Aussie Housing Market Actually Leads the U.S. by Three Years

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It’s a bit of a confusing lead from the U.S. markets today. U.S. stocks finished up for the most part. The Dow tacked on 189 points. But it was in the face of bad news.

American GDP contracted by 0.3%, according the U.S. Commerce Department. Not a big surprise, really. But it was, apparently, a better result than the ‘experts’ were expecting. And so stocks rallied!

Did you see that U.S. government debt grew by $800 billion between September 1st and yesterday? Seriously. Nearly half that is since the first of October alone. There’s more on the ongoing expansion of the U.S. balance sheet below. But how about some local market news first?

There as an interesting contrast of positions on the state of the Australian housing market over the last few days. First, RBA Deputy Governor Ric Battellino gave a speech in Sydney earlier this week in which he gave three reasons why the Australian housing market is different than the U.S. market. Don’t worry about a crash here, he seemed to be saying.

Battellino says the Aussie housing market actually leads the U.S. by about three years, and doesn’t follow it all. The correction in home values has already happened, he says. Why? Well, when the tech boom hit in the U.S. and drove the Nadsaq up, it did not drive Aussie stocks up.

Instead, Battellino says that excess global savings found their way into Australia via the housing market. The banks increased their lending to low-geared conservative households looking to trade up to a bigger home or buy an investment property. Property rose.

The second big difference, he says, is that the response to the lending boom in the U.S. (after rising house prices) was a huge increase in the inventory of new homes being built. Supply exploded in the U.S. as homebuilders over-built. The same, he says, did not happen in Australia.

“The shortage of housing here,” he says of Australia,” means that there are buyers waiting for better circumstances – e.g. lower interest rates or rising incomes – to facilitate their entry to the market. This latent underlying demand for housing is a factor that will support the market”

Finally, the lending boom in Australia-though much of it came from non-bank lenders who have since been crushed the credit crunch-never extended to the same kind of marginal borrowers it did in the States. Battellino says the lending boom was concentrated on existing home owners who were not nearly as likely to go into default as the sup-prime buyers driving the U.S. boom.

All in all, it is a spirited defence of the Aussie housing market. He does not believe buying a house priced at ten times your annual income is a sure-fire path toward perpetual debt and servitude to the bank. Battellino concludes that the boom is over, but there won’t be U.S.-style double-digit correction in house prices. He says, “The Australian housing boom ended because prices rose to levels that severely strained the financial capacity of buyers to pay higher prices, not because too many houses were built, as in the US.”

The trouble is, prices still aren’t affordable, incomes aren’t going to improve much in a recession, and lower interest rates won’t power a new boom if banks don’t lend (which they seem reluctant to do, unless it’s to people who don’t need it). So without new buyers entering the market, how will prices rise, or even be supported at current levels? Mark Latham thinks the problem is with inflated household expectations, Fed by cynical government policy.

In a spirited article in yesterday’s Financial Review, Latham writs, “Forget Kevin Rudd’s populist claptrap about extreme capitalism. The root cause of the crisis is extreme politics.” Getting away from politics-which is really just pathology-has improved Latham’s thinking.

“Internationally,” he writes, “governments have fostered the myth of universal home ownership, offering large subsidies for families that put themselves into mortgage debt beyond their means…In Australia, subsidies and tax expenditures for the property sector exceed $70 billion a year.”

“As in the US, these incentives have distorted the market in favour of housing and encouraged an unsustainable base of household debt. The impact of an international recession in Australia will be severe as risk takers in the small business and housing sectors find themselves underemployed and overleveraged.”

Latham is spot on in pointing out that the deflation of a financial bubble is nothing new. “The novel aspect of the crisis is its origins in the household sector.” The economy, rather than going through the normal booms and busts of the credit cycle, is now being affected by “the household cycle.”

“Advanced capitalism has made finance available to consumers on a mass scale. Higher social expectations about material goods have led to highly leveraged balance sheets, in turn creating a new source of economic volatility.” In other words, the entire consumption economy hinges on the health of household balance sheets.

Yet the mythologising of housing as socially desirable goal AND a way to get rich has put households in more debt than ever, and put the whole economy (through securitisation and derivatives) at risk. Houses aren’t immune from the global crisis. They’re at the epicentre of it. And if Nouriel Roubini is right (see below) house prices everywhere are going down.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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17 Comments on "Aussie Housing Market Actually Leads the U.S. by Three Years"

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Pete
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Whoa whoa whoooooaaa. Is it just me that sees something wrong with what this fella Battellino is saying? 1) “excess global savings found their way into Australia via the housing market. The banks increased their lending to low-geared conservative households looking to trade up to a bigger home or buy an investment property. Property rose.” – Does he even look at the fact that our Real Estate (RE) is 7x earnings (or more), compared to the 3x or 4x earnings in the US? 2) “The second big difference, he says, is that the response to the lending boom in the… Read more »
kojacq
Guest
Pete is absolutely spot on with his observations, however, I’d like to focus on 1 issue he mentioned ie. “blocks of 40 apartments”, as it is worth further investigation. Has anyone ever noticed that the ‘housing demand’ in Australia, is actually being approached by developers to mean: “supply more apartments, flats & townhouses”? I don’t know about you, but the last time I looked houses & apartments were 2 totally different things. What I’m trying to say is that ‘housing demand’ in Australia is real, but it is just that ‘housing’ demand, NOT ‘apartment demand’ or ‘flat demand’ or ‘townhouse’… Read more »
christina
Guest
The family of my foster child in Mongolia are among the poorest people in the world, and they just bought a house. It is made of felt and called a ger or something. It’s a felt house. It looks strong. They all live happily and warmly in it. Why cant westerners do stuff like that sometimes? Why does a house have to be something that takes a lifetime to pay off. The Indians had teepess, the eskimos had igloos, the Mongolians have felt gers, etc. Instead of having homeless people, why don’t westerners build thousands of gers in a big… Read more »
christina
Guest

Ps- do a search of the word ger on google and you’ll see what a Mongolian felt house looks like.

Nick
Guest

Everyone talks about the banks not lending but I went to the broker the other day with my 70K p/a income and am looking to borrow 300 with limited savings and the mortgage broker said there has said there is 12 lenders willing to give me a loan or which 3 are big banks….

I know two other people have had no troubles recently either. I am getting suprised with all this talk of the banks not lending.
It just aint true here in Oz.

Ross
Guest
Battelino is running foil for the condemned tribe, keeping the finger in the dyke another day for yesterday’s clown’s and sinking his own career in consequence. The same for their commercial sector compadre’s Schubert and Norris going from one swashbuckling stupidity to another (look at CBA’s stock vs Westpac/ANZ/NAB and look who is running last recently). No solutions, no strategy even aproaching, Battelino is just the fly sitting there with broken wings doing his last hurrahs and waiting to be swatted. Look at Greenspan’s comments on the Australian miracle real estate economy and how much he learnt from us while… Read more »
Michael
Guest
It’s funny that the people pumping up the housing market are the Real Estate Agents, RP Data, the Government, Saul Eastlake from ANZ and now RBA Deputy Governor Ric Battellino. These are the people who have the most to lose. Everyone else including Gerard Minack that doesn’t have an interest in the market are predicting prices will fall. If prices do fall as expected, the agents will lose commission, the Government will have a harder job preventing a recession, ANZ and other banks financial viability will be if trouble and Ric Battellino with the help of the rba will need… Read more »
beyondtool
Guest
Quite frankly Battelino is wrong, dead wrong. You only have to chat to the average Australian home owner to see how wrong he is. the Australian housing market has a large share of 2 types of people: a) people who put every spare razoo into their house to pay it off b) People who own multiple houses using the investment on the first as collateral to get the second (and so on) in an attempt to make money on property. Both of these types of people are on the edge. When the economy is seriously hit in the next 12… Read more »
rick e
Guest

Are Australian annalists in denial?
When America housing went down we are not exposed
Oh maybe we are cdo

Then our market went down we will be ok we have china to save us mmm
May be or not now may be 6 months or a year or 2

All the people who say that we will recover, soft landing maybe or not
What’s next (credit default swaps)or Unemployment?

The only people who have a great guess when the recovery starts are the people who called the crash before it happen (DR)

DR you are the Real Deal
Thank you for you time

Dave
Guest

Battellino spouts much of the same drivel Canadian housing “experts” put out. Housing at this point in time is simply out of reach to the average Canadian family. I have even heard them say that we are running out of land that we can develop! This is in a country that probably has the lowest population density in the world. In one town in British Columbia, Kelowna, they have seen property value drop 30% since the spring. It worked out to a loss of $500 per day in value.

Coffee Addict
Guest
Where the real estate market goes in Australia depends on where. In many sub-markets, “affordability” is reduced by artificial supply constraints. Local government levels often fail to release available land because of conflicts-of-interest (councillors have vested interests in keeping the values high). many local governments also block more “affordable” housing development options. During the 1980’s, the Federal Government undertook considerable research into the development of cheap but effective construction techniques. This all got swept away and forgotten. Cheap credit enabled councils to demand brick McMansions with double lock up garages and tile roofs. Dan’s analysis is correct for many “high… Read more »
Stephen
Guest
Actually the easiest way to determine your properties current price is to calculate on how much it is worth against the oldest test of currency “GOLD”. Historically over the past few years gold has been between $500 to $700 AUD per ounce and its currently sitting on $1100 AUD per ounce. Considering the “balance the budget” requirements on our governments they will print enough money (ie bailouts) to ensure the stamp duties etc, collected on home sales are not lagging behind budget estimates. Take my tip, get your current home price in Australian dollars and divide it by 40-50% to… Read more »
Nexus
Guest
You only have to look at how many politicians own multiple properties and have property investments. What incentive is there to restructure housing so that people can put roof over their heads at a reasonable cost. There is every incentive to maintain the current situation from a couple of perspectives – firstly, it would upset the aforementioned portfolio’s, and, secondly, it would mean a decline in property costs and this would be unacceptable those have brought into the property owning myth and those ripping off people that have no desire to buy or have to rent. Politicians are useless and… Read more »
Terence
Guest

Hi,

Just have gone through a lot of comments above. I have a question: How do we measure whether House price is too high or not?
Can anyone provide some direction and concrete figures for comparison? Without concrete figure for comparison, all what we are discussing is just a ‘GUESS’….

Paul
Guest
re: why not live in a mud hut? above being from the country im biased and cant help but laugh at the prisons people put themselves into in their minds. 300-400k for a standard block of land in the city??? are you retarded?. theres 40 acre allotments in the country with arable land being sold for 30-40k……. save up for 2-3 years, buy that land put a shed on it and there you are. your own home and land!!! you can even have a cow as a pet!. i can see the attraction of living in a city when your… Read more »
Peter Carvapai
Guest
Did you see that U.S. government debt grew by $800 billion between September 1st and yesterday? In the F.T. (Economists’ forum) there is a discussion about how the “Supplementary Financing Program” is being financed. If I understood well what was being said, the arrangement was like this. The FRB made a currency swap with the ECB for around 600 billion dollars and then it lend the dollars issued against the euros not to the ECB but to the Treasury and book the euros received under general reserves. In this way the naked printing of money was obfuscated. In other words.… Read more »
Charles  Norville
Guest
The big difference here in Aus is the -ve gearing that has caused investment inflation. I think that everyone agrees that the trigger for house price fall is unemployment releasing the grip of multiple ownership by the few. Govt mainly local and state have been ripping off the housing consumer for years, historically Govt used to be proactive in getting families into homes, pegging out blocks of “public” land and essentially giving them away together with utilities infrastructure. Now developers including Govt squeeze people into ever smaller allotments through theft, we are being conned into believing that exponential growth of… Read more »
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