From today's DR newsletter. This sums up the status of the RE market
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--The trouble is, there is still a lot of liquidating to do. And we are not just talking about labour markets where, after all, Qantas expansion was the result of low fuel prices and globalisation for many years. No. We're talking commercial and residential real estate.
--That's where Australia's banks have the most exposure on their loan books. And that's where you'll see write downs and losses on commercial property portfolios. We suspect that's why the banks are getting tight. They are preparing for much tougher times. Are you?
--Well you wouldn't be if you were just listening to the good folks at the Reserve Bank of Australia. Luci Ellis, the head of the RBA's financial stability department, said that lending standards never delved too low into subprime territory in Australia to lead to a mortgage lending bubble.
--In comments she delivered in Melbourne, she added that the inability of Australians to deduct the interest on their mortgage from taxes gave them a financial buffer against falling prices. She said that Aussies tended to pay off their mortgages more quickly because of this, whereas in America, the interest deduction presumably encourages people to maintain high balances on their mortgage.
--And what defence of bubblicious Aussie house prices would be complete without trotting out that old canard, the housing supply gap! "Unlike in the United States," Ms. Ellis said, "housing supply [in Australia] had not boomed in the same way for the past five years. There simply has not been an overhang of supply built up that would subsequently weigh on prices."
--We'll get to the supply bogey in a moment. But we're certain Ms. Ellis knows that the supply of homes is just one part of the pricing equation. The other part is, of course, demand. And the demand for housing is clearly influenced by the price of money (mortgage rates plus the first home buyer grants). Everywhere else in the world, plunging interest rates led to a huge mortgage lending boom that inflated house prices at historic multiples of household income.
--Nowhere else in the world, in fact, has housing become as expensive as it is today in Australia, when measured against household income. Two things make this possible. First is the availability of mortgage financing to lever up and get on the property ladder. Second, and more importantly, is the deep seated belief-encouraged and repeated by those in government and banking and real estate-that property prices always go up.
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The Great Australian Property Price Crash is coming people. You can't have a depression in credit and expect inflated housing values to magically levitate. The latest figures on housing and commercial finance show a few things. They show that first-home buyers are propping up the market while investors flee (as was the case in the U.S. in 2006). And they show that bank-lending to the private sector (both fixed loans and revolving credit) is retrenching.
--But what about the great supply deficit? Ms. Ellis cites a report by the National Housing Supply Council. This "State of Supply" report is prepared by a committee of insiders from the building, banking, and real estate industries. You'd naturally expect them to conclude that the supply gap is large and growing.
--Yet this is not exactly what they've done. They've confessed that their estimates of housing demand are based on statistical models. To quote directly, "The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008. This is based on the incidence of homelessness and the low level of vacancy rates in the private rental market."
--And you thought we were joking about the homeless.
We've always said if there was really a supply problem, you'd see more homeless people. The estimate the Council comes up with for the gap assumes, we assume, that the homeless are homeless because there aren't enough houses. This is nonsense. Studies show that a fair portion of the homeless choose to be homeless, or would be homeless regardless of historically low mortgage rates.
--But that point aside, low rental vacancy rates are also cited as evidence of a gap. This is nonsense too. Couldn't this also be the fact that so many Australians live in capital cities? And so many of them want to live in the same place? It's not that there aren't places to live. It's that everyone wants to live in the same place, which violates the laws of physics, of social propriety, and also drives up rents).
--In other words, maybe the two factors the Council cites in fabricating a housing gap have other, better explanations that a fictional shortage of housing. But maybe that narrative doesn't suit the needs of people who make money selling houses.
--Ah! A caveat arrives on cue!
--"The Council acknowledges the crudeness of this [housing supply gap] estimate and also points out that there were some 830,000 vacant dwellings in Australia at the time of the 2006 Census. The Council has assumed that most of these were probably second homes, homes in the process of sale or homes awaiting redevelopment and that there is likely to be limited capacity for absorbing growth in underlying demand within the present level of housing supply."
--Baffling. Or just deliberate chicanery?
--There are 830,000 vacant dwellings. But that, according to the Council, is not enough to meet the housing supply gap of just 85,000 dwellings? Math was never our strong suit. But this smells fishy.
--Could it be that property investors, let's say boomers sitting on property as a retirement income, are not prepared to sell those investments at these prices? There's no urgency, after all. Do they expect to sell these properties to pay for their retirement? Or are they just taking advantage of the tax benefits of negative gearing?
--Who knows, dear reader? But we'd humbly suggest there is no housing supply gap at all. You could bring some of those 830,000 vacant dwellings on the market by changing the negative gearing laws.
And the elimination of the first home buyers grant would prevent so much future demand from being "brought forward" merely to prop up values for existing homeowners who want to sell now to the sucker first home buyers.
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But we reckon none of that is going to happen. While the stock market wades through earnings information and employers batten the hatches and throw men overboard, Australia's property market is headed towards an epic fall. More on the fall tomorrow.