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Housing bubble trouble for the middle class (Read 803 times)
Sir lastnail
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Housing bubble trouble for the middle class
Aug 19th, 2010 at 1:14pm
 
http://www.theage.com.au/business/housing-bubble-trouble-for-the-middle-class-20...

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Housing bubble trouble for the middle class


Morgan Stanley's Gerard Minack has diversified from being bearish about US equities into calling Australian housing a dud investment, a bubble, albeit one that just might steadily deflate rather than dramatically pop. 

It's two months since Reserve Bank deputy governor Ric Battellino delivered a myth-busting speech that included an effective defence of the Australian housing market and the sustainability of the present level of household debt. Minack's latest newsletter to clients seems to take direct aim at that Battellino speech, but doesn't go as far as
Sydney academic Steve Keen's Doomsday forecasting.

Minack produces plenty of evidence that Australian housing is expensive on any number of counts - and there's no news in that for anyone looking for a home in the capital cities. That process of becoming expensive made housing a rewarding investment over the past decade, but Minack thinks being expensive will make it a poor performer in the years ahead - if we're fortunate.

The Morgan Stanley economist says there are two potential pins that might pop the bubble. The first is Keen's dire prediction of large-scale job losses, but Minack doesn't think that's likely in the foreseeable future. The second though is that the nation's landlord class might realise en mass that they're losing money and bail out.

Minack notes that bubbles more often pop than subside, but sometimes the less dramatic path is followed.

''Sydney, for example, has seen two periods - from late 1980s and from 2004 - where inflation-adjusted house prices were flat or declined,'' he writes. And we've had a previous look at just that phenomenon of how an Aussie housing bubble deflates.

''This is a best-case outcome. Even so, it would make for a very unusual domestic cycle. Homeowners and investors are banking on steady increase in house prices. Flat or moderately declining nominal prices would presumably affect confidence and spending. Banks have relied on mortgage lending as their bread-and-butter. Growth will be structurally lower.

''Moreover, this underscores an obvious point: while we can debate the macro risks surrounding housing, it is likely to be a very poor investment given current valuations. House prices can - indeed, often do - show no growth in real terms for a very long period. To take an extreme example, real house prices in Melbourne did not surpass their 1891 peak until 2001. Buying a bubble is an extremely bad investment. I expect that the real returns on residential investment will be negative over the next decade.''

RBA's early move

Minack reckons the RBA appreciates the risk of our housing bubble and that capping house prices was a key aim of RBA policy tightening earlier this year.

''Better to slowly deflate a bubble than to see it pop. If Australia could achieve a cycle where house prices are steady or see moderate nominal declines, while growing incomes at a trend 6 per cent growth rate, it could reduce the over-valuation and financial risks associated with excess debt,'' Minack writes.

While appearing to welcome that policy aim, Minack says it was a major error by policy makers to let this bubble inflate in the first place.

''There is no value to society from rising house prices. It is simply a wealth transfer to existing owners from potential buyers. Pumping up house prices creates no more wealth than the RBA printing an extra six zeros on every piece of currency.

'''Worse, by increasing the leverage in the household sector and financial system, it increases the financial risks in the economy, as the last two years have demonstrated elsewhere. In short, there seems a strong case for policy-makers to aim to cap house prices.''

What Minack isn't sure about is whether the large number of negative-carry property investors could create selling pressure if nominal house prices are flat for an extended period.

Hanging on

I'd argue that the Australian experience is that residential real estate owners, both owner occupiers and the landlord class, tend to hang on grimly as long as they can service the debt (i.e. unemployment remains relatively low) rather than facing up to the on-going financial drain. What Minack does, though, is debunk the real estate spruikers' claim that ``you can't go wrong with bricks'n'mortar

''Australian Tax Office data confirm that residential investment is a poor investment: total rent has not covered total costs since FY2000 (the date the bubble started to inflate). In short, this is an investment that depends on capital gain for its payback.

''With net income not even covering interest charges, this is a classic Hyman Minsky Ponzi scheme. Ponzi owns the house, and he's betting that house prices keep rising.

''Not only is the aggregate private rental market a loss-making affair, but a rising share of landlords are making rental losses. The percentage of landlords claiming a rental loss (that is, rent not covering interest and other costs) has increased from 50 per cent to 70 per cent over the past decade. It's not just that there are more landlords, there are more loss-making landlords.

''This matters a lot. Much of the discussion on the residential market concentrates on owner-occupiers. But arguably property investors represent a significantly larger risk if ...
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Sir lastnail
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Re:  Housing bubble trouble for the middle class
Reply #1 - Aug 19th, 2010 at 1:17pm
 
cont....

Quote:
''This matters a lot. Much of the discussion on the residential market concentrates on owner-occupiers. But arguably property investors represent a significantly larger risk if they became widespread sellers of their loss-making investments.''

Middle-class exposure

A key part of the Battellino defence of household debt sustainability was simply that it tends to be the wealthy who have borrowed the most and therefore they can afford it, but that's not the case when it comes to residential landlords, claims Minack.

''Certainly property investment is more prevalent at higher income scales. But it is simply wrong to assert that rental properties are largely owned by high-income households: losing on residential property investment is largely a middle-class affair.

''Only 3 per cent of all loss-making properties are owned by taxpayers with a taxable income of over $200,000. Taxpayers who earn $80,000 or less own 80 per cent of all loss-making properties.''

And there are a lot of residential property investors.

''Australia has become a nation of landlords: in 1988-89, 608,000 taxpayers reported rental income, by 2007-08 1,765,00 taxpayers did - 13.5% of the total. This clearly reflects the widespread belief that property is an excellent medium-term investment.

''Over the past decade property has been an excellent investment. But it is, in my view, extremely unwise to expect such gains to continue given current valuations. The investment fundamentals of housing have sharply deteriorated.''
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bridonta
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Re:  Housing bubble trouble for the middle class
Reply #2 - Aug 19th, 2010 at 1:40pm
 
don't worry nail , it will comes to an end like the rest of the world. Australia may be lucky but no exception , kept on intake more people to inflate prices may be good for them now but will be worst in the near future ahead .. when China is moving from export and not relying too much on our resources ..
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Re:  Housing bubble trouble for the middle class
Reply #3 - Aug 19th, 2010 at 1:59pm
 
bridonta wrote on Aug 19th, 2010 at 1:40pm:
don't worry nail , it will comes to an end like the rest of the world. Australia may be lucky but no exception , kept on intake more people to inflate prices may be good for them now but will be worst in the near future ahead .. when China is moving from export and not relying too much on our resources ..


Where are the eternal property optimists now ??

Note how they have put the crummy property auction shows back on TV again. That is a sure sign of desperate times !! Quick, go out and buy and pay top dollar before you miss out !! Smiley LOL
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bridonta
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Re:  Housing bubble trouble for the middle class
Reply #4 - Aug 19th, 2010 at 2:35pm
 
that's how they tried to encourage landlords to push up renting by writting all craps in the media .. that they expect rents to rise due to low increases in previous year ... which are disadvantage for all landlords ??
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Re:  Housing bubble trouble for the middle class
Reply #5 - Aug 19th, 2010 at 3:03pm
 
bridonta wrote on Aug 19th, 2010 at 2:35pm:
that's how they tried to encourage landlords to push up renting by writting all craps in the media .. that they expect rents to rise due to low increases in previous year ... which are disadvantage for all landlords ??


the property sector is one of the biggest advertising sponsors of media so it is little wonder the bias is towards spruiking property, but this incestuous relationship can only go so long before the punters see through it Wink
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bridonta
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Re:  Housing bubble trouble for the middle class
Reply #6 - Aug 20th, 2010 at 1:48pm
 
finally a sound advice from Kochi

http://au.pfinance.yahoo.com/b/david-koch/1342/think-twice-before-buying-a-home
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Re:  Housing bubble trouble for the middle class
Reply #7 - Aug 21st, 2010 at 1:47am
 
bridonta wrote on Aug 20th, 2010 at 1:48pm:
finally a sound advice from Kochi

http://au.pfinance.yahoo.com/b/david-koch/1342/think-twice-before-buying-a-home


Yes good article. I will repost it for the benefit of the eternal property optimists. I also heard that banks are holding back on raising interest rates until after the election. They are not making enough out of the punters so will want to screw them more. Such is life Wink

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Think twice before buying a home


All the indicators show the property market will continue to soften. Auction clearance rates are down from the start of the year, house prices have started to fall for the first time in 18 months and homes are staying on the market longer.
The boom in the housing market is over. Figures out this week show the number of Australian home loans dropped more than expected in June to a nine year low. That tells us demand for property is falling.

Higher borrowing costs have scared off buyers.  The Reserve Bank raised interest rates six times between October and May to control the economic recovery. It’s definitely worked. There’s very little chance they’ll hike rates again this year.

All the indicators show the property market will continue to soften. Auction clearance rates are down from the start of the year, house prices have started to fall for the first time in 18 months and homes are staying on the market longer.

Time after time

First homebuyers have been dropping off since the end of the Federal Government’s boost to the first homebuyer scheme earlier this year. Banks are now reducing the amount of money they are willing to lend to this section of the market.

Time after time foreign economists visit our shores and are staggered by the price of residential property. Australia’s median home price was 6.8 times gross yearly income last year, compared with 5.1 times in the UK and 2.9 times in the US, according to the annual Demographia International Housing Affordability Survey. Overseas economists warn Australian home prices are up to 50 per cent overvalued.

Our property market missed last year’s global downturn. Sometime in the next two to four years there will be a dip in the property cycle, I’m concerned it could be a major correction.

Show me the money

If you’re looking to enter the property market consider waiting on the sidelines until things settle down, because you don’t want to buy at the top of the market unless you have something to sell.  There is a very good argument to say it would be better to rent instead of buy at the moment as long as you invest the difference between what you pay in rent and what you would fork out in mortgage repayments each month.

Variable rate home loans are charging around 7 per cent interest. On an average $300,000 home loan the monthly mortgage repayment would be about $2,120, around 80 per cent of that would be paying off interest and just 20 per cent would reduce the principal. You also have the added cost of maintaining a home, which you don’t have if you’re renting. There are also extra transaction costs involved in buying a home, like stamp duty and legal fees. Your property would have to experience significant price growth for you to be ahead in the short term.

I understand finances aren’t the only consideration when buying a home. There are also lifestyle reasons like stability and security. That’s fair enough because life is more than just about money.

When the crunch comes


When the crunch comes, history tells us property prices will eventually swing back up. If you’re in the market for the long term, there’s no need to worry providing you have enough equity in your home. You just don’t want to be a forced seller in a downturn.

Spring will be a real test for the property market. Things traditionally pick up from September as properties flood onto the market and warmer weather brings buyers out of hibernation. There is some concern there will be an oversupply of homes on the market this spring, as so much of the winter stock has not sold.



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