Three Ways the US Housing Crash is Affecting Australia
“The dollar is mired in weakness,” Nobuaki Kubo from Brown Brothers Harriman told Bloomberg. You can say that again, Kubo-san. Durable goods orders in Team America are set to slow down, according to data from the US Commerce Department. And of course Americans are spending less on big-ticket items. That biggest-ticket item of all—the family home—is declining in value and sitting on the market for longer.
The National Association of Realtors reported that existing home sales fell by 4.3% in August. Over the last twelve months, sales are down by 13%. And with falling sales, you have falling prices. In 15 of 20 cities tracked by the Case/Schiller Housing index, prices fell.
The average decline in home prices nationwide was 13.9%. It’s the worst slump in 16 years for the American housing market. And the inventory of unsold homes now stands at 10 months. Later this week, data on new home sales will be published. You can expect it to confirm that sentiment—America’s slow-motion housing meltdown is alive and unwell.
So what, you may be wondering. What does any of this have to do with Australia? America’s housing crash has three effects on Australia. First, the US housing crash is pushing the American economy into recession. The Fed has lowered rates to head the recession off at the pass. The resulting fall in the dollar is driving global investors away from US dollar denominated assets and mortgage-backed debt to real assets…like BHP. Impact number one: higher Australian stock prices, as evidenced by the resource-driven record run on the ASX.
Impact number two is higher interest rates. This is largely a consequence of the credit crunch and has already been much discussed. What’s notable here is that while the Federal Reserve moved short-term interest rates down in the States, the market moved long-term interest rates—including 30-year mortgage rates—up. That shouldn’t be shocking. In the face of obviously inflationary policies from central banks, bond investors are demanding much higher yields for longer-maturity bond issues.
Impact number three is less obvious. But it gets to whether Australia has an American-style housing problem. We are told—based on the number of subprime style loans—that Australia has no such problem. But we’d respectfully suggest that the larger problem is not a particular style of risky loans—but an entire financial system that emphasises the accumulation of huge household debts.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by J on 26 September 2007:
Now this is a valuable article as it can relate to us in Australia. Good one because what happens in Australia is not the primary concern of us denizens of Australia...
Comment by J on 26 September 2007:
coorection.... what happens in the US I should say
Comment by Alan on 26 September 2007:
I am not sure about the supposed short term movements of long bonds as a response to inflationary expectations.Bond traders go day by day,at a stretch, week by week.The move was probably related to reweighting to shorter maturities,a move into equities and overseas selling on a weak dollar.Incremental changes as time passes might signal inflation....but then the Fed may fiddle, considering the importance of these longer maturities.
Comment by kayle on 26 September 2007:
I think I've left this question before, but it bears repeating - based on what do Australians continue to insist they DON'T have a "subprime" situation in home mortgages?
Even basic logic contradicts that claim. Unless wages have appreciated in line with home prices (clue: they haven't), then the only way Australians could "afford" current home prices are through the use of low-doc loans. IOW, easy credit to mask the low earning power of their wages.
Your post points out the precarious state of Australia's "credit economy" - good catch. But in the context of home prices - the housing bubble alone can sink this economy, in a similar way it is sinking the US and England.
The housing bubble is not so much about "subprime" or any other buzz-word - but simply, how much house can a citizen's wages buy?
A look at wage levels shows: the citizens here can't afford their homes any more than the citizen of the U.S. and England can.
There is not REALLY such a thing as "credit wealth", regardless of what the RBA would have us believe. (Just as the central banks in the US and England once claimed too, BTW.) Nor is there any reason to expect housing to perform any differently here.
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Low-doc market booms
By Stephen Blaxhall
Tuesday 31 July 2007
Fears of a sub-prime like meltdown seem far from lenders minds as Australia's low-documentation (low-doc) home loan market flourishes.
The low-doc market, which has doubled in the past four years, now makes up 16 per cent or $37.9 billion of total housing lending commitments.
There are now 385 loans offered by major banks, regional banks, credit unions and building societies, as well as the traditional non-bank lenders.
Stephen Blaxhall, http://www.investordaily.com/archive/2620.xml
Comment by JGCS on 4 February 2008:
There is absolutely zero doubt in my mind that Australia will exactly mimic the problems in the USA. The story repeated on all major TV News channels tonight was that approx 300,000 families are in danger of losing their homes if the RBA raises interest rates on Tuesday the 5th of February. This story annoyed me enormously because that fact has been obvious for at least 12 months and only now has the main stream media decided to warn people of this situation. It is also true that South Africa, Bulgaria, Italy, Spain, etc etc face exactly the same situation. It should also be stated that a rise in interest rates in Australia will further widen the spread between Aus and US where 80% of Aus banks wholesale funding is raised - free kick for bank profits - also it will make Aus Treasuries more attractive - more credit available to Aus Govt - Aus People pay more for their mortgages and have less money for the rising prices. Oh yes and I really, really expect that the price of Oil will drop because of the decreased demand for Oil from Aussie consumers - yeah right!! The RBA should leave interest rates exactly where they are for the next 12 months and then request to be be dissolved as a useless institution.
The 275 Billion figure to be written off is, in my opinion grossly understated. There are many reasons to believe this but the fact that this is what the ratings agencies are owning up to is pretty well proof enough.
There was a story on Bloomberg today about the EU investigating the dumping of below cost chinese steel being dumped on the EU market and thus affecting the profitability of EU steel makers. Is it possible that the production over capacity that has been created in China is actually already starting to show. Or is it possible that the only way some Chinese companies can actually make a profit is to sell overseas thereby getting around the price controls put in place by the government - time will tell. I realsise that there is a lot more to the China story than this but I am damn sure that China/India is not going to save Australia. As an economy Australia is one of the many US clones - the story in the US is relevant to us as we can see in advance how things will unfold here. I know of at least 30 local governments in Aus that purchased CDO's etc from Grange Securities (now (always?) Lehman Bros) - on their old Web Site Grange stated that State and Federal Government agencies were also customers so that will be interesting. Never forget that "Motor Finance Wizard says yes!!"