Mish: Australian Housing Bubble About to Burst, Market About to Crash
Housing-Market / Austrailia Feb 03, 2010 - 12:47 AM By: Mike_Shedlock
Today the Reserve Bank of Australia (RBA) unexpectedly held interest rates at 3.75%. No doubt this was in fear of the Australia's enormous housing bubble that exceeds the height of the bubble that long ago burst in the US. 20 economists predicted the RBA would hike. Not a single one predicted anything else.
Fear in the board of governors over the pending crash is palpable. Prime Minister Kevin Rudd did not learn a single thing from the US and the disastrous policies of Greenspan. He gave one last goose to the housing market with $14,000 tax credits in a foolish attempt to stem the tide of the global recession that started two years ago.
Prime Minister Rudd brags about Australia's ability to duck the recession. It did not work. All Rudd did was delay the inevitable, fueling an even bigger housing bubble. The bigger the bubble, the bigger the crash, and rest assured Australia is headed for a housing crash.
Here are a few snips from the Bloomberg article Australia Unexpectedly Keeps Interest Rate at 3.75%.
Here is a statement from the article that particularly caught my eye: Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney said "Today’s decision reduces the serious risk of a policy blunder.”
Serious Policy Blunder
Sorry Prasad, a serious policy error was made long ago, and there is not a damn thing the RBA or anyone else can do to stop the impending housing crash in Australia.
What follows is a post I actually wrote yesterday. I intended to post this before the rate decisions, but it never happened. I too, thought one more hike was coming. That it did not come is a sign of panic at the RBA.
First Time Buyers In Severe Stress
Just as happened in the United states with subprime borrowers, Australia's first-home buyers struggle as interest rates rise.
No Lessons Learned
"LD", a reader from Australia who sent me the link asked and answered his own question: "What have Australians learned from Americans over the last 2 years? Nothing!"
Credit Squeeze Coming Up
Craig, another reader from Australia writes ...
Mish
I've been waiting a long time to buy a house in Australia. Looks like I may not have to wait too much longer for the Aussie bubble to burst. As always, love your blog. Cheers, Craig
Craig is referring to Tighter credit rules to halve home loans.
Deposit Math
Note the above paragraph in red by Steve Keen, one of few economists in the world who actually has a clue. His blog is Steve Keen’s Debtwatch.
Also note the worries of the so-called housing experts in the above article: Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse.
If those "experts" had an ounce of common sense they would be worried the housing bubble would get bigger.
Indeed, housing prices are so stretched in Australia that the bubble will bust soon enough regardless of whether lenders tighten standards or not.
The US housing bubble burst with credit standards still getting looser a year or more later.
When Do Bubbles Burst?
Bubbles burst when the pool of greater fools runs out, and not before.
That is exactly why Economist Steve Keen lost housing bet against Rory Robertson
Why The Bet Went Wrong
Keen's mistake (miscalculation is a better word as I am positive he will ultimately be proven correct), was that he misjudged actions the Rudd administration might take to keep the bubble going.
Bear in mind that once the trend changes, it changes for good, but until the trend does change, efforts to keep bubbles alive frequently produce blowoff tops.
In Australia's case I finally sense a blowoff top in fools. The US suffered the same fate in 2005 when the cover of Time Magazine went "gaga over real estate" and people were camping out overnight and entering lotteries for the right to buy Florida condos.
Inquiring minds might be interested in the following flashbacks, the first showing the funniest Time Magazine cover in history, the second shows approximately where we are today although I do have to move the arrow one notch closer to the bottom.
April 10, 2006: US vs. Japan Land Prices Pictorial Update
July 13, 2009: Housing Update - How Far To The Bottom?
How did Bernanke and other experts fair?
Let's answer that with a few more flashbacks.
The initial data point on my chart came in the post It's a Totally New Paradigm on March 26, 2005. Here are some excerpts from that post.
- Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that "South Florida is working off of a totally new economic model than any of us have ever experienced in the past." He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.
- "I just don't think we have what it takes to prick the bubble," said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90's. "I don't think prices are going to fall, and I don't think they're even going to be flat."
- Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. "It is a new paradigm" he said.
Flashback October 27, 2005
Inquiring minds may wish to review Bernanke: There's No Housing Bubble to Go Bust.
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.
Flashback February 12, 2008
Bernanke Expects Housing Recovery by Year End
Bubbles and Humpty Dumpty
Bernanke has proven all the king's horses and all the king's men cannot put bubbles together again.
For further proof please see Bernanke's Deflation Preventing Scorecard.
After bubbles burst, nothing matters including loose lending standards in the US that lasted long after the housing peak in summer of 2005.
Supply of Fools Exhausted
I am willing to bet that at long last, Australia's pool of greater fools just ran out. Rudd's ridiculous $14,000 grant and stamp-duty relief programs were likely enough to exhaust that pool.
The ultimate irony of Keen's bet is that by the time he starts his hike in April he will likely be right.
Bear in mind however, that prices tend to fall slowly at first as inventory builds up. Then the losses accelerate quickly.
A Long Wait
By the way, Australia buyers might need to wait 5-7 years or more for reasonable valuations. Look how long it took for the US housing bubble to implode. We have not hit bottom yet after 5 years, and the Australia bubble has a bigger starting point.
Please see Housing Bubble Comparison: US, UK, Canada, Spain, Australia, Japan for a county by country comparison of housing bubbles from the Ecomomist.
Demographia International Housing Survey
Inquiring minds are reviewing the results of the 6th Annual Demographia International Housing Affordability Survey. Countries in the survey include Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States.
Least Affordable Cities
The article shows the top 58, I captured the top 20 above.
Congratulations To Canada And Australia
Congratulations go to Vancouver, Canada for being the least affordable city in the survey. Vancouver thus wins the gold medal in the individual competition.
Sydney Australia proudly wins the Silver medal and the Sunshine Coast Australia wins the bronze. It was close but no cigar for Australia's Gold Coast. Honolulu Hawaii came in a respectable fifth place.
Most Affordable Cities
Detroit, South Bend, Youngstown, Flint, Toledo, Akron, Peoria, Cleveland, and many other "affordable" cities are not places where anyone would particularly want to live. Indeed many cities at the top of the affordability list are places that most would hope to escape from.
The high school graduation rate in Detroit is a mere 25%!
I am willing to bet that Detroit's graduation rate is far and away the worst of any city in the survey. See Michigan Forces Business Owners Into Public Sector Unions; Detroit's Aura of Hopelessness for more details.
Moreover, there are houses in Detroit, Cleveland, Flint, etc, that one could buy for $500 that have no takers. Unlivable houses no one wants at any price skew the results.
Demographia Summary by Nation
All of the affordable markets were located in Canada and the United States, while most markets in Australia, New Zealand and the United Kingdom were severely unaffordable.
Australia: House prices have continued to rise in Australia (Figure 2), which registered the worst housing affordability (the highest Median Multiple) in the history of the Survey. Overall, housing in Australia is severely unaffordable, with a Median Multiple of 6.8, more than double the 3.0 historic maximum norm. Housing had been affordable in Australia in the late 1980s, with a Median Multiple of under 3.0. The Median Multiple remained at or under 3.5 until the late 1990s.
All of Australia?s major markets were severely unaffordable (Median Multiple above 5.0). Moreover, all markets, including smaller markets were severely unaffordable except Ballarat (Victoria), which was seriously unaffordable (Median Multiple between 4.1 and 5.0).
Canada: Housing is moderately unaffordable, as in previous Surveys. Canada?s Median Multiple is 3.7. Housing had been affordable in Canada in the late 1990s, with a Median Multiple of 3.0. Canada had 5 affordable markets, 13 moderately unaffordable markets, 5 seriously unaffordable markets and 5 severely unaffordable markets.
Vancouver remained the least affordable market of any size in the surveyed nations, at 9.3, worsening from 8.4 last year. Toronto joined Vancouver as severely unaffordable, with a Median Multiple of 5.2. However, Barrie, within the Toronto region was moderately unaffordable, at 3.4. Victoria, Abbotsford and Kelowna (all in British Columbia) were also severely unaffordable.
Ireland: Housing in Ireland has become moderately unaffordable with a Median Multiple of 3.7, showing a trend toward historic norm of 3.0.20 Housing had been affordable as late as the middle 1990s, with a Median Multiple below 3.0. The extent of Ireland?s recent housing affordability improvement is illustrated by the EBS/DKB Affordability Index, which indicates that mortgage payments have been halved in Ireland since the peak of the bubble in relation to first home buyer incomes.
New Zealand: Housing in New Zealand was severely unaffordable, with a Median Multiple of 5.7, nearly double the historic maximum norm of 3.0. Housing had been affordable in the early 1990s, with a Median Multiple of under 3.0. Auckland is the least affordable larger market, with a Median Multiple of 6.7, while Christchurch (6.1) and Wellington (5.7) were also severely unaffordable.
Tauranga-Bay of Plenty was again the least affordable market, with a Median Multiple of 6.8. Five of the 8 New Zealand markets were severely unaffordable, while Palmerston North, Napier-Hastings and Hamilton were seriously unaffordable New Zealand had no affordable markets and no moderately unaffordable markets
United Kingdom: Housing in the United Kingdom remains severely unaffordable, with a Median Multiple of 5.1, well above the historic maximum norm of 3.0. Housing had been affordable in the late 1990s, with a Median Multiple of under 3.0. Less than one-half of the United Kingdom markets were severely unaffordable (14 of 33), while the other 19 markets were seriously unaffordable. The United Kingdom had no affordable markets and no moderately unaffordable markets.
United States: Housing in the United States is rated as affordable, with the Median Multiple of 2.9.The recent house price declines have restored U.S. housing affordability to the below 3.0 historic norm (last achieved in the early 2000s), as the price bubble burst in many plan-driven markets. The United States had 98 affordable markets, 58 moderately unaffordable markets, 8 seriously unaffordable markets and 11 severely unaffordable markets.
The most affordable major market (population over 1,000,000) was Detroit. Other affordable major markets were Atlanta, Buffalo, Cincinnati, Cleveland, Columbus (Ohio), Dallas-Fort Worth, Houston, Indianapolis, Kansas City, Las Vegas, Louisville, Memphis, Minneapolis-St. Paul, Oklahoma City, Phoenix, Riverside-San Bernardino, Rochester, Sacramento, St. Louis and Tampa-St. Petersburg.
Gold, Silver, Bronze Medals
In terms of national unaffordability (the team competition) Australia wins the gold medal, New Zealand, the silver medal, and the UK wins the bronze medal.
Because of a preponderance of "affordable" cities in the US and the way the national rankings are made, I question the results of the national survey although it likely did not affect the top three medal-winning rankings.
Email Exchange With Survey Developer
I had this exchange with Hugh Pavletich of Performance Urban Planning who helped develop the survey
Bear in mind my goal is quite different than Hugh Pavletich's. He wants to show the role local planning rules have in affordability. Hugh makes a case that local zoning rules play a huge factor on a city by city affordability basis while I am concerned with "How Big Is The Bubble?"
From my perspective, the US and Canadian bubble problems are very understated, and the national affordability rankings of the US and Canada are thus overstated. To be certain, one would have to take a weighted average of populations and rankings. One would also need to take into consideration unlivable houses offered at $500 that no one would take. If one did that, we would see the bubbles are where the most people live.
There is much more in the survey. Please give it a look.
Mortgage Stress in Australia
If this chart does not scream "nationwide bubble", nothing ever will
Australian Interest Rate Hikes
On December 2, the Reserve Bank of Australia hiked rates to 3.75%.
Let's come back to that last paragraph a year from now. Two years from now it is likely to look downright silly.
One more hike is in the cards, too, on February 2. Some will lay the blame on what is about to happen on these last couple hikes. The reality is the blame for the coming bust lay in the ridiculous expansion of credit that preceded it.
Australia's problems have not yet started. Remember too, that commercial real estate follows residential with a lag. Australia can look forward to a bust in commercial real estate down the road as well.
Email From "Down Under"
Here is another email from Australia that readers may appreciate.
"Down Under" Writes ...
Australian Dollar Outlook
Two of the biggest factors affecting currency fluctuations are interest rate differentials between countries along with trends in interest rate differentials. The latter is more important. The Fed clearly is not going to cut rates (at zero bound it can't).
The Australian dollar has strengthened vs. the US dollar on the back of rate hikes. If the RBA hikes once more and the Australian dollar sinks anyway, the top is likely in.
$XAD Australian Dollar vs. US Dollar Monthly
Déjà vu all over again?
At some point the RBA will stop hiking and start cutting. In turn, speculators in Australian dollars will start taking profits. At a bare minimum, at least a fair sized pullback in the Australian dollar vs. the US dollar is likely.
$USD - US Dollar Index Monthly Chart
Most underestimate how far the US dollar can strengthen. Another run at 90 is certainly not out of the question.
Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.
I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.
When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .