Australian Property Bubble....

[elltel]

Board,

There seems to be a lot written on this topic in the press and internet, see links below. Just wondering if anyone had views (of course everyone does!).

If people were to play it... any ideas? Finding some CDOs like Burry did. Out of the money puts. Shorting Banks in Australia?

Thoughts...

 

http://www.smartcompany.com.au/economy/20100920-australia-s-housing-riddle-expert-says-no-bubble-but-prices-more-than-24-overvalued-maley.html

 

http://en.wikipedia.org/wiki/Australian_property_bubble

 

Elltel

[Baoxiaodao]

Board,

There seems to be a lot written on this topic in the press and internet, see links below. Just wondering if anyone had views (of course everyone does!).

If people were to play it... any ideas? Finding some CDOs like Burry did. Out of the money puts. Shorting Banks in Australia?

Toughts...

 

http://www.smartcompany.com.au/economy/20100920-australia-s-housing-riddle-expert-says-no-bubble-but-prices-more-than-24-overvalued-maley.html

 

http://en.wikipedia.org/wiki/Australian_property_bubble

 

Elltel

 

Thanks a lot for the info. I was planning to start buying things in Australia, so this is a good heads up!

[ERICOPOLY]

Board,

There seems to be a lot written on this topic in the press and internet, see links below. Just wondering if anyone had views (of course everyone does!).

If people were to play it... any ideas? Finding some CDOs like Burry did. Out of the money puts. Shorting Banks in Australia?

Thoughts...

 

http://www.smartcompany.com.au/economy/20100920-australia-s-housing-riddle-expert-says-no-bubble-but-prices-more-than-24-overvalued-maley.html

 

http://en.wikipedia.org/wiki/Australian_property_bubble

 

Elltel

 

 

This is an interesting article -- lots of good numbers in there:

 

http://www.marketoracle.co.uk/Article16958.html

 

Check out Figure 7.  Wow!

 

 

"‘‘I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is to be leveraged up into property."

- Glenn Stevens, Governor, Reserve Bank of Australia

 

http://www.smh.com.au/business/rbas-housing-comments-stun-real-estate-chief-20100330-raxn.html

 

 

How much faith do you have in the IMF?

 

"Australia’s house prices may be overvalued by 5 per cent to 10 per cent, the International Monetary Fund said last week."

 

http://www.smh.com.au/business/top-end-house-prices-sag-as-rates-bite-20101222-195ac.html

 

Prices of the most expensive 10 per cent of Sydney properties dropped 7.5 per cent in the six months to September, compared with an average 1.1 per cent increase in the rest of the market, according to real estate researcher RP Data. Melbourne’s top end property prices fell 10.8 per cent in the period, compared with an average 2.5 per cent price climb for the remaining homes.

 

John McGrath, chief executive officer of Sydney-based realtor McGrath, said his company had seen a 50 per cent increase in listings from the same time last year.

 

Reserve Bank governor Glenn Stevens raised interest rates seven times since October last year, citing a surge in home prices among reasons for the increases. Economists expect the central bank to raise rates by another three quarters of a percentage point by the end of next year, according to the median forecast of economists surveyed by Bloomberg.

[arbitragr]

There's no bubble in Australia.

Use the word "Bubble" with caution.

[nwoodman]

This one is pretty close to my heart so I would prefer to draw on some of the local blogs, here in Australia, that might provide a good starting point for those not familiar with the Australian situation:

 

http://www.unconventionaleconomist.com/2010/11/bubble-bubble-on-wall-whos-biggest-of.html

http://www.debtdeflation.com/blogs/

 

IMHO our economy is very dependent on the kindness of strangers.  Firstly, a source of foreign credit to finance the high price of housing.  Secondly, credit growth and in turn fixed asset investment in China to facilitate the terms of trade.  

 

However, it is worth noting, that similar to other Western economies we seem to be sharing some of the precursors to a bursting of a credit bubble.  There are currently falling auction clearance rates and retail is taking a dive.  Albeit, with a backdrop of 7.5% mortgage rates.  

 

I personally  think bubble is an inappropriate description.  We have a housing stock that is currently valued at 3.3x GDP.  To put this in context, at today’s exchange rate of around parity with the US dollar, the price of Australia’s housing stock is $US4 trillion.  This is ¼ of the entire housing stock of the USA of $US16.5 trillion.  This is an extraordinary feat for a country that has 1/13th of the population, 1/13th the number of houses and 1/12th the GDP of the USA.

 

We have been through three terms of trade shocks in the last 100 years but there is no political will here to try and quarantine any of our good fortune.  The one bureaucrat who suggested a little something out of the ordinary was shouted down and has decided to leave the post (just as it looks like debt/gdp is starting to contract).

 

http://www.businessspectator.com.au/bs.nsf/Article/Ken-Henry-Rudd-Gillard-mining-tax-pd20101221-CC5LV?OpenDocument&src=srch

 

One cavet to all of this is that macro does my head in but this seems pretty obvious to me.  I feel very confident in buying L, FFH (US exposure), BRK as the AUD is my margin of safety

 

Cheers

nwoodman

 

 

[ERICOPOLY]

nwoodman,

Thanks for those links.

 

I see the bubble naysayers arguing that the tight supply justifies increased housing costs.  Yet in that data it points out that real rents have risen 15% since 1987, whereas real house prices have climbed roughly 170%.  I'm not sure why, but the greater mass of people are not connecting the dots between 15% and 170%.

 

 

[nwoodman]

Hi Ericopoly,

 

 

as you would know, if you look at real estate bubbles around the world, tight supply is always used as a justification of why it is different this time.  It doesn't seem to stop regression to the mean once credit starts to dry up. 

 

 

There are some nice graphs in this post that show this in the US context

 

http://www.unconventionaleconomist.com/search/label/US%20Housing%20Market

 

FWIW here in Australia the two supposed boom states of Western Australia and Queensland are currently getting hit the hardest in terms of declining clearance rates and rising delinquencies.  The report below is prior to the recent 25bp interest rate increase at which time the banks put on an extra 15 bp due to "increased funding costs"

 

http://images.brisbanetimes.com.au/file/2010/12/21/2104501/Australian%20Mortgage%20Delinquency%20by%20Postcode%20Dec10.pdf?rand=1292898395690

 

 

The real shortage at the moment is finding people able to trump up US550,000 for a median house

 

Cheers

nwoodman

 

 

[ERICOPOLY]

The real shortage at the moment is finding people able to trump up US550,000 for a median house

 

The dollar is practically at parity, so the math is getting easier.  Australian median household incomes are 34% higher, but the median house price is more than triple.

 

Despite the seeming relative bargain, people in this country still point out that houses are not cheap by historical comparison.

[lance2210]

As an Australian, property is way expensive (as a future first homeowner, i am projecting a $100k deposit for a house  :() but not due to overvaluation but due to lack of supply that hasn't kept up with demand. However we are not in a bubble if we measure it compared to the realestate flipping of the States with their CDO's, NINJNA's etc.

 

As well our laws are different, from what i understand in the US, one can walkaway from a mortgage fairly easily. It's almost a

 

There was a http://www.news.com.au/business/economist-steve-keen-loses-housing-bet-against-rory-robertson/story-e6frfmbi-1225793985120 famous bet between a pessimistic economist and an interest rate strategist at an IB about house prices and this included during the GFC.

 

Anyway you could have made money shorting the banks during the GFC as the big 4 lost half their market cap but they have now recovered, but we have the Government Deposit guarantee http://www.guaranteescheme.gov.au/, as unfortunately like Citigroup, they are now in the "Too Big to Fail" category so govt will always step in. As well the top 2 of the big 4 got even bigger as they were able to buy the number 5 and one of the challenger banks ranked 7th as they had effectively runout of liquidity during the crunch.

 

However long-term Australian residential property is a secure investment most of the time. So http://www.businessspectator.com.au/bs.nsf/Article/Popping-the-hedge-funds-bubble-pd20100909-94UB9?opendocument&src=rss Jeremy Grantham, you will have egg on your face!

 

 

 

[Cardboard]

Lance2210,

 

Many of the items you point out sound very similar to the ones I hear all the time up here in Canada. Although, with incomes not rising as fast as housing and individual debt levels climbing higher and higher, eventually something has to break.

 

This is what happened in the U.S. Many of the people that I saw on "House of cards" were not flippers, but simply unable to afford what they had bought. When their interest rate climbed on the mortgage, they were bk.

 

In Canada and Australia the system is built differently, it is less private enterprise and more public. So in Canada at least, banks issue mortgages then get them insured by CHMC or Genworth MI Canada. They do verify income and debt ratios, but they have become less and less demanding. Interest rates also don't reset the same way as it happened to many in the States. They will reset on a national scale with the big banks all changing them together.

 

So I think that the U.S. housing crashed first because it is was more based on a market economy instead of a government driven system. Fear was replaced by greed. Some mortgages were fraudulent and interest rates did reset to much higher levels on some of them. Once you have had a critical mass of defaulters the system unraveled: banks started to tighten for everyone. Although, we should remember that the first signs of default by subprime appeared in late 2005 while the heights of the financial crisis or when liquidity froze was in late 08.

 

There is definitely a strong sentiment that it can't crash up here, were different. I would argue that with a few changes: higher interest rates or less demand for commodities or simply lower prices that things could change dramatically. Drops in house prices did happen in the past, so we can't assume that we are immune to it because of the system being different than the U.S. or because economic conditions won't change.

 

Cardboard

[ERICOPOLY]

but not due to overvaluation but due to lack of supply that hasn't kept up with demand.

 

Explain then how rental income as a percentage of the property value has fallen from 8% yield in late 1980s to 3.5% today.

 

Are rents immune to a supply shortage?

 

That says it right there in a nutshell. 

 

My parents are both from Australia, I was raised in California (born in 1973).  Throughout my young life we'd visit relatives in Australia every two years and one thing I remember is that Australia was about 4 years behind on my sister's favorite TV program (The Days of Our Lives) and that theaters would always be showing the "new releases" that I'd seen a year earlier back at home.  Today, I go online to the "property" section of the Sydney Morning Herald online and judging by the tone of the articles I feel like I'm once again watching last years' show.

[ERICOPOLY]

Wow.  I'm turning up some interesting things.

 

It looks like one may be able to purchase $1,000,000 properties in Australia for just $20,000 down!  

 

http://www.debtdeflation.com/blogs/

 

I’ve just been alerted by Banking Day (a subscriber-only service) that Westpac–via its subsidiary St George–is now allowing potential borrowers to treat their rental payments as “evidence of genuine savings” when applying for a home loan.

 

This is of course portrayed as  good thing in the press release that announced the development–issued by the broker Loan Market (see the press release at the end of this post). It will, they state, enable Australians who currently can’t afford to buy a home–because they can’t save a deposit–to do so. All good news.

 

The more cynical interpretation is that this is a way to let banks increase their maximum LVR (loan to valuation ratio) without actually saying so, and to expand their pool of potential borrowers as a consequence. At present, you need a $30,000 deposit to bid $1 million for a property if you get a loan from the Commonwealth Bank, which currently has one of the highest maximum LVRs of 97%: “The maximum we will lend you is 95% of the valuation amount. We also add the Lenders Mortgage Insurance or a Low Deposit Premium to your loan (up to a maximum of 97%), so it doesn’t cost you anything upfront”.

 

This press release implies that you could approach St George with $20,000 in savings, be given a $1 million loan, and have it recorded as a 95% LVR loan (since St George probably has the same maximum published LVR as Westpac of 95%) where $20,000 was your actual deposit and the effective LVR was actually 98%.

 

The effect of this trick is to expand the pool of potential borrowers to whom St George can extend a loan, while appearing not to alter its lending standards.

 

There’s at least one line that I agree with in the following press release: “This is a major step forward which will also boost activity in the struggling home finance sector and we expect other lenders to follow suit.” It will enable the banks to meet their loan sale targets, by expanding the number of applicants who qualify for a loan.

 

To me, this move smacks of desperation. The house price bubble has made entry into the market impossible without sky-high LVRs, and this in turn has undercut the banks’ business model.  Increasing their maximum LVRs by around 5% back at the end of August apparently wasn’t enough to secure the level of loans business they wanted, and St George’s response is this ruse that gives a higher LVR without calling it such.

 

It will be interesting to see how regulators treat this: will they allow rent that you’ve already paid to a landlord to be recorded as “evidence of genuine savings” and pretend that St George hasn’t increased its maximum LVR?

 

 

[ERICOPOLY]

As well our laws are different, from what i understand in the US, one can walkaway from a mortgage fairly easily.

 

That's true about California, but not all states. 

 

Here is an article on the topic:

 

http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/

 

In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

 

Note that Florida is one of the hardest hit states in the real estate collapse.

 

 

[BargainValueHunter]

Interesting discussion.

 

I wonder how much the typical square meter of urban Aussie property would cost now compared to a square meter in Tokyo in 1989 or Miami in 2005.

 

Also...how much would that Sydney property cost, per square meter, in 1997?

 

Has the annual average percentage increase been in the double digits?

 

Answer that and you'll know if our friends on the Continent have a bubble on their hands.

[ERICOPOLY]

To get evidence of a bubble, I resort to these three facts:

 

1)  People have been rewarded by leveraging up in property over the past 20 years because the property has gone up at a rapid clip.

2)  This game has led to rental yields (before expenses) falling from 8% of property value to just 3.5%

3)  So exciting has this game been, that now 12% of Australian households own a rental property, yet 70% of them claim a loss on their tax return.

 

Okay, that's 8.4% of households that are losing money on their property before considering capital gain.

 

How long will those 8.4% hold their properties off the market if prices stall?  That's a lot of properties.  And once prices slip, where will the support come from?  In this country (the US), the experts in the newspapers (who people pay more attention to these days) claim that prices should resort to their long term trend line relative to rents.  I think the income tax rate is something like 48% in Australia, so this has made property rental losses more bearable -- they call it "negative gearing"... however it still doesn't count as money in the door, now does it.  Wow, imagine their surprise if prices go down 20% and people still tell them it's only half-way over.  They are mostly amateurs almost by definition if they think this is even a half-way good idea -- so they'll be turning to the newspapers for information and all they'll get is people like Peter Schiff telling them to prepare for the even larger decline.  And he might be right too!

 

Is there more water in the well for Australian real estate?  Well, I dunno... the banks now have 55% of their loan portfolios in real estate today vs just 35% twenty years ago.  During that time frame, down payments have declined from 20% down to just 3% down.  Is there anyone left who doesn't believe this price appreciation is debt fueled?

 

I read that hedge funds (almost certainly only a few of them) in Australia have unloaded their long positions in banks and are starting to short the banks. 

 

Ask yourself... why do young people want to buy when they can rent for half the payment?  My answer is that they are looking for capital gains.  Okay, but what if they are worried about prices slipping?  Once the psychology shifts, it shouldn't take too much convincing to get them to understand that this supposed undersupply of housing ought to also put pressure on rent in the same proportion (but it didn't).  I tried explaining this to a cousin (who owns multiple rental properties with leverage) but it didn't sink in -- I think if there was a bit of fear it would. 

 

[spin]

CBA (#1 bank) Slide deck justifying to bondholders why no property bubble (Australian banks can't self-fund lending from deposits so are reliant on foreign bond holders for ~20-30% of capital)-

http://www.asx.com.au/asxpdf/20100909/pdf/31sdyy8h1qk3rv.pdf

 

Two articles hi-lighting deceptive stats used in CBA slide deck.

http://www.moneymorning.com.au/20100910/has-commonwealth-bank-deliberately-misled-investors.html

http://www.abc.net.au/news/stories/2010/09/24/3021480.htm

 

WBC (#2 Bank) - Says no bubble

 

pp51-54

https://www.westpac.com.au/docs/pdf/aw/ic/2010_FY10_IDP1.pdf

 

Article on WBC claims.

http://www.abc.net.au/news/stories/2010/10/28/3050984.htm?site=melbourne

 

Stephen Keen - Most vocal critic of Australian house prices.  Economist who lost a bet to Macquarie economist on house prices.

http://www.debtdeflation.com/blogs/

 

Investor sentiment:

Australia is the miracle economy having ~20 year of uninterrupted economic growth.  There is a whole generation of highly-levered retail residential investors at the margin using the ATO tax offset from rental losses (negative gearing) against traditional earned income to justify the holding of a housing asset for capital gains.

http://www.ato.gov.au/content/downloads/IND00237831N17290610.pdf

 

Shorting Australian banks:

While Property prices may be high or overvalued, remember LTVs on bank lending are generally reasonable and loans are full recourse-no jingle mail.  High LTV risk is partially off loaded to Mortgage insurers though for WBC MI insurer is captive.

 

WBC average 44% Current LTV on current non MI loan book.

http://i56.tinypic.com/11txt2d.png

 

Banks, while susceptible to any downturn, may not be the best way to play a housing correction if your expecting bank capital to implode a.la. US Banking.  There will will be pressure on banks though especially if international bondholders refuse to roll debt at reasonable rates - however Australian government will step in again with AAA government bank guarantee to bond investors to ensure banks can continue to fund.

 

While continued rising interest rates in Australia put continued pressure on the marginal borrower, Australia housing probably will be unlikely to correct meaningfully unless there is a recession triggering job losses that force the hand of the investor class and typical home-owner causing a flooding supply less sensitive to price.

 

For this to happen you need to take a view on China as Australia is joined at the hip to China in-terms of continued economic prosperity.

 

Spin

[Myth465]

Spin very interesting first post. Seems like you rarely swing but when you do its a nice one. Do you think China and Oz are joined at the hip? Also do you think the miracle economy is eventually due for a correction?

[nwoodman]

RBA lowers rates by 25bp

 

http://www.businessspectator.com.au/bs.nsf/Article/RBA-cuts-cash-rate-pd20111101-N7455?OpenDocument&src=hp1

[Myth465]

nwoodman you are in Australia right? If so what city? I have just moved to Melbourne and its been an interesting experience. In the inner suburbs prices are a bit too high, but not insane from where I sit. When you are on the ground down here its quite interesting. It doesnt look like the US Bubble. Incomes here are also much higher then the US. I am not sure how this plays out but its interesting to watch.

[nwoodman]

Hi Myth,

 

that is an interesting observation.  We certainly have had good wages growth over the last 5 years as the terms of trade have reached 140 year highs. 

 

 

http://www.eurekareport.com.au/iis/iis.nsf/1B242DF1E24E07A9E92579300022C812/$file/111021%20Australia%20terms%20of%20trade%20and%20private%20investment.png

 

However this may well be running its course if iron prices are anything to go by.  In this respect we are at the mercy of the Chinese and their desire to construct GDP

 

 

http://www.macrobusiness.com.au/wp-content/uploads/2011/10/Picture-512.png

 

 

Similar to other countries prior to their bubbles bursting the finance sector as a % of GDP is way too large.  There is already talk of large retrenchments in the banking sector due to reduced credit growth. This credit growth has been the real driver of housing prices and it appears to have finally tipped over.  It will be interesting to see if we succumb to the same debt saturation as other Western nations.  If so then the RBA now starts to push on a string in terms of policy response.  If we get regression to the mean in terms of housing prices then it will be quite the correction

 

http://www.whocrashedtheeconomy.com/realhouseprices1880to2011.gif

 

Cheers

 

nwoodman

 

[ERICOPOLY]

This was sort of disappointing.  I started off with Westpac to see how bad they will get impacted by a falling property market, but it looks like they would get off fairly easy.

 

Westpac has 67% of their loan portfolio in mortgages.

 

They claim to be at risk of losing only $498m under the following stress scenario:

30% decline in house prices

10.4% unemployment rate

3% decline in interest rates

3.2% decline in annual GDP growth

 

See page 103:

 

http://www.westpac.com.au/docs/pdf/aw/ic/2011_UPDATED_Full_Year_Results_Presentation_and_IDP.pdf

 

47% average loan to value in portfolio (takes into account principle paydowns thus far)

69% average loan to value of new loans

 

[ERICOPOLY]

nwoodman you are in Australia right? If so what city? I have just moved to Melbourne and its been an interesting experience. In the inner suburbs prices are a bit too high, but not insane from where I sit. When you are on the ground down here its quite interesting. It doesnt look like the US Bubble. Incomes here are also much higher then the US. I am not sure how this plays out but its interesting to watch.

 

Myth,

What gross rental yields are you seeing in your area?  Meaning, what % is annual rental income (before expenses) relative to a purchase price?

 

I think this measurement is the most straightforward because people collectively don't use borrowed money to push up rents.

 

All of those arguments about dual incomes, supply, demographics, etc... etc...  this method strips out all that noise and just gets down to basics.

 

 

 

[prevalou]

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQxMjcyfENoaWxkSUQ9NDYzMzA1fFR5cGU9MQ==&t=1

 

Genworth opinion on australian  real estate market

 

[ERICOPOLY]

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQxMjcyfENoaWxkSUQ9NDYzMzA1fFR5cGU9MQ==&t=1

 

Genworth opinion on australian  real estate market

 

It's funny you posted that -- I was reading it yesterday after I noticed that Westpac uses Genworth for mortgage insurance.

 

Genworth says: "Strong demand drives prices"

I wonder:  "Why aren't rents driven up in unison by strong demand"

 

Genworth says:  "Borrower recourse".

I say:  "This puts you on even terms with Florida's rules".

 

Genworth says:  "Mortgage interest not tax deductable"

I say:  "No property tax in Australia"

 

 

[ERICOPOLY]

This is a terrrific presentation.  The presenter believes Australia is heading down the long road of debt deflation ->  going Japanese.  He sees that an inevitable decline in consumer debt will stick a fork in the housing market.  He bases his theories on the back of Hyman Minsky's thinking.

 

"Debt And Australian Housing"

 

http://www.debtdeflation.com/blogs/2011/03/20/mortgage-finance-association-of-australia-talk/

 

At the 15:10 mark he addresses "responsible lending" in Australia

At the 24:00 mark he addresses the "population growth" argument.