Australia Research
Australian home values slump in November as higher interest rates hurt housing affordability
RP Data – Rismark Home Value Index Release (31 December 2010) Capital city (-0.2 per cent) and ‘rest of state’ (-0.1 per cent) home values both fell in seasonally-adjusted terms in November. In raw terms, the declines were larger (-0.6 per cent and -0.8 per cent, respectively). RP Data & Rismark expect further weakness in 2011 as rates rise. Drawing on more than 340,000 sales in the year-to-date, Australia’s leading measure of movements in the value of residential real estate, the patented RP Data-Rismark Hedonic Home Value Index, recorded falls in the month of November in both the capital city (-0.2 per cent) and ‘rest of state’ (-0.1 per cent) housing markets across all dwelling types. In raw terms, the declines were unsurprisingly larger (-0.6 per cent and -0.8 per cent, respectively) given the seasonal slowdown that occurs at this time of the year. In the capital cities, Australian home values are now lower than the levels they reached in March 2010. That is, there has been no capital growth since the end of the first. Similarly, in the ‘rest of state’ markets, which account for around 40 per cent of all homes by number, dwelling values are now below their January 2010 peak. The key drivers of the soft-landing in Australia’s housing market in 2010 has been the RBA and the banks, which have lifted the headline variable mortgage rate from 6.3 per cent in November 2009 to 7.8 per cent in November. RP Data’s director of research, Tim Lawless, observed that the decline in Australian home values had been reasonably modest, “Since their peak in May 2010, capital city home values have fallen by 1.0 per cent in raw terms. The rest of state areas peaked in April 2010, and have suffered a similar 0.9 per cent fall. In the broader scheme of things, these are fairly modest adjustments in value.” The soft-landing in Australia’s housing market has been evidenced in all capital cities and across each segment of the market. When RP Data-Rismark divide up their hedonic dwelling value index into ‘cheap’, ‘middle market’, and ‘expensive’ suburbs, they document a synchronous downturn in capital growth rates across all these areas. Christopher Joye, Rismark’s managing director, added "Since the middle of the year, we have had a somewhat bearish view on housing over the 2010-11 period as a function of our projections for interest rates. If for some unlikely reason the RBA does not raise rates further, we would expect to see national dwelling prices stabilise over 2011 and grind out capital gains in excess of headline inflation, which we anticipate will breach 3 per cent by the end of the year.” “Assuming, heroically, that there are no more increases in the cost of mortgage debt, we would forecast capital city dwelling price growth of 4-6 per cent in 2011. This is not, however, our base-case”, Mr Joye said. Joye continued, “We believe that there is a risk of at least three cash rate increases in 2011. In this event, our central case is that there will be little-to-no nominal dwelling price growth over 2011, with a chance of small nominal declines. This is no bad thing, and will only further improve asset-class valuations. Indeed, Rismark has recorded an improvement in Australia’s dwelling price-to-disposable household income ratio, which has fallen from a peak of 4.7 times to 4.4 times in the third quarter of 2010. We believe that the likelihood of substantial national house price falls is remote.” The under-performance in Perth and Brisbane has persisted in line with their higher repossession rates that came about care of the GFC. Over the three months to end November, Perth home values were down 3.0 per cent and Brisbane values were down 1.0 per cent in seasonally-adjusted terms. The best performing markets over the three months to end November have been Darwin (up 1.9 per cent), Canberra (up 1.2 per cent) and Melbourne (up 1.2 per cent). Financial markets are currently pricing in a further two 25 basis point RBA cash rate increases over 2011 while the economic community expects a more aggressive 3-4 rate hikes. According to Mr Lawless, the prospect of further rate hikes is likely to keep market conditions in the doldrums over the coming year, “The expectation of higher mortgage rates will be enough to keep a lid on capital gains across most parts of the country. Consumers have become very sensitive to interest rate adjustments to the extent that the nation seems to hold its breath on the first Tuesday of each month when the RBA’s decision is announced.” Christopher Joye added that the RBA had pioneered a new form of monetary policy, “The RBA has well and truly led the central banking world on the subject of asset prices. The RBA has recently adjusted the way it sets interest rates to take more explicit account of changes in asset prices, which, in principle, include shares, commercial property and residential housing. The RBA accelerated its rate hikes in 2009 and 2010 more rapidly than it would normally have done so in order to engineer a cooling in a housing market that it perceived to be growing at unsustainable rates. Other central banks, such as the Swedish Riksbank, are now following the RBA’s innovative lead.” “This expansion in the RBA’s policy remit is not, however, without considerable risks: it is always possible that this benign autocrat overplays its hand and lifts rates too far in response to non-inflationary events. Mistakes in this vein arguably occurred in the late 1980s, which led to a peak mortgage rate of 17 per cent in January 1990 and the recession ‘we had to have’. As a consequence, unemployment soared to around 11 per cent. The independence of central banks, and the RBA’s hard-won inflation-fighting credibility, are historically recent innovations. The non-democratically elected leaders of these institutions would, therefore, be wise to exercise their considerable powers with the utmost humility and care”, Mr Joye cautioned.
House prices poised to rise, not burst: BIS Shrapnel report
Geoffrey Rogow
From: Dow Jones Newswires
October 12, 2010 1:39PM
Housing
Source: The Australian
AUSTRALIAN house prices will rise for the next three years on the back of the country's robust economy, according to a BIS Shrapnel report.
The report, commissioned by QBE and written by BIS Shrapnel, forecast median house price growth of 20 per cent in Perth, Sydney and Adelaide over the next three years, with prices in every major city in Australia rising by 9 per cent or more.
The survey comes at a crucial time in sentiment surrounding the Australian housing market. Recent data shows pricing in the market is starting to slow, while international investors and even the International Monetary Fund have recently argued the local housing market is overvalued.
As prices have dipped, some economists and investors -- most notably GMO chief investment strategist Jeremy Grantham -- have even argued a housing bubble was being created in Australia, something both BIS and QBE dismissed at a press conference.
"We aren't in for a period of phenomenal growth but we're certainly not in for a 20 per cent drop either," said BIS managing director Robert Mellor.
Mr Mellor argues a string of six rate hikes in seven months by the Reserve Bank of Australia in late 2009 and early 2010 has more to do with the recent slowdown than anything else. Earlier this month, RP Data-Rismark reported Australian capital city house prices fell 0.2 per cent in August from July.
However, should a correction occur, mortgage insurers such as QBE would be arguably most exposed to the drop.
Ian Graham, chief executive of QBE, said the firm hasn't made any broad changes as the concern has picked up, though he noted the firm went through some changes to tackle the ongoing credit issues during the global financial crisis.
"Any adjustments we've made have been at the margin," said Mr Graham.
In addressing the slowdown in prices, Mr Mellor said even though a first-time home buyer's grant pushed some sales up to the early part of this year, he expects first-time home buyers to return to the market with vigour late this year and early next year partly thanks to a recent pause from the RBA.
The RBA has now paused with rates in its last five meetings, including last week when it surprised economists by keeping rates steady at 4.5 per cent.
In dismissing the idea of a bubble, Mr Mellor noted than unlike the bubble in the US, Australian housing prices haven't moved upward continuously, adding prices were still 12 per cent to 15 per cent below peaks from 2003.
Still, the local housing market doesn't come without risk, according to BIS. Should the economy heat up even more than BIS forecasts, the impact that move would have on interest rates could damage an already somewhat stretched affordability issue in Australia.
"The big risk is affordability," said Mr Mellor, who said affordability wasn't a short-term risk but could turn into one by 2013 should rates reach above 8 per cent.
The report come on the heels of a senior central bank official last week saying the housing market has already cooled off. Luci Ellis, head of financial stability at the RBA, said dwelling prices have tapered in recent months and housing credit has slowed, most notably to first-time home buyers.
"Loans to property investor households have not surged the way they did during the more buoyant, rather speculative period in the early 2000s," Mr Ellis said.
While a temporary cooling of house prices will be welcomed by those worried the market place is overpriced, it has done little to calm those concerned about a bigger correction.
Set for release tomorrow, Fitch Ratings will conduct stress testing on the housing market after being inundated with inquiries both locally and abroad on the sustainability of prices.
Australian Property Report - April 10
Much talk of housing ‘bubble’ - but fundamentals sound
– Record population gains & inadequate supply growth
– Critical housing shortage worsening/demand momentum strong
– FHB replaced by investors, upgraders & offshore buyers
– Conservative lending/low delinquencies/no sub-prime/full recourse loans
Household sector well placed
– Economy & labour market solid, unemployment falling – no forced sales
- Low delinquencies reflect comfortable debt servicing
- Solid gains in real household incomes
- Growing skilled labour shortages/upward wages pressure
Financial system solid
– On balance sheet lending raises incentives re. sustainable serviceability
– Conservative lending = low delinquencies
– Full recourse lending cf. US = less incentive to default
Risks
– Rising interest rates/deteriorating affordability could cap price gains
– Policy reversal of 2009 FIRB changes?
– Change in immigration policy?
– Rising unemployment/recession?
Click here to download full report - http://www.ipsinvest.com/News_199_Australian_Property_Report_April_10.aspx
Lifting rates will not stem rising market in Australia
Terry Ryder
# From: The Australian
SOMEWHERE amid the fuzzy logic that drives the Reserve Bank's interest rate policy is the notion we have a housing price bubble and that raising interest rates will deflate it.
Glenn Stevens and his cohorts are wrong on both points. There is no bubble and history shows that lifting rates does little to quell a rising market.
Of course, it's difficult to know what Stevens and his faceless friends on the RBA board are thinking. They meet, decide to increase the cost of our mortgages, issue a press release and then disappear into the city.
Stevens should be compelled to face a press conference after each decision and justify the increasing pain he is inflicting on families and businesses. The economy is recovering, no doubt, but it has not yet recovered. Many businesses are still doing it tough, especially retailers.
The RBA appears to be reacting to extremes: the massive numbers that express future export deals by resources companies and activity at the top end of the housing market, all of it magnified by the tabloid media.
It is overlooking the mainstream where most action happens: ordinary businesses that employ of the bulk of the workforce and the everyday property market where 95 per cent of deals happen. Neither of these spheres is going ballistic.
I haven't seen anyone define what the term housing bubble means, but I assume it describes a market inflating out of control with prices increasing in an extraordinary way. I'm convinced most journalists and commentators wouldn't have a clue what it means and don't care whether it's true or not.
James Packer spends $12 million buying houses next to his Vaucluse mansion so he can build a swimming pool and this is presented as evidence the market is out of control. A small number of Chinese investors buy at the top of the Sydney market and they're blamed for pushing prices beyond the reach of families.
We do not have prices rising exceptionally in the mainstream market. According to the usual research suspects, house prices across the nation rose an average of 11 or 12 per cent in the past year. This is being represented as extraordinary, when it is merely average based on the standards of the past decade.
We saw much larger price rises in the 2003-2004 up-cycle and again more recently.
In 2007, the houses price indexes from the Australian Bureau of Statistics showed prices rose 12.5 per cent in our capital cities, including 14 per cent in Canberra, 18 per cent in Melbourne, 20 per cent in Adelaide and 22 per cent in Brisbane.
Why, suddenly, is a rising real estate market a problem?
Why is Stevens so concerned about a recovering property market? And where did he get the idea that lifting interest rates will scuttle it? There's no evidence that lifting interest rates correlates with a fall in dwelling prices.
We started in 2007 with the official interest rate at 6.25 per cent, compared with 4.25 per cent today. In the next six months rates increased from 6.25 per cent to 7.25 per cent.
But dwelling prices kept rising. Indeed, the rate of price growth throughout 2007 and into the first half of 2008 kept accelerating. The more the RBA lifted rates, the faster the rate of price growth. It was only the onset of the global financial crisis that finally slowed the market.
Over the 18 months from the start of 2007 to the middle of 2008 Darwin's median price rose 15 per cent, Canberra's by 18 per cent and Adelaide's by 23 per cent.
The evidence goes back well beyond the past decade. In my research I found a Residex article written in 2000 which began with: "Do rising interest rates mean decreasing property prices? If history is any guide, not at all. In fact, analysis of our data reveals that interest rates have no effect on the capital growth of property at all."
The article presented data on periods of rising interest rates in the 70s and 80s which "were followed by accelerating or steady house price inflation".
My three decades of researching real estate tell me price trends correlate more with the level of public confidence than the level of interest rates. If anything, rising interest rates have a positive impact on confidence, because they are a sign of an improving economy.
Prices stopped rising in late 2008 because confidence fell as we faced a battering of negative news about the GFC, the impending Australian recession (which never arrived) and the prospect of high unemployment (which didn't happen either).
Confidence, and price growth, revived in the latter part of last year as the emphasis switched to news of recovery, falling rates of unemployment and a resurgent resources sector.
Low risks make it a great time to invest in property in Australia
ECONOMIST: Frank Gelber
* From: The Australian
* April 15, 2010 12:00AM
DO I sound bullish about property to you? If not, you're missing the point. To me, this is an extraordinary time for property investment.
Most of the risk has gone. Non-residential prices have fallen dramatically. They're below replacement cost. Development has stalled. Demand is returning. And we can't build until rents rise.
Risk hasn't been this low, or investment decisions more clear cut, for 15 years. Certainly, across cities and sectors, prospects aren't uniform. But by and large, we're looking at strong positive returns over the next five years, with some internal rates of return above 20 per cent.
The key is risk. Some think high return means high risk. Too many people look at risk as statistical without trying to understand where it comes from. For them, risk is variation, everything that they're not sure of.
We can do better than that. We can specify sources of risk associated with specific events.
Let's focus on three specific cyclical property risks: overbuilding and its consequences, excessive gearing and overvaluation.
First, overbuilding. Before the global financial crisis hit, I was worried about overbuilding during the boom leading to oversupply and significant falls in rents and prices, a classic boom/bust cycle. Buoyed by the inflow of funds, building was rising to unsustainable levels. As it turned out, the GFC did us a favour, curtailing construction early, before we oversupplied markets.
The initial setback to development came from the funding squeeze. Now, the problem is making financial feasibilities work. Commercial and industrial commencements have halved in real terms since the peak and are struggling. During the boom the risk of overbuilding was high. Now, it has evaporated and there is the prospect of a shortage.
Second, gearing. This is not only an individual property investor risk but can also create market risk. The financial engineering boom put enormous pressure on corporate Australia to gear up. And the Real Estate Investment Trust sector, with relatively stable cash flows, was a prime candidate.
It was hard to resist. And the REITs didn't, gearing up from 14 to 40 per cent in the blink of an eye, with some more classic financially engineered operations heading above 90 per cent.
Gearing compounds returns in the good times, but multiplies losses when returns don't cover interest. Of course, the GFC triggered falls in property prices which, with gearing, compounded the fall in net assets.
Initially, shell-shocked investors did nothing. The REITs, without equity injections, were forced to try to sell assets. But, with few investors, markets didn't clear and prices fell. Only later were the less affected REITs able to raise equity, mainly through new rights issues, gradually reducing gearing to levels that are allowing them to resume normal operations and think about development and investment.
The third risk is overvaluation.
Increased gearing in the boom, plus additional equity, hugely boosted investable funds, all chasing a limited amount of property. Yields got away from us. Weight of money caused yield compression and caused prices to overshoot.
The risk was that yields would correct, that prices would fall. And they have. The risk of further price falls is low.
Contrary to the present heightened perception of risk, all three types of risk have receded. We're too cautious.
To me, it's safe to invest.
I worry more when I can't understand value. My benchmark is replacement cost -- we can't stay below it for long when we need to develop. This stage of the cycle presents an undervalued market with emerging demand and little new supply.
At BIS Shrapnel we're looking at internal rates of return in some sectors up to 20 per cent. Most risks are on the upside. What would you do? I know what I'll do.
Frank Gelber is chief economist for BIS Shrapnel fgelber@bis.com.au
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