The Party's Over For Australia's $5.6 Trillion Housing Frenzy

Tyler Durden's picture

Early this month, we discussed whether the world’s longest running bull market – 55 years – in Australian house prices had come to an end. This was UBS’s view following the October 2017 monthly report on Australian house prices from CoreLogic suggested that measures to tighten credit standards and dissuade overseas buyers (especially Chinese in Sydney and Melbourne) have finally begun to bite. As CoreLogic’s summary table shows, Sydney prices fell in October, for the second month running, and poised to lead national prices lower.

We followed up that discussion with “Why Australia’s Economy Is A House Of Cards” in which Matt Barrie and Craig Tindale described how Australia’s three decades long economic expansion had mostly been the result of “dumb luck”.

As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.

Now Bloomberg has followed UBS in calling the end of the bull market, while showing some of the frankly scary metrics for Australian housing versus the country’s GDP.

The party is finally winding down for Australia’s housing market. How severe the hangover is will determine the economy’s fate for years to come. After five years of surging prices, the market value of the nation’s homes has ballooned to A$7.3 trillion ($5.6 trillion) -- or more than four times gross domestic product. Not even the U.S. and U.K. markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them.

Australia’s obsession with property is firmly entrenched in the nation’s economy and psyche, fueled by record-low interest rates, generous tax breaks, banks hooked on mortgage lending, and prime-time TV shows where home renovators are lauded like sporting heroes. For many, homes morphed into cash machines to finance loans for boats, cars and investment properties. The upshot: households are now twice as indebted as China’s.

One thing which should slow Australian property prices on the way down is that the Governor of the Reserve Bank of Australia (RBA), Philip Lowe, is still in no rush to raise rates. However, his hands are tied…and he knows it…as Australia’s New Daily reported.

“In striking the appropriate balance in our policy setting we have paid close attention to trends in household borrowing given the already high levels of debt.”

 

Over the past four years, household borrowing has increased at an average rate of 6.5 per cent while household income has increased at an average rate of just 3.5 per cent, he said. An area of particular concern for Dr Lowe is the slow growth in household incomes. Over the past four years, nominal average hourly earnings have grown at the slowest rate in “many decades”.

 

“This means that borrowers haven’t been able to rely on rising incomes to reduce the real value of the debt repayments in the way they used to,” he said.

Here’s Bloomberg on the same theme.

Aussie households have racked up record private debts and aren’t getting the pay rises to help service them. That’s a core concern for the RBA and frequently cited as a deterrent for hiking interest rates. Macquarie Bank has said such debt levels mean any hikes will have triple the impact on consumers than tightening cycles in the mid-1990s. With retail sales looking grim and wage growth near record lows, debt will likely vex policy makers for years.

Of course, as Bloomberg notes, the RBA is pointing out the resilience of the Australian financial system should it be hit by any shocks...somewhat reminiscent of Ben Bernanke prior to the sub-prime crisis.

So far, the Reserve Bank of Australia has relied on banking regulators to apply the brakes with lending curbs. It reckons the financial system is well-placed to withstand any shocks, but isn’t so confident on consumers.

The banks didn’t fare so well in the 2008 crisis, nor will they in an Australian housing crisis. Bloomberg continues.

On one hand, the dizzy valuations reflect a desirable location and strong population growth. But they also reflect the massive liabilities that are now tied to these assets. “The risk is that it leaves the Australian economy extremely exposed, and a minor shock could become far more significant,” said Daniel Blake, an economist at Morgan Stanley in Sydney.

The increasing treatment of housing as a financial commodity has seen borrowers rush into a byzantine maze of mortgage-related products. That’s made banks very profitable, but very exposed. While the RBA is satisfied that lenders have adequate buffers to cope with any downturn, banks may find it harder to value their collateral in a falling market as investors look to consolidate their portfolios of multiple homes, said Blake.

Meantime, aside from tighter lending standards and fewer overseas buyers, the major Australian cities are poised to see a wave of new supply, especially apartments – as this chart shows.

As you’d expect, even that is not something that will change the rhetoric from the central bank, as Bloomberg notes.

While cranes dot the Sydney skyline for miles, the central bank remains confident that population growth will eventually fill all those new apartments. Its worries about a Melbourne glut have eased off recently, with the main concern in the Brisbane market, where peak completion is expected this year, capping a three-year period in which the number of apartments has increased by more than a third. Overseas buyers comprise up to 15 percent of new dwelling purchases nationwide, according to the RBA.

Having called the end of Australia’s housing boom, UBS notes.

“The cooling may be happening a bit more quickly than even we expected.”

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38BWD22's picture

 

 

The party may be over everywhere.  

Prepare.

God, gold, guns, proper education, etc.  Eschew debt too!

Even somewhat resistant Bitcoin to .gov attack via taxation.  Just be ready to pay Capital Gains Tax if you sell at a profit.

 

FreeShitter's picture

U may have missed RIOT this week...that stock was on fucking fiaaah.

Laowei Gweilo's picture

As stupid as Vancouver's affordability and growth has been, it's still only 94th in the world based on median prices (below even Detroit)

 

Australia, on the other hand, is just bat shit crazy. 2x the price of Vancouver on a per GDP metric is insane. Actually, VAN being 2x is insane; AUS being 4x is just... terrifying. 

Crazy Or Not's picture

Australia has always been among the highest living cost Nation States. Mecca for retiree's, CEO's and "made it's" - but unable to produce significant parts of its own food, relying on mineral exports & consumer purchases for wealth. The construction and expansion of US Base in Darwin signals its next manifestation - as a large US Aircraft Carrier in Spratley Islands / South China Seas flowering hostilities.  

ronthefisherman's picture

^^ "but unable to produce significant parts of its own food,"

You know nothing about Australia , which exports food all over the World.

 

By the way, it's all over for USA in the Asia Pacific, China makes the rules now...

 

 

Truthoutthere's picture

Australia has sold out to the multinationals.Flogged off all our gas,our prime agricultural land.They even sold the port of Darwin to the Chinese(without telling the Americans who have a base nearby).A lot of the big building companies operating here are Chinese(who must be pissing themselves at how easy this soft takeover is).Many of our energy providers are overseas corporations.They truly would sell the Harbour Bridge if they thought they could get away with it.Lucky Country my arse.We will be the whipping boy of China very shortly and our useless lying politicians won't care 'coz they'll be well gone with their fat arise pensions.

JRobby's picture

Debt based currency will result in over lending and underlying asset bubble. Every time. Nature of it. Lenders keep lending unrestrained by anything except ass hammering bubble collapse.

Laowei Gweilo's picture

ho li fuk @ the 350 cranes stat BTW.... i need find some pics of that o.0

Endgame Napoleon's picture

Wonder what will happen when they raise rates, presumably meaning higher prices on other items. Since incomes for everyone except the dual, high-earner parents in the top 20% have stagnated to the point where rent is unaffordable, people will have to cut back on things like food, fuel, etc. unless they are reproducing out of wedlock, in which case the US government rewards them with free food and housing, in addition to a $6,318 check at tax time.

desirdavenir's picture

Don't look at France... GDP ~ €2Tn, house stock > €9Tn.

AssN9's picture

West of the Great Dividing Range property values have already halved in many rural townships. Real Estate agents are no longer listing prices in window advertising out here. We survive because there is a real economy in agriculture, however,along the Pacific coast could be a different story...Perth is already experiencing a huge decline also...It was the mining/gas collapse that pulled the trigger.
I encourage people to own physical gold and silver and to establish vegetable gardens, some people still think I'm batshit crazy but no where near as many that did 10 years ago...

Laowei Gweilo's picture

I can imagine so. I'm a city slicker but vis-a-vis having some roots in rural BC industry I see so much of the province is barely hanging on by a thread, and any single mine spill or forest fire can turn a lot of communities into ghost towns over night. 

Rural industry always been a 'anchor tenant' to communities, but communities used to 'weather the storm' ... these days, one bad event and the company closes up shop -- and effectively the town :(

VAN is booming and people here give zero shits to the rest of the province, and electorally they're increasingly marginalized. 

Not unlike the '2 Americas' concept, I guess. Is why Canada is probably eventually gonna have a Conservative PM again. Prob not next election but first serious correction the country faces, gonna break that camel's back.

JRobby's picture

How to destroy developed economies:

Low rates / easy money / excessive lending

Export jobs to low wage areas offshore

No wage growth / unchecked immigration

Strangle small businesses (primary job creators) with regulation.

Then raise rates.

Slavery

chestergimli's picture

Your first sentence should have read, How to destroy developed financial systems. My dictionary says economy: production and distribution of goods and services. A monetary system is a detriment to a healthily functioning economy. Just look around you at the world. See what I mean.

SoDamnMad's picture

Mission accomplished USSA

Mentaliusanything's picture

Correct and the massive immigration of the unskilled "squat to shit" types will see wages fall heavily. Its a paridise when massive numbers jobs are created by ubering delliveroos and "services for cash" types. This country is done.

MozartIII's picture

At some point and time it will all burn.

Captain Nemo de Erehwon's picture

increasing carbon emission and slowing down the cooling.

MD's picture

The price is barely declining on a month over month basis, which is unremarkable. From the very first table in this article: 7.7% YEAR OVER YEAR INCREASE IN PRICE.

Prices are NOT falling. Fake news, Tylers.

Nexus789's picture

Keep on believing Australia is different. What a muppet. 

Captain Nemo de Erehwon's picture

...but no one else has Kangaroos. That should count for something?

MaxThrust's picture

"...but no one else has Kangaroos."

and they taste pretty good also.

Mustahattu's picture

I'm guessing you are a very disappointed immigrant?

ronthefisherman's picture

Australia is the lucky country - get with the story...!

 

Truthoutthere's picture

It is different.It's a fucking joke.We're squandering our assets,selling everything not bolted down,desperately clinging on to the 20th century.We could run the planet on hydrothermal(which is a proven energy source),our stupid fucking govt. is in bed with coal.They want to give a loan(from the taxpayer) to a corrupt Indian coal miner to build a railway to carry 100's of millions of tonnes of coal to the coast to be shipped overseas through the Great Barrier Reef.'Coz you know what's? Coal has a great future.These words out of the mouth of our insane former PM.
Australia is getting played like a fiddle whilst being ransacked.

Expendable Container's picture

Too right! But you forgot one thing - we the ethnic-European tribe in every nation around the world are under serious assault including Australia and WE MUST LEARN TO BECOME A (united) TRIBE! https://europeansworldwide.wordpress.com/2017/11/19/in-the-shadow-of-satan/ Our love for individuality has served us well, creating many civilizations in history, but it is now working against us. Consider this.

Yen Cross's picture

   One can only hope.

  The : Pinheads that are using specs  based on taxes, usability, maintainance ect.. are spot on.    lol

I Write Code's picture

That's crazy, less than 1/10 the US population but more than 1/5 the value, that's twice the $$ per capita.  They must be counting kangaroo kondos or something.

spdrdr's picture

She'll be right, mate...

Nexus789's picture

She won't be... Big bust coming here. 

spdrdr's picture

Yep.  I suggest that you immediately place on the market your negatively-geared properties, so that I can Hoover them all up.

JRobby's picture

That's the game. Back to the 1800s landlord class/poor renter class

Truthoutthere's picture

$million mortgages.What could go wrong? Yep,there are a lot of young professionals out there for whom even a blip will scupper their plans of being property magnates.I think the phrase is 'in up to the hilt'.

Dragon HAwk's picture

But debt is an Asset, somebody is Rich I tell you.

Package Debt and call it a Security, what can possibly go wrong.

Juliette's picture

What they call a house in Australia is really just a shack. Repellingly low building standards and lack of space, and all a hundred times overpriced. German houses are the best in the world.

Jacksons Ghost's picture

Nigga plz! Like the Banks won't just print money and buy the f'ing houses if need be.  Central Banks intervene in all "markets".  There is no real markets.

 

Mustahattu's picture

Sort of true with the new units and apartments they are building in Melbourne and Sydney. They build with low quality materials to keep the price down and get max profit. They focus on the living space to get good photos for the brochure and website. The builders just don't care and reputation means nothing.

But other than that houses in Scandinavia are the best in the world. Germany can suck it.

Bingo Hammer's picture

"Lebo'" building companies and bought and paid for "Lebonese" born or raised politicicians/beaurocrats are a cancer in Australian capital cities.....drugs, fraud, corruption at every turn, just like the disgraced former Labor minister Eddie Obied.....on and on it goes...

Killdo's picture

When I was in Melbourne 2 years ago - I noticed the quality of new (and old) buildings is far superior to anything in the US or Canada. Especially new condos built in Melbourne seemed the best quality I have seen anywhere. In the US (i.e. San Francisco) where I lived for 5 years the quality  and design of new buildings is pretty bad. You can tell they only use the cheapest materials (while trying to charge as much money as possible). 

I think the bubble in Australia is nothing compared to the US where nobody I know can afford to buy anything. My friends in Australia can afford to buy and they do buy. In SF a friend who is a global director of a department of a famous IT firm cannot afford to buy a one bedroom place. 

JRobby's picture

Good thing because it is not safe to leave the house since guns are banned.

Endgame Napoleon's picture

They do that in some luxury houses in gated communities in the US, too. At the peak of the pre-crash housing boom, I hung an exhibit in a massive, castle-sized home. They were renting the space out even before it hit the market. The area was still under construction, so driving into the neighborhood, no English was heard anywhere around the 100% immigrant (likely 100% illegal immigrant) work crews. I overheard sellers laughing about getting cut-rate prices on low-quality materials, assuming that the buyer would only see the colossal space and not the low-grade materials and sloppy detailing.

Juliette's picture

Scandinavian houses are built of wood, German houses are built from stone or technologically advanced forms of bricks. I prefer stones and bricks any day, with the foundation, cellar walls and all floors made of steel-reinforced concrete. Such a house is way more durable than a wooden house, in any climate, and will last hundreds of years.

Jacksons Ghost's picture

How did the Atlantic Wall and the Siegfried line, all made of cement, hold up for you Fritz?   FU and your SS Nazi family.

Parrotile's picture

Build quality was bad in the 1980's, and has just continued to deteriorate. In the meantime the "Licenced Professional" builders (short courses via the local TAFE Institutes) have  had no problems overcharging for very second-rate construction. In Australia, it it the unskilled / semi-skilled who drive the "prestige" marques (and a lot of that's down to a Nationwide desire to "keep up appearances"). 

If you want to see just how bad things have become - the exurbs from Sydney down through Wollongong are enlightening. Massive timber-framed (and clad) homes, on tiny (350 square metre) blocks of land,  so close to the neighbours that one may shake their hand through the upstairs windows! VERY glamorous interiors though, with all the latest "must haves" as featured in our incessant, prime-time "property" shows, along with the triple garages, pools, boat, jet-ski - the usual "look at me, I'm so successful" trappings (all "paid for" by refinance!).

The "unspoken nightmare" is that, should property prices (especially apartment prices) show signs of "significant weakness" (RE slang for dropping and fast), a large chunk of those "invested" in RE will certainly decide to get out now - and that will be when the fun really starts, and we'll see the REAL value of all those crappy little shoe-boxes.

rc59's picture

Poor quality is systemic. Check out only 33% compliance with national building standards for metal roofng in Perth c. 2014 -- WA Building Commission report published in 2016 (after Auditor General became interested). Builders' lobby attacked it and ZERO media attention (assume realestate advertising revenue theory). "FINAL REPORT General Inspection Report One: A general inspection into metal roof construction in Western Australia" (2016)

https://www.commerce.wa.gov.au/sites/default/files/atoms/files/general_i...

JRobby's picture

Where a quality metal roof installed correctly is a 50 year lifespan product. But the question is: where?

rc59's picture

Correction: that link seems problematic due to re-organisations etc. Google the title or this link seems to be working: 

https://www.commerce.wa.gov.au/sites/default/files/atoms/files/general_i...

Captain Nemo de Erehwon's picture

Poor quality ensures that no one "owns" anything and has to make periodic "rent" payments for its upkeep. It keeps the economy going. Why else would anyone need to rent a new phone for $50/month every two years?