic shopper because new debt accelerates the decline in net worth.

As home prices fall, so therefore does “discretionary” spending. Australians will continue to eat and to air condition their bedrooms, but they’ll cut way back on vacations, new cars, etc. And the debt-based part of the economy will suffer. This will cause stock prices to fall, knocking another leg out from under the average citizen’s net worth and making them even less likely to splurge. And so on.

Credit-bubble capitalism depends on mood, which makes it fragile. That fragility is about to be on full display pretty much everywhere.

Source: ZeroHedge

Aussie Home Prices Could Collapse 30%: UBS

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Queensland Australia

A new analysis by UBS concludes that housing prices in Australia could fall as much as 30% in a deep recession scenario. UBS analyst Jonathan Mott assembled five different scenarios to predict the direction that Australia’s housing market could go. The worst case includes the first recession in 27 years, a 30% collapse in house prices and widespread litigation against the banks for mortgage mis-selling. The bear case would also include the central bank cutting rates to zero before embarking on its own version of quantitative easing, the suspension of dividends and equity raisings from the big banks.

Mott thinks that current conditions are already reflecting the very real possibility of a housing correction and also warns that risk of a credit crunch “is real and rising.”

Mott stated: “The rapidly deteriorating housing market is a signal of even tougher times ahead. The housing credit squeeze experienced over the last six months is expanding. The outlook for the banks has not been as challenged since at least 2008.”

UBS dire forecast comes at a time when tighter lending standards have restricted the availability to borrow in Australia, causing the country to enter its second year of a housing slide. Major cities like Sydney and Melbourne are leading the declines, down 7.4% and 4.7% in October from the previous year, respectively. These were the two hottest markets when prices were on their way up in years prior. Meanwhile, the Australia House Price Index has posted its first sequential decline only for the first time since 2011.

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Meanwhile, the Reserve Bank of Australia has kept its rate cash rate unchanged and at a relatively low 1.5% since the middle of 2016. The crunch is coming mainly from regulators cracking down on riskier loans, such as interest-only mortgages, that are more popular with speculators than traditional buyers. On top of that, Australian Regulators have enforced more stringent verification on expenses that is tightening the amount of money people are able to borrow as Australians already have some of the highest household debt in the world, something we pointed this in August.

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As a reminder, the Australian household debt to income ratio has ballooned to shocking levels over the past three decades as Sydney is ranked as one of the most overvalued cities in the world. According to the Daily Mail Australia, credit card bills, home mortgages, and personal loans now account for 189 percent of an average Australian household income, compared with just 60 percent in 1988:

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An additional reason Australia’s housing prices boomed was the influx of overseas capital. We recently discussed the urgency with which the Chinese middle class was trying to get capital out of the country. And one of the main ways to do this involved investing in homes in places like Australia (and Canada). Those looking to buy real estate outside of the country have negatively impacted many local economies, sometimes causing housing markets to bubble.

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In response, Australia has tightened its foreign investment rules. In 2016, the land Down Under even made it illegal for the country’s four major banks to lend to foreign property buyers without domestic incomes. New Zealand went so far as to simply prohibit foreigners from buying property altogether because the demand was driving property prices out of the reach of locals. Canada did something similar, canceling its Canadian Federal Immigrant Investor program because of the huge backlog and bubbly real estate markets in places like Vancouver and Toronto.

Source: ZeroHedge

Mortgage Prison: Sydney Home Prices Suffer Largest Annual Decline Since 2008

Home prices in Sydney and Melbourne are back to 2016 levels. That is a tiny down payment as to what is coming.

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News AU reports House Prices Drop in Sydney, as Melbourne Prices Stall.

Tumbling house prices in Sydney and Melbourne are the main drivers behind the first annual drop in national property prices in six years, a new report shows. The national median house price fell 1.0 per cent over the June quarter and year, according to a report by property classifieds group Domain released on Thursday.

It is the first time values have fallen on an annual basis since June 2012.

The negative national growth rate reflects weakening house prices in Sydney and Melbourne, which together represent about two thirds of Australia’s housing market by value.

Sydney house prices fell by 4.5 per cent in the 12 months to the end of June for their largest annual drop since 2008. Sydney units also fell by 3.5 per cent over the same period.

The figures chime with those released this week by property data firm CoreLogic, which said overall Sydney prices fell 5.0 per cent in the 12 months to July 22.

“House and unit prices in Sydney are now back to values seen at the end of 2016,” Domain property analyst Nicola Powell told AAP. Tighter credit availability and a high number of units being built are key factors behind the dive, Dr Powell said.

Apartment Boom Comes to End

Next up, please consider Construction Set for Biggest Decline Since the Global Financial Crisis

Australia’s building commencements, fueled by investor apartment construction, look like heading from boom to bust, according to forecaster BIS Oxford Economics.

In a reality check for investors who bought at the top of the apartment boom, BIS is predicting the biggest correction since the global financial crisis hit in 2008, with housing starts set to fall by almost 23 per cent by 2020.

Associate director Adrian Hart told the ABC’s AM program that the slump would be led by high-density dwelling construction, which is set to halve over the next two years

A key factor in the residential slowdown has been tougher regulation by the Australian Prudential Regulation Authority (APRA) to curb investor lending, while the Foreign Investment Review Board (FIRB) and tax office has been clamping down on overseas buyers.

Mortgage Prison

Finally, and most importantly, please consider Aussie Homeowners Trapped in ‘Mortgage Prison’.

Australian homeowners are trapped in “mortgage prison” because of a rule change. And there is no easy way out.

Changes in bank rules around living expenses calculations have effectively wiped huge amounts off the maximum a bank will allow you to borrow.

Many people are now finding they originally borrowed more than a bank would lend them under current conditions, meaning they haven’t got the option of shopping around to get a better interest rate — no bank will lend them the amount they need.

Precise numbers of Australia’s mortgage prisoners are hard to come by, but Mozo investment and lending expert Steve Jovcevski told news.com.au that he expected most of them are those who have borrowed and bought in the last five years.

Oops!

Jovcevski gave an example in which a couple was able to borrow $800,000 a year ago can now only borrow $680,000 under the same rules.

They are now trapped in a mortgage with no way to refinance and no buyers because of declining prices.

Mortgage Slaves for Life

This is precisely what some us foresaw years ago. It’s finally come home to roost, and at a time China is highly unlikely to bail out these buyers.

People may be trapped for decades. So expect to see more articles like this as desperation sets in: Australia Housing Insanity: Tent Outside, Full Use of Apartment, Cheap, $90 Per Week.

That was from a year ago. Rates will drop fast. Buyers will need tenants to stay afloat.

Special Mention

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Dateline July 23, 2017

13-Year-Old Kid Buys $552,000 Home

Meet Akira Ellis a 13-year-old kid. He just bought his first piece of real estate, a $552,000 four-room one bath house in Melbourne’s Frankston.

Right at the peak of the market a 13-year-old kid (with obvious help from his parents), bought a house costing over half a million dollars.

I noted “Akira is already looking for his next property.”

I asked “What can possibly go wrong?”

Today, we found out.

Source: ZeroHedge