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


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.


  1. 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 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.”

    – Hi, my name is ‘poor public transport infrastructure’, i’m from Sydney…and Canberra…and Brisbane…and Perth. Not to mention some rather annoying state governments not releasing land. With our lovely negative gearing rules, isn’t it so much easier to speculate on current property than to bother with building? There are examples in Sydney western suburbs of blocks of 40 apartments that sold only THREE after building. Why? Crappy transport facilities and prices too high.

    3) 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.

    – Is that right? Lets find out in the coming year when our unemployment rises and recession really starts its sting. Just the idea that our banks (you know, the really safe AAA rated banks that can’t possibly fail because they are so clever at what they do and have no exposure to anything nasty) have very little exposure to anything sub-prime in Australia is completely laughable to me. I have a friend who lied on his mortgage application to buy his house at 6x earnings. Low Doc loans…everywhere. People might be getting by for the moment (including using more debt) but when things start to crumble further we’re really going to see what our big four (five? STG isn’t so tiny) banks are made of.

    And the fact that this Battellino is DEPUTY GOVERNOR of the RBA is freakin scary to me…

    Sorry for the ramble, I just felt like something should be said

  2. 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’ complex demand, but ‘HOUSES’ demand.

    In other words, people want houses, not apartments, flats or townhouses, but real houses on decent sized blocks. But guess what?

    The deals that local, state & federal governments have made, in order to release land, is actually a deal only pertaining to developers, not first home buyers or individual home buyers on the market, looking to secure their first, or a parcel of land to build on. This is because our housing affordability issue is actually a land availability issue, artificially created by governments (ie. we have the lowest residential land development percentage in the English speaking world); in the hope that they can score a higher price of developers, than to release it to first home buyers.

    And what do developers do with this privilege of having a deal with local, state & federal govt. for first use to develop this released govt. land?

    They go and build more apartments, flats & townhouses, as if Sydney, Melbourne, Brisbane and Canberra were lacking in supply for apartments, flats & townhouses? Which is hardly the case.

    I think Battellino is right in the short term ie. 1 year – 18 months (if you only apply what he says to houses). However, that is not the market where the excess supply has been created in Australia in the past 5 years. The excess supply has been created in apartments, flats & townhouses. It is in these markets that we will truely see the price declines happen first, and when the Adjustable Rate Mortgages reset each year, for the next 3 years, we will see if this price decline infects the houses as well.

  3. 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 park or on an empty land or something? Even if only temporarily so they dont become homeless.

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

  5. 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.

  6. 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 he was in Sydney for that Forbes meeting years ago. This public sector lot have a long way to fall and as Latham says the Keatings and Howard’s and Costello’s and the banksters should go hard over with them.

  7. 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 to cut rates further. I beleive History repeats itself and Japan is a prime example. They had a hosuing boom in the 80’s and everyone thought that it would never end and prices wouldn’t fall, well suprise suprise, 15 years of negative price growth. Once the psych of the market changes, there is nothing stopping it.
    We sold our house 6 months ago due to the issues emerging in the States. We are looking to buy again and we saw a house we really like, but my head is still saying wait another 6 months. Would like to hear what others have to say.

    My question to all the bulls out there is how can we be immune to a house price crash when unemployment is on the way up, lenders are tightening credit policy, debt levels are at record levels, housing affordability is at record lows and other property markets have lead the way. Sure supply is limited in Aus, but what about the UK where there is limited supply and there prices have dropped 20%+. If there is no demand to buy due to the psychology of the market changing, then how can prices be sustained. The other question is if commodity prices are dropping, then housing inputs will drop in price and this will make new housing cheaper. I agree with bear Gerard Minack and I think prices will come off by up to 50% just like it did back in 1990. History repeats itself.

  8. 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 months these people will not be able to afford to keep their houses and a mass sell-off will commence. It is inevitable, the glut of sellers and limited buyers (even would be buyers won’t be able to get the credit they need) will force prices down.

    I am one of those people Battelino refers too who are “waiting for the right time to buy”. But it’s not a matter of making more money or having government incentives..nearly 100% of my wage is required to pay off the interest on the average home price (I am on an average income in this country). Why would I want to buy in this climate? I’d have to be absolutely nuts. I’m seriously waiting for %50 to fall off the prices of houses in this country, it is most surely a bubble and we can blame negative gearing, first home buyers grant, the influx of immigrants and the control developers have over 95% of land for new houses.

    If you think people are just going to accept ridiculous prices for housing you’d be crazy. People have options, they can leave this country, they can rent, they can move in with mum and dad or they could join a commune or housing community. We are not like Japan, we have plenty of space in this country. In the UK prices have been falling at 10% a month recently. They thought it would never happen there either.

    Like I said to my partner though the other day, if any financial adviser or politician comes out and admits things are bad, the market will panic and the problem will be much worse. This doesn’t mean things aren’t about to get bad… real bad.

  9. 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

  10. 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.

  11. 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 value” areas that have been supported by the resources boom and high value foreign individuals seeking a pad “sought after” locations. The boom has finished and “high value” individuals have less to play with.

    The Battellino analysis may be correct for some “in between” suburbs. The outer metropolitan areas have already had some huge marks-to-market. Inland regional centres vary in line with the level of council corruption. The best have never been over priced because there has always been a reasonable flow of land available for development. The smaller country towns have been declining for decades but are now starting to take overload from the cities and this will continue.

    Coffee Addict
    November 3, 2008
  12. 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 find its “true” current value. No need to wait Ladies and Gentleman the price has already been crushed.

  13. 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 totally self serving.

  14. 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’….

  15. 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 younger but these people who are proud of living in a city baffle me, oh if you have a partner who is that insecure that they have to have the latest car or possessions to show off/feel better about themselves, lose them and get a real one. high maintenance people are interesting but in the end a nightmare to live with. i see this depression as a worthy slap on the head for the sheep who couldnt stop eating the green stuff :)

  16. 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. If you want to print money for government purposes then arrange a false swap and hope that nobody will notice.

    Peter Carvapai
    November 21, 2008
  17. 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 population/consumerism is good economics, ie we import people and then building somewhere for them to live. We actually import a lot of the materials to build housing.

    The basic instinct of humans is to have expanse of land and a shelter safely ‘well within’ it, to then go out and work for our food and essentials and then find all manner of places to re-create & create complementing technologies. On the way we (should) protect the young and the weak, we gain wealth that complements the existence of others and not at their expense.

    We put instead our trust in corrupt centralised power that herd us, don’t want to train our population, treat them for illnesses, nor get them to work on time or give them anywhere affordable to live.

    The building industry should be industrialised the ridiculous use of brick and mortar as the main element is pathetic. The building industry should be an export industry, why not give the world the simplicity of pre-fabricated housing, and live within our population means. Housing in terms of micro economics should be treated as a basic necessity ie for shelter, not the core business of an economy.

    Lets move onto the better business of creating a more innovative society full of advanced environmental technologies that use less people, and smarter energy efficient materials.

    These emperors without clothes that promote “confidence/bs” that run our society are spivs and hoons have no idea what they are doing, they know of course they are lying.

    EXCERPT from DR:
    “My reading of history convinces me that most bad government results from too much government.” Thomas Jefferson “Commerce with all nations, alliance with none, should be our motto.” Thomas Jefferson “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802).

    Charles Norville
    November 22, 2008

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