300,000 Australian Households at Risk of Losing Their Homes

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Tonight at 8:30 on ABC1 you can watch a program called “Debtland.” We haven’t seen it ourselves. But the blurb on the ABC website puts it this way, “Mortgages doled out to people on disability support pensions; loans to refugees with no English and no jobs that leave their families with next to nothing to live on; home loans so large they push borrowers below the poverty line…This isn’t America’s sub-prime meltdown – it’s Australia’s debt debacle, the legacy of a credit binge that’s sent household debt through the roof and lending standards through the floor. Now the hangover is kicking in.”

“As many as 300,000 Australian households may be at risk of losing their homes. It mightn’t take much – another rate rise or two, a family illness or maybe just the car breaking down – to send people under. And for thousands more who are better off but feeling the pressure, this credit crisis is getting too close to home.”

Hmmn.

Say what you will about the quality of personal balance sheets in Australia. But it is much easier to sleep at night when your liabilities do not grossly exceed your assets. Consumer credit is one way for people to lever up their standard of living beyond what an ordinary income can provide. This kind of levering up-using credit to meet expenses-has been going all over the Western World as wages deflate and prices rise.

What’s going on in the sliver market? “Weird things,” according to Gabriel.

Silver’s price is up more than 20% year-to-date but is down 10% over the last month. Last week, it rallied again strongly before closing lower due to consolidation generated by profit taking (see chart below). Lots of choppy price action…

“It seems that several silver dealers in Canada, in the US and even in Australia are out of inventories. A US specialist of precious metals, Jason Hommel, reveals that some of these dealers are “big names in the business, Scotia bank, the Perth Mint in Australia, CNI Numismatics in LA, APMEX say they have some items, but are looking to buy.”

“The price has dropped of nearly $4 an ounce while there is a stock shortage in the coin shops. This sounds really weird. There are two possibilities to consider.

“The first one is to consider that there is an obvious paper short selling manipulation on the futures exchange. Silver futures are traded on the Comex, which merged with Nymex in 1994. It’s a futures exchange where there are almost no physical settlements, and where the stocks are therefore very low. It’s a financial market where physical silver demand from industry is difficult to satisfy, which can lead to a potential crunch.

“The second possibility is that dealers may be aware of such an illogical price action and expect the price to move up again in the near future. They hold before selling back to customers. Therefore the crunch does not exist. Anyway, as the fundamentals of the industry still remain the same, in both cases silver price should jump towards its recent high levels.

“Technically, as long as the main support line holds, the medium-term momentum will remain bullish. After the strong fall in March, the Stochastics and RSI indicators have turned bullish for the short-term perspective.”

If there’s something about silver you think we should know, send us an email to dr@dailyreckoning.com.au

What’s this? Housing prices are headed up? Do tell…

“House prices throughout Australia are predicted to rise by up to 40 per cent over the next five years,” reports the ABC, quoting a report from BIS Shrapnel. “Economic forecaster BIS Shrapnel says the housing affordability crisis will only get worse as demand for housing continues to outstrip supply. BIS Shrapnel property analyst Angie Zigomanis says the outlook for the housing market is dire.”

Right. People have to live somewhere, especially all those people currently living in the streets…

The idea that there isn’t enough physical housing stock for Australia’s population is patently absurd, as is the idea that prices HAVE to go up as demand exceeds supply. There’s plenty of physical supply. It’s just not affordable given median housing prices in Australia and median incomes. But here’s what BIS reckons…

“Our forecast is for anywhere between 25 and 40 per cent across most of the capital cities. The environment will still stay tough for the next 12 to 18 months because of rising interest rates. But as the interest rate situation stabilises we expect a lot of those pent-up demand pressures to be released onto the market in terms of rising price growth.”

That’s right, as soon as interest rates go down, people will resume making stupid financial decisions. Let’s be clear. Needing a place to live doesn’t mean you are willing, or can, pay ten times your income. The BIS analysis, from what we can gather, confuses interest-rate sensitive buying decisions with a more a fundamental measure of affordability: incomes.

It doesn’t make any financial sense for a buyer to take out a loan at ten times his income to buy a house. So what if interest rates fall and the mortgage debt is serviceable? The size of the monthly mortgage payment is one factor. The total size of the mortgage is a much larger factor.

The only possible reason you’d buy a house more than ten times your current income is if you believed you could turn around and sell it for more than you bought it. This is exactly the kind of financial speculation (houses as investments rather than dwellings) that’s led to the affordability crisis to begin with.

Do you have a comment on Australia’s housing bubble. Let us know at dr@dailyreckoning.com.au or visit our message board at
http://www.dailyreckoning.com.au/talk

Dan Denning
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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Comments

  1. What about population growth driving demand ?

    +1.5% last year..

    From ABS:

    “The Australian population grew by 1.5% during the 12 months ended 30 September 2007. Natural increase and net overseas migration contributed 44% and 56% respectively to this total population growth.”

    Reply
  2. Assume it costs about $90,000 to deliver a serviced a block in a new suburb and about $150,000 to build a three bedroom ensuite house. Lets add $0 to $100,000 for the location. This should put most Australian houses in the price range of $240,000 to $340,000. The rest of the value is a lie based on cheap and easy credit.

    Super funds also lie. So called “Cash” options are actually “interest bearing investment” options, often with a high level of exposure to margin calls and toxic debt.

    Coffee Addict
    March 31, 2008
    Reply
  3. For a number of years now I have argued that Sydney house prices will eventually drop at least 50%.

    If bubbles give up their inflation gains, and we take those gains from the late 1990s, then Sydney house prices will drop at least 60%; but if we takes those gains from the early-1980s, then it will be greater.

    This may sound like a ridiculous claim, but this coming downturn, at least one or two years away, is going to be as severe, or even worse, than the 1930s. (Sydney house prices fell 30.3% between 1925 and 1935; the Australian sharemarket rose 196.1% from December 1916 to February 1929 and then fell 46.3% from February 1929 to August 1931).

    The coming nominal high in the Dow Jones will mark the top of the American hegemonic cycle – compare 1873 for Britain; and the coming downturn will force through the restructuring for the Information Age proper just as the downturn after 1873 ushered in the Industrial Age proper.

    A world economy saddled with so much debt is going to make this transition more painful than it need be. But it is also overindebtedness, as Irving Fisher learnt, that plays such an important part in driving the economic-financial cycle.

    The deregulation of the 1970s, supercharged by the Thatcher and Reagan Revolution, was always going to end in Great Depression.

    Eric Hobsbawn’s observation, in the recession of the 1990s, will be more relevant in the near future:

    “Those of us who lived through the years of the Great Slump still find it almost impossible to understand how the orthodoxies of the pure free market, then so obviously discredited, once again came to preside over a global period of depression in the late 1980s and 1990s, which, once again, they were equally unable to understand or to deal with. Still, this strange phenomenon should remind us of the major characteristic of history which exemplifies: the incredible shortness of memory of both the theorists and practitioners of economics. It also provides a vivid illustration of society’s need for historians, who are professional remembrancers of what their fellow-citizens wish to forget” (“Age of Extremes”, p.103).

    Reply
  4. Coffee,

    I’ve recently been looking into my Cash option super – and I’m setting up an SMSF. At least my earnings will be under my control. My ‘cash’ option was money market securities. (I kid you not). I may consider litigation, but definitely an ACCC compliant for the moment.

    Reply
  5. Kage

    You are lucky in that you can change funds or move to a SMSF (if you can . As a public sector employee in the education sector I don’t have any choice. I am forced to put my money in an undermanager fund which is controlled by may employer and will ultimately lose money which ever asset allocation is chosen. The fund CEO is now bailing out (after 7 “successful years”).

    Coffee Addict
    April 1, 2008
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  6. Excuse the gramatical errors above. Fast typing syndrome.

    Back to the market, the RBA is aware of the issues raised by Dan.
    My guestimate is that there will not be any more (significant) interest rate rises (this year) as a result.

    Higher inflation, relaxed work visa requirements and improved infrastructure investment will be deemed preferable to the further application of fiscal brakes.

    Coffee Addict
    April 1, 2008
    Reply
  7. We need to get rid of the privately owned reserve bank, and set up something like what the commonwealth bank was set up for originally.

    a bank by the people for the people.

    Reply
  8. What has the RBA done wrong? Are you suggesting it should be under government control? Or under the control of the public themselves? Can you imagine everyone voting on an interest rate rise? I wonder who would vote for higher rates to curb inflationary pressure…no-one.

    Personally I think the RBA is doing exactly the right thing. At least we don’t have the corrupt Fed the USA has.

    I know this wasn’t your point, but I have to laugh at the Commonwealth bank “by the people, for the people” line. For the people? Haha, I think the Commonwealth Bank forgot about their people a long time ago…

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  9. Note: My above comment was in response to Jackon’s comment

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  10. I find it ironic in the extreme that the governments superannuation guarantee levee on wages will fail utterly in that the little bit left after the failure of stock market investment will buy virtually nothing after inflation. Or maybe I missed the point, it was guaranteed, that is, guaranteed to fail.
    Its one thing to have taxation, at least one can imagine its going to a good cause – but superannuation?
    I can already see the federal minister responsible for superannuation ducking for cover.

    Reply
  11. Winston Churchill once said

    “The further back into history you look, the further into the future you can see” All this has happened heaps of times before in history, but people forget and make the same stupid mistakes each generation. Why oh why!

    Reply
  12. What no-one seems to be talking about with respect to house price increases is the impact of inflation (real, not CPI). M3 is running at about 10%:

    2004 $m 2005 $m 2006 $m
    Money base 37,194 38,678 41,278
    4% 7%
    M3 623,049 678,292 747,229
    9% 10%
    Broad money 686,293 764,400 841,134
    11% 10%

    source: http://www.abs.gov.au/ausstats/abs@.NSF/bb8db737e2af84b8ca2571780015701e/53153F2003B13A23CA25723600046678?opendocument

    This alone should see house prices increasing should it not?

    Before I get flamed, I’m not saying current prices are realistic or supportable. Just that, all other things being equal, property values should no more remain static against a devaluing currancy than any other product.

    Reply
  13. Because, christina, evolution takes thousands of generations, thus we are on average no smarter than civilizations ten thousand years before us (Egyptians, Aztecs, etc…) that had slavery, mass murder, wars, etc… Hey we have all those things today, big surprise!

    The point is, people are pretty stupid on average, just as they were back then.

    Reply
  14. Sigh…..Yes it does look as though house prices in Australia will drop.I thought that a good scenario was that the prices would just flatline until all things caught up. If you have recently bought into the market, I think that you have aquired a negative asset, because the massive amount of mortgage interest payments can’t be offset with rising house prices in the future.Now that there is a high possibility of them dropping? Is that called a double negative asset?

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  15. Zaphod all is not lost if you own a property as this market will not go down without a fight [look at what USA is doing] it takes three years in an average market to break even on All costs, this market will have another peek in about 12-18 months, thats when you need to cut and run, from there it will all start a gradual decline to where it needs to go. Its like the share market it will find a bottom then we will see how long it has to stay there. Good luck

    Diggin it!
    April 4, 2008
    Reply

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