Housing disaster looms if rates rise

The RBA may achieve its desire and stop property prices from rising, but I can tell you for certain that rents will go through the roof. This has been our experience of the past seven years.
I do not understand why the Australian public is so accepting of the supposedly infallible decisions of the RBA. We already have the highest interest rates in the developed world.
No other country is even considering raising their rates (which are much lower than ours).
Should the rates be raised from 3 per cent to 5 per cent, as suggested, this will result in borrowers' mortgage payments being 40 per cent higher than what they are paying today, and for no additional benefit.
It is time the Australian people ask the RBA and our political leaders why they have to pay so much more than borrowers in other countries.
Why do Australians have, even now, the highest rates of interest in the developed world?
Why are we going to raise interest rates before everyone else?
more....Housing disaster looms if rates rise | The Australian

 

Hi Tropo,

I think it is important to note the author of this article is Harry Triguboff, the owner of Meriton Apartments which is a property developer.

If Harry wants to help the supply of homes maybe he should sell them for cheaper?

As inflation has actually dropped to 1.3%, it is less likely that the RBA will raise rates in the remaining 2009. With the rest of the world a economic mess, it will probably take a while for inflation to get between the RBAs inflationary target of 2% to 3%. Maybe once inflation actually increases the RBA may increase interest rates.

CNN had a special on Sunday live from Istanbul about where the world is heading, one of the discussions was around raising interest rates and when is the right time. It was agreed that later would be better than earlier as any early moves may strangle recovery whereas a later increase would be more sensible due to the fragility of the worlds economic plight.

Cheers,

Dan

 

Hi Dan,

We all know that the interest rate in OZ is very high in comparison with other countries, so H.T opinion about it is correct.
As a comparison...You can have right now in France a mortgage with an interest of 3.65% fixed for 18 years.

 

The problem with the article is it is very Sydney centric. "It really amazes me that after seven years of stagnation in Australian housing prices." That is not true for Brisbane, house prices have more then doubled over the last seven years. The average house price in my suburb was $200,000 in 1999, now it is $650,000 in 2009 (from rpdata).

The RBA can't make discissions based on the house prices in just one city. While I don't neccessary want rates to rise, something needs to happen to make housing more affordable.

 

I agree with Tropo, our interest rates are a joke.

 

Housing will become more affortable when they release more land and give incentives to developers to build new property.

But this alone is not enough, I am sick of seing government and RBA pulling the economy in opposite directions and us tax payers & investors paying the price. This needs to change.
Changing the RBA board would be a good start.
Those guys don't know what they are doing.

Last year they were still increasing interest rates when even blind Fredy could see that the storm was approaching and now before the economy had a chance to stand on it's own feet they started rising rates again.

Those guys live on a different planet........

 

I agree Bill. Inflation is still well below the 2-3 % range that they were so obsessed with adhering to back in 2007 when they continued to raise rates whilst the worlds financial systems were about to fall into a black hole. Now, even with the recovery at an embryonic stage they start raising again, IMO putting the recovery at risk. Any recovery is far too fragile at this stage to start worrying about hyperinflation, they should have just waited to see what happens in the US and UK first.

 

Average Australians obsession with debt fueled expenditure and living beyond their means is the real joke... not the RBA.

That said I don't personally agree with the RBA's move either... not that it is overly significant, but I just think they have more time up their sleeves.

That said, as they keep hinting they need to limit the number of new morons running out to leverage themselves to the eyeballs to buy property at low rates. This country doesn't need our resource allocation to our property bubble to get any bigger.

 

It's a supply and demand issue. Either limit immigration or build more houses !
Up here on the Sunshine Coast you can buy a new 4 bed 2 bath for around 400 K. Compared to the UK, that's cheap. Sydney and Melbourne are expensive but overall I don't think we have a house price bubble. There is a bubble in grocery prices but that's something that nobody seems to want to address !

 

Not from my perspective. It's a money supply (debt) and irrational exuberance issue. Most developer stopped building mid last year because there was no demand, even with Australia's population growing faster than ever.

Unfortunately immigration is the solution to much of our lack of competition and high reliance on imports, because it helps solve our low population problem and further promotes economies of scale and higher levels of competition.

That said I agree the government should try and pull at least a couple of the fingers it has in the property pie out, and should put greater focus on regulating efficient urban design.

By that I mean we should start looking to build up not out.

You can think what you want, but anyone worth their weight when it comes to economics disagrees, and the only people pushing the other side of the argument are banks, the real estate industry, and other individuals that stand to gain.

I'm not saying that property prices can't go higher from here, or that prices will crash by 40%, I'm saying that eventually the penny will drop and people will become rational about property prices, and that like any investment it should make a cashflow profit because the capital gains in majority are just a refelction of inflation.

The only thing stopping a price correction is Average Australian's nieve enchantment with bricks and mortar and their belief that they will dilver them to riches, but rising interest rates, unemployment and a contracting broad money supply with change that tune.

There are "small" degrees to with the big grocery players abuse their market power, but with that said it's a tough issue to address effectively, and from what I hear they have been making some inroads and that with the emergence of chains like Aldi it is becoming less of an issue.

 

It is interesting to read the financial commentary, before Tuesday commentators were saying the majority of economists said rates were going up, after Tuesday they come out and criticise as too early. If the RBA role is to set the inflation boundaries, then moving so early when other major economies are still in recession, where FX rates are moving up and imports are cheaper, makes little economic sense. Where are the inflationary drivers?

It seems more an effort to be seen to be doing something about housing prices but what a sledge hammer approach. The real issue with increasing rates is on business lending. They were high before the increase and will only get higher to further stifle confidence and ability for business to borrow. This is the real risk to the economy and employment.

I have read Chris C argue about Australians and debt and the risks of being property investors, but the real issues are not investment lending, it is ordinary Australians with credit card debt and personal loans. This is where the defaults and bankruptcies are highest. The default rate of investors is traditionally very low compared to other debt classes. Lenders have tightened lending policies substantially in the last 12 months so very high gearing is almost impossible and the previous practices of revaluing & refinancing at high LVR's is almost non existent.

Developers stopped developing (the large development projects anyway) because they could not get finance, not because demand had dried up. Lenders changed criteria even for small developers doing 3 units on a suburban block, they simply changed policies and said No, we will no longer do these at residential rates, you need to go to our commercial channel lending at far higher rates.

There is much of what Chris says that should be considered but some of it needs critical review. Chris suggests that people will eventually get rational about property prices ( I suggest that the intelligent investor already is) but I am not sure 'people' will. I look at the share market and wonder why do people believe a share price will go up. Price movements are not based on a dividend yield streams or fundamentals, they are based on speculation and greed from what I see, so why would the property market be any different?

While there may be 1.3 million or so property investors in Australia, around 75% or so just own one IP and are unlikely ever to own more than one. The vast majority of houses are held by owner occupiers. Investors do not drive property prices, home owners do, wanting to upgrade, to get into the market, to live closer to CBD, whatever. Investors will have an influence in some areas of the market but not the overall market. It is also about wanting it now mentality with many of the baby boomer and younger generations.

People need to do more than rely upon superannuation to be able to afford a comfortable retirement and I see building a property portfolio safely and securely over time as a key vehicle to achieve that.

You need to understand the numbers and consider and factor in the risks.

 

I'm certain the housing bubble is going to pop.
The RBA are not going to come out and say that but I think the longer they leave it the worse the eventual downturn will be.

I wondering of the RBA is secretly annoyed at the FHBG because is has disrupted their ability to control the economy?

We recently wrote a piece on housing affordability and I think it will be the repayments that eventually kill the market.
They way I see it once people stop thinking of property as an investment and as a place to live they will be less likely to take out 30 year mortgages that chew 50% of their take home income.

 

Zippy

Which particular housing market are you referring to?
what makes you so sure it's a bubble?

The way I see it prices are controlled by supply and demand.
Increase supply and prices will come down naturally
but not in areas where we've run out of land.
But how can you increase supply when developers can't get finance?
At the same time young people want their own space so they move out and the government is bringing more people in.

Mate, I don't like to bring you bad news but I only see property prices and rents going up so my suggestion would be to get used to the idea of buying your own place and to do something about it now.

 

Because while the rules of supply and demand are true i don't think your considering volume and price.

We live in a world where there are lots of things that people want but can't afford. There is the same demand for all kings of luxury designer goods but if you can't afford them you can't have them.

It is a bubble because the price is dependant on the increasing price rather than the underlying asset.
Honestly, how many people buy a house without considering the resale value?
I'd say none because you can't practically afford to ignore the resale value in the Australian market.

 

Who knows what they are thinking, inflation actually dropped from 1.8% to 1.3% on the quarter and they increase interest rates. Hello RBA, what are you doing??? Our Prime Minister Kevin Rudd wants to keep the inflation genie from getting out of the bottle...The RBA just smashed the bottle with a sledge hammer...Inflation genie is dead (for the time being).

...Price movements are not based on a dividend yield streams or fundamentals, they are based on speculation and greed from what I see, so why would the property market be any different?

While there may be 1.3 million or so property investors in Australia, around 75% or so just own one IP and are unlikely ever to own more than one. The vast majority of houses are held by owner occupiers. Investors do not drive property prices, home owners do, wanting to upgrade, to get into the market, to live closer to CBD, whatever. Investors will have an influence in some areas of the market but not the overall market. It is also about wanting it now mentality with many of the baby boomer and younger generations.

Superannuation is a tax vehicle whereas property and shares are assets, imagine if you slapped the two together...

It didn't pop when RBA rates were at 7.25% why would they pop at 3.25%?

Essentially there is not enough supply for the demand. While this is the case prices will continue to climb. If we had developers building a million homes for five years then we would be oversupplied and we would see property prices drop. Supply is below demand and until developers are building more homes we will see the prices skyrocket. As Greg said, unfortunately it is the developers which are hardest hit at these times which means less new homes are being built which obviously means that home prices will skyrocket even further until this imbalance is sorted out.

Cheers,

Dan

 

I'll preface by saying, I'm am really trying to spend less time on Invested these days because I got real work to get on with, so I'll have to learn to keep my posts shorter which will mean many of my points won't be as well justified with examples and explanations and the onus will be on the reader to seek further information.

It's a cop out to say that when you are trying to argue a point, but at the end of the day, I have an opinion that whilst I'm confident will eventuate, I'm not "that" confident that I can be bothered wasting too much time convincing others of it.

Each to their own.

Well Australian credit growth in aggregate is still positive and has been through this entire episode, mind you it was only supported by continued real estate credit growth. And whilst it's no where near what it has been in recent years, it's not negative so deflation equally isn't an issue for Australia and with a more stable economic environment rates this low would quickly prove to cause inflation.

After all you don't want too many people finding a new sense of confidence around their irrational exuberance such that they run out and start repeating the same mistakes that cause the crisis in the first place. So I think they can justify in their position on moving early on future inflationary problems.

For more information review the RBA's monthly credit aggregate reports.

I was a little confused with the wording, but if you are saying the idea of the rate hike was supress real estate lending but it's terrible that it's stifling business lending in the process. If you are then I totally agree!

However central banks can't do much other manipulate broad interest rates... clearly the issue is real estate based lending which has been growing quite solidly throughout the crisis whilst business lending has fallen off a cliff which is the complete reverse of what we want to be encouraging right now. I think it's time the government moved away from FHOGs to entrepreneurial grants for business innovation and job creation. FHOGs and FHOGB's give the public the wrong idea about buying a house, where as the government should really be promoting entreprenurish, innoviation and productivty growth - that's what really drives the economy, and as a flow on effect will drive housing prices too.

Of course this isn't the place of the RBA, unless they want to allow them to regulate credit flow and start moving the way of the Chinese central bank and start a credit rationing to move finace to the productive and socially beneficial sectors of the economy, which I would argue would mean less money going into real estate and property. For the record I'm all for adopting the Chinese model of rigid monetary regulation - it would cut a lot of crap out the system.

Default rates on property over the last decade have been low because property values have been skyrocketing due to credit expansion and if any Aussie got into trouble they could just sell up (normally it was a pretty quick process too) and realise a tidy little capital profit in the process, of course banks also loved this because there was little risk of them making a loss. Thus the properrty ponzi scheme.

Of course this "low rate of default" principle will be interesting to watch if property prices stagnate, interest rates rise with unemployment and sales volumes drop. That would make for a very ugly default statistic, which if I'm not mistaken was definitely on the rise, though I haven't looked into it for awhile. I wrote about it here:

http://www.invested.com.au/96/non-performing-loan-across-countries-36464/

My sources informed me that most big developers (like Mirvac, Stockland, etc), both commercial and residential, were putting developments on hold not because of financing concerns but because most of the developments weren't getting high enough levels of presales to start construction. My source, is my best mate who is a property economists whose firm consults to these property developers every day.

Anyway the point is neither here nor there because it doesn't matter if final consumers can't get finance or developers can't get finance, because at the end of the day if finance is harder to get prices go down because people that wanted to buy can't, therefore demand goes down throughout the economy.

Thus my real fear centers on money supply contraction as a result of tighter lending standards. I'm not saying we don't need tighter lending standards (I think we do) I'm just saying that the process through which you have to go to get them will be be quite contractionary for the economy and I think most of the unwinding left to do is in the property industry (we all saw what happened during the deleveraging process on the stock market).

You're right again that investors probably aren't driving the market, but at the same time home owners aren't completely uninfluenced by their home price. By that I mean if a deflationary trend was to emerge within the Australian property market you can bet your bottom dollar that many home owners would be willing to sell to avoid future capital losses, especially if they lots of debt tied up in their property.

This theory, whilst preached often, is completely flawed when you think about it rationally, because at the end of the day for someone to justify owning an IP you need someone to rent it, which means that renter much not have their own PPOR or IPs.

So this "retirement strategy" isn't scalable, therefore the "majority" shouldn't pursue this strategy, otherwise we'll all end up in a situation like the US where everyone invests in property, creating an oversupply, such that the financing costs (debt) use to buy/development the IP can't be serviced forcing investors into default. Obviously if it's done on a large enough scale you get a US style drama/recession.

I think the key point to focus on at the end of the day is that property doesn't produce anything. They don't become more efficient over time, or innovate themselves. Property is just bricks and mortar. There will always be demand for them, but they are a store of wealth not a path to riches.

I'm sure the RBA has a love hate relationship towards with the FHOGs and FHOGB... it was a quick and effective way to prop up the housing industry when things were at their worst. However I'm sure they are now looking at them as the once welcomed guest that has now overstayed their welcome.

I just thought I'd publicly mention I'm not going to debate points like this anymore. For me they are given, but I can appreciate that other won't see them as such unless they burst. Then there are some that are just going to believe what they want to believe (I may be one of them).



Please note, just because I believe housing prices are in a bubble doesn't mean I don't think they can't go higher from here, but I do believe that with time the bubble will "deflate".

I think they are just trying to take the punchbowl away before the punch-drunk debtaholics before they come back from their little smoko.

The only downside is you gotta trust the government... which means there is a lot of underlying risk as most governments don't have good "long term" track record, but I have a great record at looking out for numero uno (I pretty much do it all the time)



But I appreciate the point and will definitely be hedging my bets. Some money to super, some money to my future Swiss bank account.

This is a BIG point, and I totally agree this bubble is unlike to pop while rates are low, which is why I actually think this property recovery might actually have some legs in it (for the time being).

However I think the next "affordability crisis" (I love the way they call it that - PR spin at its best) the difference will be a much slower economy, lower levels of inflation (ie meaning weaker capital growth), tighter lending standards, higher taxes (not just because of government debt but lower labour participation rates with increased retirements), household workers working fewer hours and of course the big kicker - unemployment.

At the end of the day most households can buckle down and cut back on a few luxury items to make the mortgage payment when rates go up a bit, however if you lose your job, your stuffed.

I think the best case scenario for property going forward will be relatively flat property prices, which makes them a dud investment given that most people's IPs are still negatively geared (also known in business as making a loss) at historically low interest rates, so imagine when rates go up!