Higher Rates Preventing Buyers from Looking for New Mortgages

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The idea of a multiverse is that multiple (infinite) universes can exist parallel to one another. Therefore, in some universe parallel to this one, the Australian housing bubble has already deflated, China’s credit bubble has also deflated, and America’s looming stock of unsold housing has reached a clearing price.

But in the universe in which your editor woke up this morning, none of that has yet happened. That makes this world, at least to these eyes, surreal. It’s not like the facts aren’t evident. In Australia, for example, the average house price remains so far out of reach for the new buyer that it’s laughable. Yet day after day, everyone in the press (and in polite society) pretends that things are going along quite normally.

Well, for another day they are. But there are signs of abnormality. Take the number of Australians looking for new mortgages and actually getting them. New home loan approvals fell by 5.6% from October to November, according to data released by the ABS. It was the steepest month to month fall in 18 months.

So is housing going to drive economic growth in Australia this year? Not according to the data. Higher rates may be preventing buyers from looking for new mortgages. Or it could be prices, which continued to rise. While the number of new mortgages fell, the aggregate value of the mortgages made actually rose slightly. Fewer mortgages but a higher aggregate value means rising prices.

The First Home Buyers went missing, as well. Well, not missing. But first home buyers as a percentage of new mortgages fell from 26% in November to 22.1% in October. You’d expect that the higher short interest rates go – and they do seem to be headed higher – the more FHBs will be squeezed from the market. So what?

Well, it doesn’t really matter whether housing drives the economy or not. No one buys a house because he thinks it’s going to be good for the economy. You buy a house because you want one, and it’s a financially sensible decision. With higher rates, high prices, and wage growth below the rate of inflation, the forces of financial gravity (in this universe) are conspiring against new home buyers.

Of course that doesn’t mean home prices will fall, as property spruikers will readily tell you. We’ve never lived in a place where you are assaulted by so many bullish (and bullying) messages about buying property as you are in Australia. For a largely secular country, property is nearly a religion.

Get on the ladder! You can never lose money buying property! House prices always go up! And all of God’s children said Amen!

Still, we can’t help but compare the emotional state of today’s Australian property bulls with the dot.com crowd circa 2000 and the U.S. housing crowd circa 2004. It’s not just a feeling, though. It’s a reality. House prices in Australia are not affordable. And with rising rates, they’ll get less so every day…until prices fall.

And by the way, all the FHB grant did last year was steal demand from this year. It accelerated the time frame people had for getting into a house by altering the financial incentives. The net result is lower demand this year…and a whole slew of Australians carrying huge variable rate mortgages as interest rates begin a new up-cycle. Nice work, politicians.

But what about shares? Is that a good place to have your money instead? Lately we’ve expressed doubts about commodity and metals prices for 2010. China’s regulators lifted reserve requirement s at Chinese banks since we wrote you yesterday. This is an anti-inflationary policy designed to cool off asset markets in China and lead to more responsible bank lending. Will it trigger a correction in metals prices, which have soared since the mid-point of last year?

“NO!,” says the Sweden-based Raw Materials Group. RMG does expect a first half correction. It argues that high metals prices have attracted production increases in recent months. But in the bigger picture, it says the metals industry hasn’t added enough capacity to meet growing demand following the big wipe-out in 2008. It cites two big bullish factors for this year: physical demand from China and financial demand from everywhere else.

Hmm. That sounds so…2007. Like we went back in a time machine. Same universe, same argument, different day. Except we know what happened last time an explosion in credit triggered huge price rises in asset markets. It went supernova and then…destroyed everything in sight by at least 50%.

Of course how much wealth is destroyed in a credit bust depends on what you bought with the borrowed money. China bought itself a lot of factories and fixed capital, including residential real estate. Maybe it will simply grow into all that added capacity over time, even if it has overbuilt today.

William Pesek from Bloomberg says, “The real problem is the quality of growth. The trillions of yuan lavished on the [Chinese] economy last year won’t boost demand for exports. Nor will it soon morph the nation’s rabid savers into enthusiastic consumers. If today’s public borrowing doesn’t create a domestic-demand-driven economy, then it’s risky.”

Getting out of bed is risky, too. But you more or less have to do it. You don’t have to invest in China. Pesek says you should be wary. He writes that, “China’s overinvestment in 2009 may have delayed this day of reckoning, not averted it. Officials in Beijing are on notice that savvy short-sellers are delving into their books.”

Not that a China reckoning is automatically negative for Aussie stocks. Granted, Aussie stocks were down yesterday. But so was Wall Street. So was gold. And so was oil. And meanwhile in the trenches of the economy, China’s Bright Food Group made a $1.5 billion offer for the sugar and renewable energy assets of CSR. This shows that regardless of what happens in the credit markets, Chinese companies are looking to own more Australian assets.

The Chinese certainly have an eye for underperforming assets. CSR is down 23.9% over the last five years while the ASX/200 is up 19.6%. Shareholders would expect better and might be amenable to Chinese overtures. But as we said yesterday, you have to get ahead of these moves, not trade their wake. Kris Sayce just put a “buy” recommendation out on one of 2009’s worst performing stocks. We’ll see how that goes.

In the meanwhile, there are many more questions to take up; including the one we closed with yesterday: who is going to pay for America’s $3 trillion in borrowing over the next 12 months. Tomorrow, the answer, and what it means to global markets.

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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70 Comments on "Higher Rates Preventing Buyers from Looking for New Mortgages"

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GerBot
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Such is the life of property bear.
You know you’re right in the current world with the current rules.
But the rules might change and now you’re in a different world and you’re wrong.

GaryB
Guest

The real estate push and their media mates in the Murdoch press in Australia love the phrase “a record 3 interest rate rises”, referring to the RBA’s moving the cash rate up by a modest total of 0.75% in 3 x 0.25% pixie steps in 2009, but of course not mentioning that this minor move up came after an unprecedented 3.25% slashing and hacking of rates over just a few months in 2008/09.

Pete
Guest
Enjoying the platonic realism, Dan. As you infer, we’ve already _had_ the property crash in that other great universe of the mind. Crackling synapses, Batman, there goes China, too!~ Why fight conventional wars?! ;) Experimented with the Rating System, by the way. None of my computers, abroad or here, permitted me to give a Thumbs Up or a Star rating to any response. At a mate’s place, however, I used his computer… and whaddya know… it all worked! Now I’m not so paranoid that I’d ever suspect you’re blocking property bears’ ratings in that parallel Plato-Zen shadow world. After all,… Read more »
james espositos
Guest
Every part of the monoply contolled media keeps talking up the realestate titanic.They are so worried that when the bubble bursts that they may also burst with it such is there precarious financial situation just look at News Ltd they will start charging for online content.Paying for the garbage they write is just such a turn off.For example a Brisbane paper wrote that 20 60 storey apartment blocks would have to be built for the next 10 years to satisfy demand in the housing market in Queensland alone.Yet on a recent visit to Cairns I couldnt help but notice the… Read more »
Unpopular Truth
Guest

Don’t ignore the fact that politicians will change the rules as needed to ensure they’re re-elected (or electable if in opposition). If housing is a religion in Australia, what does that tell you about politicians likely-hood of changing the rules to stop a property crash?

Even if that would help first home buyers, there are a lot more people with houses already than are looking for houses.

wasabu
Guest

The other religion around here is the belief politicians and governments can fix things. All they can do is postpone corrections and thereby make things worse (ie steal more money from private enterprise to sustain unproductive bubbles like real estate).

Australians are pretty much socialists. Free markets are always on notice when elections come around. The Pollies like to engineer their futures by encourage the ‘something for nothing’ personality. See great article by Ty Andros: http://www.gold-speculator.com/editors-picks/18180-something-nothing-personality.html

The day of reckoning cometh, it always does!

Justin
Guest

Sugar’s still looking good! CSR is into sugar is it not?

Ned S
Guest

DD said: “Yet day after day, everyone in the press (and in polite society) pretends that things are going along quite normally.”

Well the fact is that things are going along quite normally – For Oz anyway with house prices up not too far from their average for the last 55 years.

Joe
Guest

Ned, what’s your source?

Ned S
Guest

Nigel Stapledon’s Oz house price data back to 1880 – Keen certainly seems to accept his figures.
Some graphs based on Stapledon’s stuff here:
http://www.stubbornmule.net/2009/06/property-prices/

Wages
Guest
Ned, i would like to see the comparison charts on wages and consumable products and see whether they have to averaged out since 1880’s. I think you will find that the wages have dropped off significantly in the last few decades and this is why the situation is untenable. I think i shared this a few weeks back but a mate of mine was stressed to the eyeballs that he was going to miss out on entering the property market after a messy divorce. He started looking at the $350,000 mark after a few Auctions in September he went back… Read more »
Wages
Guest
We also should look at trends from the 1800’s namely boom and bust trends. Before every great recession/depression there is an initial shock e.g. GFC then a very quick, fluid and confidence building recovery, this is invariably followed by a sharp deep pre-longed decline. from the 20-30’s through to the 70’s-80’s and even as early as the 90’s this has happened. History will repeat itself, this time round though we have really lost sight of how high up we have gone. When the floor does come out from underneath this ponzi scheme the fall will take a heavy heavy toll… Read more »
Brian
Guest
I’m suprised in the number of people STILL predicting a house price collapse?? I thought Steven Keen was the only one that remained deluded. What the “housing bears” do not realise is that there has been an enormous amount of money printed globally in the last few years in order to “fix problems”. This money cannot be taken out of the system but miraculously for now is yet to translate into excessive inflation because people are still cautious about paying what they think is too much for an asset. But every day we get further away from 2008 without any… Read more »
Bertie
Guest

Brian is on the money

Ned S
Guest
Similar thoughts crossed my mind re “comparison charts on wages and consumable products” Wages. Had a quick look at the time but didn’t find anything I felt to rely on. Re “the situation is untenable” … I’m not sure it is untenable. And I think we’ve got to be careful about saying things as absolutes if there is a chance they aren’t. It is one of the attractions of this site though I guess … It expresses things as absolutes. So it’s readers can opt to abrogate responsibilty for thinking for themselves. Even though their absolutes may later prove to… Read more »
watcher7
Guest
“No one defies economic laws,” he [Scott Kennedy, who heads the Research Center for Chinese Politics and Business at Indiana University] said. “Eventually you get it, whether you want it or not.” (Michael Wines, “As China Rises, Fears Grow on Whether Boom Can Endure”, nytimes.com, January 11, 2010). Unfortunately it appears that Steven Keen failed to grasp history. When Central Bankers began to intervene in December 2007 to prevent the crisis, it suggested at the time, that there would be one more bubble before the collapse, or near collapse, of the world financial system. History suggests that the world economy… Read more »
Joe
Guest

When did any Dailyreckoning punters ever tip fixing your mortgage interest rate?

Would love to know whether fixing mine at 5.54% from Dec 1st for 3 years was a good move (delayed due to missing paperwork from Jul) and if it is, why no one at your office recommended it to me?

Perhaps my memory is too short and I have forgotten all those tips and worthwhile advise to fix. I Would appreciate someone pointing out where this advice was offered just to reassure myself that other advice offered may have equal foundation and merit.

Pete
Guest

Joe, if you fixed 5.54% for three years from 1st December 2009, you are an effing genius. We should all kneel and salute you, right now, causing all Australia’s sulphur-crested cockatoos to rise, flapping madly and causing hurricanes in southern China, precipitating economic chaos there, thus stimulating a property collapse across Australia.

Please enlighten us. With which lending organisation did one secure that three-year rate in December?

Joe
Guest

NAB Pete.
As I said, we agreed in July, but due to some paperwork mismanagement, staff moving onto new positions, it wasn’t finally fixed until Dec 1st 2009.
So yes, I must be an effing genius. Seems (excluding capital gains tax) I can get a higher return saving than my bank does lending.

Flying
Guest
The front pages of both the Heralf sun and the Age put melbournes median house prices up to $540,500 and rising at an average rate of $766 per day. That means if it keeps going at this rate the median house price will be around $815,000 by the end of the year. suggesting that interest rate rises are having an effect is ridiculous, thuis market could easily take another percentage point ot 2 and still be able to maintain steady pricing at worst. You would be mad not to be on the property ladder right now, i myself have resided… Read more »
Pete
Guest

Thanks, Joe. I’ll talk to NAB. At 6.0% we were told we had the best rate in Oz. It’s certainly a strange situation when a borrower can get a three year fixed loan from NAB for 5.54% for three years… while a saver gets 6.8% for one year from Westpac!

Pete
Guest

Flying, 23/1/’10″…melbournes median house prices up to $540,500 and rising at an average rate of $766 per day…. thuis market could easily take another percentage point ot 2 ”

Yes, the market could probably take a 3% rise, Flying. To an investor, that’s deductible anyway.

Your best hope is that the government gives ALL homeowners a tax write-off on their mortgages.
There’s an election coming. Don’t be surprised if you see the introduction of this fair(er) concept… .

Ned S
Guest
“government gives ALL homeowners a tax write-off on their mortgages” – Now that WOULD be a case of property prices on steroids! So I’d be inclined to save the concept up for a time when prices just could need a bit of stimulus somewhere down the track maybe? But yeh, with our vote grubbing pollies, who’s to really know. Seems the KHR is being leaked frantically now. Nothing too nasty that I can see at all. Except they’ll need more tax rather than less – But that’s no surprise. More tax breaks for oldies who keep working maybe? Hmmm –… Read more »
Pete
Guest

Now Ned, let’s think of the positives! Think how may more young kids would be assisted to get into a home. (I’ll be lucky if my two don’t try to put me into one…! :) )

Ned S
Guest

I don’t trust the mean buggers Biker – Once they do that the logical corollary is to want their CGT on the joint when you sell it. And I don’t find that an attractive prospect at all!

Suspect your boys may let you stay out of the fuddy duddy farm providing you continue to be useful around the place – To paraphrase Paul Hogan: “Keepa digging Mario!” :)

Pete
Guest

Got to look very closely at Super, Ned. While there’s (still) a provision to roll CGT into Super (albeit 15% tax) it’s not too bad.

Really need another hour with our accountant… but I’ve done five lots of new Dep Scheds _myself_ (too short a timeline after the trip) so I doubt we can cover everything I need to ask in a morning.

Doesn’t look like too much to worry about in the KHR, from the leaks of things…

Ned S
Guest
It does seem that super will continue to be treated kindly Biker. And as to the KHR in general, I’d call it all pretty much benign from what we’re hearing. It’ll have its effects for sure. But nothing that specifically targets me in an unhappy way that I’ve been able to spot to date. (Except the wine tax maybe? :) ) CGT might go up a bit? Goodo, don’t sell. Or yes, sell “soon” and push the money into super as you suggest. It’ll just be nice to see all the unknowns and maybes laid to rest. Then I’ll run… Read more »
Pete
Guest
Wine: My missus says I’m to stop stocking the stuff, Ned. Probably have enough now to last. Depends how long I live, I guess… . Anyway, graysonline has changed their auction strategies, possibly to frustrate blokes like me. CGT: I’m expecting that our situation won’t be retrospective, so we may beat that. Showing a Profit: No problem there, especially once the super pays out all debt. It’s only the major tax issue that really worries me, hence the van, etc., and my ‘wage’…. write-offs. “It’ll just be nice to see all the unknowns and maybes laid to rest.” We discuss… Read more »
Ned S
Guest
Fully expect you’re correct about no retrospectivity. But either way 25% on CGT really isn’t that low. And given that it’s investment type income, it doesn’t seem to be something they are especially keen to crucify. If they bump it up, it won’t be by too much maybe. I was expecting them to get serious on all the disparities in tax rates on different entity types and asset classes. But there doesn’t seem to be much on that filtering through at all. Just too difficult and entrenched perhaps? Or maybe they still really haven’t got a clue and just want… Read more »
Ned S
Guest
When it comes right down to it, I need to do some guestimates on whether a fully self funded retirement is a realistic option for me. So I’m keen to see what little helping hands/incentives there might be for yours truly in that regard. If it doesn’t seem to be realistic, then between now and 60 (a bit under 9 yrs), I get to run down my cash. Then flog off (or do a reverse mortgage on???) the rental house in my name. And live on that between 60 and 67. And then flog off the house that’s in the… Read more »
Ned S
Guest
PS: I could do another decade or two of work I guess? But unlike Biker, I’m fat and lazy. And have pretty much lost interest in helping all our squawking gimme gimme Gen Ys get across the line. I tried a few times? But they looked at me with eyes bugged wide open and said I wouldn’t do that!!! Or Nah, I tried that and didn’t like it! (To suggestions like working OS; And doing a plumbing apprenticeship and such like.) So MY turn now thanks! :) :) :) With emmigration being a very real option providing I structure my… Read more »
Pete
Guest
We never really set out to be SFRs, Ned. Independence was always a dream, but until we hit our late forties, it seemed an impossible goal. At that point it all just seemed to take off… all the buying and selling… churning, if you like… suddenly went ballistic. It all just came together during the next two decades. Then salary sacrifice boosted the Super, after we sold a $125K block for an effective $325K… and lived off that, while sal-packing nearly all our wages for a few years. Nothing wrong with supplementing your retirement with an OAP… we’ve just exceeded… Read more »
Ned S
Guest
SFR – Yeh, I’ve just got to figure out if I’m really all that motivated to give it a shot? It’d be nice as I said. But I’m not inclined to kill myself to achieve same either. Enjoying life regardless has lots of attractions once one has backed off a lot re the work thing … I’ve found anyway. Which is why Ken and Kev probably aren’t that keen to see too many of us figure that out? :) And I have a bit of an idea of the risks after having done a practice run during the GFC –… Read more »
Ned S
Guest

…zzzzzzzzz…hehehehe…zzzzzzzzz…LQQK!!!…zzzzz….Yeh!…PS: Ya ya ya…

Dan
Guest
If we get more Rudd, we’ll have more favouritism for people who do no work and did no work – maybe not the glorious return of a decent old age pension, but definitely tax hits against anyone who doesn’t qualify for a pension. So if you go for SFR you’ll probably end up partly paying for someone else’s also. That’s the case in pretty much any first world country. It’s possible to circumvent, but you have to take the risk of being poor on the books – like, for example, giving your kids their inheritances before you’re dead, etc. But… Read more »
Bargeass
Guest

The impending Aussie housing crash from such ridiculously overpriced levels will be a welcome correction and the sooner it happens the better.

Ned S
Guest
Everything you say there is good commonsense Dan. Ta. No kids here – So at least that’s pretty clear cut – For better or worse. When I croak I’d ultimately like to see my home go towards my brother’s two kids. Although there’s no expectations or committment. And that suits me fine. It does seem to me that a lot of people go into retirement without any real plan though. And whether one is going to specifically target being a pension recipient and why, has to be a fundamental part of the plan. I suspect there could still be a… Read more »
Pete
Guest
Dan: “So if you go for SFR you’ll probably end up partly paying for someone else’s also.” Yes, continuing high taxes are the most likely scenario. Can’t see any of the other stuff happening, frankly. Bargearse, if wishing will make it so, you’re onto a good thing here. It worked for Vera Lynn and the troops, anyway…. a WW2 morale booster when things looked grim… . You should probably repeat “… the impending Aussie housing crash from such ridiculously overpriced levels will be a welcome correction.. ” more frequently, _daily_ rather than weekly, perhaps… . :)
Ned S
Guest
I probably should have a crack at being an SFR if I reckon there is still a chance after I’ve crunched the numbers. I’ve spent all my adult life carrying one bunch of fleas or another on my back – So it’s not like anything has especially changed in that regard. And pre-GFC I wasn’t really planning to retire until 60 anyway. More just a case of having chosen to take a bit of time out – Which can become addictive! :) Of course the thought that Rudd would love to flog me back to work has been making me… Read more »
Pete
Guest

Some interesting comments, Ned. You’d need to know the retirement/tax laws in the country you’d ‘flea’ to :)
though. Our son in Montreal, who has money in both Canada and Australia, is just coming to terms with this.

This site seems worth a look: http://www.superguide.com.au/accessing-superannuation/tax-free-super-for-over-60s

May be outdated after any recommendations of the KHR are initiated, but for now it seems relevant… .

Ned S
Guest
True enough mate – I had a nice offer to emmigrate not too long back. But as I said then, my lack of knowledge on your investing laws would be a hassle. Because at my age and in my somewhat happy financial circumstances here, getting my investment strategy in order is priority number 1. More important than a job even. Heck, if a bloke is still capable of getting out of bed most mornings, he can get a job. But there does come a point in life when one starts to suspect he could begin to walk into some age… Read more »
Dan
Guest
Well in our scenario we’re assuming that decades from now a house will still be a house and people will still have the right to own land, etc, and charge others for its use. And barring a rapid collapse in population, we figure that’s still a safe path – overpriced today or not (mainly because land can be turned to productive use). And we’ll continue the tradition that those in the extended family who can work support those who can’t, and each does his or her bit – minding kids, or mending houses, and other money saving (but not money… Read more »
Pete
Guest
Dan: “But I really don’t trust Superannuation.” So, if you could take a very large bag of the $tuff and run, right now, you would, Dan? I’d figured that there might be a major correction in Australian property by 2030, but the missus just explained to me that Gen A will be as large as the BB Generation.* We were walking along the Swan River foreshore, looking at thousands of million dollar units (one of which our son rents) thinking “This stuff is priceless… we should have bought some of _this_ years ago…. ” Ned, “…age based financial hand grenades…… Read more »
Ned S
Guest
Gotta hedge one’s bets Dan – MOST especially in relation to government. They are becoming the next great force to be reckoned with given that any pretensions to having “free markets” croaked along with Lehman Bros and AIG. Yes, I take your point in relation to my bro … But he’s a good bit younger than me and has shown some pretty strongly developed tendencies to hold his hand out in the past – Albeit to our ma and pa than to me as such. Know them for what they are rather than what one might like them to be… Read more »
Ned S
Guest

Yes I checked out that bit of age based demographics too Biker – Your missus is 100% correct. Barring Great Depression II which we have every reason to suspect will be responded to with money printing anyway, about the best a sad sorry old bear like me might still be able to hope for is a bit of a flat spot to pop up in the next decade … Barring China collapsing in a crisis of absolutly catastrophic mayhem and ruin of course!!! Hey, it doesn’t hurt to think “happy” thoughts while one is revising their strategy surely? :)

Ned S
Guest

And Bargeass said: “It’s a bubble and it’s gunna crash!” (Just thought I’d help out in your abscence mate! :) )

Dan
Guest
Fair enough, Ned. Our strategy is ongoing, has taken years already and has been carefully laid. It’s maybe not as clever as Pete’s with his nose for good properties, or as good as some people’s ability to play stocks .. it’s not the same kind of empire building. Psychology is a big component, but so it is for any kind of business involving humans .. and you need safeguards, most definitely. It all builds on trust, and there are of course risks. But that is family life. It’s almost always better than having no family. Hedging bets is also right,… Read more »
Ned S
Guest
Yeh, I ignore the “scores” nowadays as well Dan. If they wish to say something helpful, then they can peck away a finger at a time and hit the “Submit Comment” button as readily as me. I’m a real big believer in family Dan. But I’m also realistic enough to accept that it doesn’t necessarily work out in our culture any more. As to my niece and nephew – Well, for whatever silly ways my bro might have had as a younger bloke re money, he’s definitely shaped up to be a really good dad. The kids and I get… Read more »
Dan
Guest
“But I’m also realistic enough to accept that it doesn’t necessarily work out in our culture any more. ” .. yeah that’s true to an extent, but I remember reading somewhere the point that “if it happened in history, then it’s sure to be doable again”. I know, though, that in old age, people looked after by family fare better than those in institutions. They eat better, they are happier, and get the sort of advocacy that no money can buy – especially in hospital, where it really counts. Rudd (and probably every other pollie) thinks he’ll fix the future… Read more »
Ned S
Guest

Well, I just scored your comment a “5” for what little that might be worth Dan?

But to more than an “an extent” I think – We have lots of severely dysfunctional families in this country these days. Including lots of potential “families” of one.

I’m probably not the most positive of chaps – And doubt that our home grown damage can be reversed. So I’m happy enough to see lots of way more family orientated migrants pour in. We stuffed ourselves – Time to take the cure – And be grateful it is at least open to us as an option.

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