House price falls

The economic ramifications of the further fall in house prices in many parts of Australia are being widely debated. Hopefully, it will not cause any let-up in the pressure for further action to address the continuing crisis in housing affordability. Apart from anything else, these house price falls are unlikely to provide much relief for those in the private rental market, which is where the worst price pressures are being felt.

Given the number of comments I read suggesting our migration intake is a key reason for the housing affordability crisis, it is worth noting a few aspects of the figures reported today. Firstly, in Sydney, which still receives far more newly arrived migrants than any other state, “house prices have been stationary for 4 1/2 years which, with inflation, represents a 12per cent decline in real terms.” Secondly, Perth, which has the fastest population growth (mostly internal migration from other states), “leads the housing price decline this year.”

Given the often asserted assumptions that too many migrants and not enough houses are at the core of the problem, it is particularly worth noting the quote by Morgan Stanley chief economist Gerard Minack

Mr Minack said the most important influence in the market was not the growth in population nor the supply of houses, but rather the supply of finance.

“If lenders are unwilling to lend – or borrowers unwilling to borrow – to buy property, then demand will fall and prices with it,” he said.

I would add that this comment reinforces the big impact that excessively generous tax breaks and exemptions had on the big spike in housing prices – and the related serious decline in affordability – over the last decade. The excessive growth in demand came from too much money being available for speculation on rapid increases in house prices, which became something of a self-fulfilling property. Trying to let the air slowly of that particular asset price bubble will be very tricky, but very important if we are to avoid some of the disasters now befalling so many people in the USA due to plummeting house values. I think this makes it all the more important that the banks fully pass on any reductions in official interest rates which the Reserve Bank is tipped to make before the end of the year.  (disclaimer: I have a not insignificant amount of mortgage debt, so obviously any cut in mortgage rates would suit me)

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9 Comments

  1. Andrew:

    What your seeing here is similar to what happened when the insurance industry when 911 struck in 2001. Australians had to pay for losses incurred overseas.

    Both the NAB and ANZ have declared bad or doubtful debts of about $2 Billion dollars. None of these banks had they been diligent would have sustained these losses and now that they have, they intend to make Australians pay for their gambling habits overseas. (Supported by the government as well)

    The official Cash rate is 7.25 most standard variable home rates are standing at 9.56% or there about. (Some are discounted with larger amounts to approx 8.9%). To make healthy profits the banks require to make 1.5% over and above the official reserve rate, therefore banks should be very profitable at 8.75% (Lower with higher lends, down to say 8.05%) Why are the rates so high ?. To make up for losses overseas.

    The answer to this is for the reserve bank to make funds available to the smaller lending institutions like credit unions and mortgage managers (who in the past to get reasonable rates had to borrow from overseas) Then we would have a market that would keep the home market moving while not adding to inflation. If not we will see the end of further finance companies, and the larger banks with reserve bank access acting like predators like they have been.

    It won’t happen though because the banks won’t let it, and the government hasnt got the guts. Or is in agreement with the current position.

    Tony

  2. Putting my greedy capitalist’s hat on for a moment, if you look at rental yields in most Australian cities, there’s no way in the world you’d put up capital to build dwellings to rent out.

    The only conclusion you can draw from that is that either house prices will drop substantially further in real terms, or rents will continue to rise, or both.

    It’s going to get worse for both owners and renters before it gets better :(

  3. There is nothing disastrous about prices falling from irrational highs Andrew. My petrol tank equity has fallen this week – oh no, cut interest rates, quick.

    What would be disastrous would be the reserve bank deciding to further undercut the few remaining savers for our meagre interest payments.

    How do they lower rates? – “Invent” as much money as they need to to lend out to maintain interest rates where they want them, diluting the money saved by the few people who earn more than they spend. Not a good idea at a fifteen year high in inflation.

    dan

  4. DAN OF BUBBLEPEDIA.AU:

    At fifteen year high brought about by high fuel costs and higher interest rates. Both adding enormous costs to the consumer and business.

    If banks hadn’t lent overseas (like Drunken Sailors) we may have been able to ride out this recession. We sold of the commonwealth trading bank so their is no way we can reign in the bank these days or provide funding where its needed. Even if the reserve bank drops interest rates, banks are indicating they may not pass on the cut and continue to milk profits from the Australian market.

    Australia will have to look at other ways to real in the banks and provide funds through small institutions or we could all be headed from a very deep and long recession indeed.

    Tony

  5. I don’t see how the banks are the bad guys and the public is innocent. Collectively for 20 years or more now we have consumed more than we make and we borrow to pay the difference. The banks are just the middleman in this crazy arrangement. We – the public – have been foolish.

    I am with Dan on this – dropping house prices and less debt is a great thing. Bring it on – it should be welcomed.

  6. DAVE:

    Bank driven interest rates never reduces debt. Neither does falling house prices. It didnt in the asian collapse and it wont here.

    Consumer debt (Credit Cards) just gets higher or more unmanageable.
    As new home approvals and house loan applications continue to drop market pressure will eventually hold house values,(as immigration and growth expand demand) and the banks will continue to cash in at the consumers expense.

    Yes the homeless will rise thats about all.

    Tony

  7. Yes, agreed Andrew, the economic fall-out of too rapid a decline in property prices is not worth aiming for, but successive governments seem to have done little to avert the prospect. In fact, the whole of the housing bubble in Australia is deliberate: ill-conceived tax concessions to investors, lax bank lending and recent somewhat high rates of immigration.
    There would be more than a little social fall-out and protest if prices fall, say, 20 percent in next 12 months.
    There are basically 2 players in the game that can guide the situation to a positive outcome – the banks and government.
    Banks have their bottom line to protect but I wonder if they have learned any lessons about lax lending practices even now. I don’t see how government can exert any influence there.
    The government is responsible for this housing debacle in the other two areas. Treasury has sanctioned massive tax concessions for investors (see recent Senate report June 2008). Treasury needs to review tax treatment of that group. The other department is Immigration. I agree with immigration in moderation or in more organic fashion. The recent decision by Labor to almost triple the intake from 10 years ago looks a bit excessive. Will it work, time will tell. I hope it does.

  8. ALAN:

    The removal of negative gearing on residential properties has been tried before and failed.

    There’s no doubt that it will reduce house prices.

    Yes it will stop residential investors. Yes it will lead to a housing shortage.. Yes it will increase rental rates massively.

    Do you want that ?

    Tony

  9. Negative gearing needs to be tweaked rather than subject it to wholesale changes. There are numerous vacant properties in the market which are more than likely claiming tax concessions from the federal government. Vacant properties do nothing to alleviate the current affordability issue and rental issue in fact vacant properties exacerbate both problems. Negative gearing should be tweaked to allow investors a vacant period during the tax year (90-120 days) outside of this the negative gearing tax concessions cease. This will not solve the entire issue but it will make a positive contribution.

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