Mr Medved

It's official - "No housing bubble"

66 posts in this topic

http://www.abc.net.au/news/stories/2010/05/18/2902788.htm

Reserve says Australian housing crash unlikely

By online business reporter Michael Janda and staff

The Reserve Bank official charged with preserving Australia's financial stability says a US-style housing crisis is unlikely here.

Luci Ellis, the RBA's head of financial stability, says most of Australia's heavy housing debt burden is resting with those most able to afford it.

"Our assessment is that the increase in debt has broadly been concentrated in the hands of those generally more able to service it," she told a residential property conference.

She also adds that there does not appear to have been a drop in lending standards to first-time buyers, even when the First Home Owners Boost (FHOB) was in effect.

"As far as the data allow us to tell, recent new loans to first-home buyers look quite like those made to previous cohorts of first-home buyers."

However she does warn that financial institutions need to maintain strict lending standards to prevent a speculative property bubble developing.

Contrary to much recent commentary, Dr Ellis says that recent surges in house prices have more to do with increased demand due to stimulus measures than they do with population growth.

"Government policy was supporting first-home buyers' capacity to pay for housing; interest rates were unusually low for a period; and unemployment did not rise as much as earlier feared," she said.

While those drivers of growth have largely dissipated due to the expiry of the FHOB and rising interest rates, Dr Ellis says the Reserve Bank expects the nation's relatively rapid population growth to underpin housing demand in the medium term.

However, she also cautions that investors should not race into the market expecting capital gains in housing to continue indefinitely and underpin their ability to service their debts.

"If too much of the response to faster population growth comes as faster growth in housing prices, this could be built into people's expectations," she warned.

"If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment - or worse."

Affordability warning

Meanwhile, the Housing Industry Association (HIA) is again warning of an affordability crisis among first home buyers, because of rising interest rates and higher house prices.

The latest First Home Buyer Report by the HIA and Commonwealth Bank shows affordability fell by 4 per cent in the March quarter, and is now nearly 29 per cent lower than the same time a year ago.

A senior economist at the HIA Ben Phillips says the cost of renting is also likely to climb, as fewer people enter the property market to try to buy their first home.

"As the house prices go up and first home buyer markets deteriorate, the unfortunate reality is more people are stuck in renting and they can't get into home ownership," he said.

"So that has some fairly serious issues in terms of rent price increases, so it's bad news whichever part of the market you're falling into as a first home buyer."

Mr Phillips says governments need to cooperate to deliver critical housing infrastructure.

"Housing infrastructure costs a lot of money - at the moment the new home buyer is picking up the tab on that, often to the tune of $60,000-$70,000. That's unsustainable," he said.

"So we need to have an arrangement between the Federal Government, state government and local government. The Federal Government already has a very good scheme called the Housing Affordability Fund, but unfortunately the level that's been pitched in for that isn't really enough, and we know the housing shortage issue has only gotten a lot worse."

Glenn Stevens speaks:

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Well, he didn't say 'no bubble', in fact he said the FHOG boost, and the low interest rates had caused prices to rise faster than any fundamentals would dictate. What he did say was he didn't expect a US style crash.

Which sounds like he's calling a 'permanently high plateau'..

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Well, he didn't say 'no bubble', in fact he said the FHOG boost, and the low interest rates had caused prices to rise faster than any fundamentals would dictate. What he did say was he didn't expect a US style crash.

Which sounds like he's calling a 'permanently high plateau'..

I agree with everything that you say hamish except Luci is a girl.

"Housing infrastructure costs a lot of money - at the moment the new home buyer is picking up the tab on that, often to the tune of $60,000-$70,000. That's unsustainable," he said.

"So we need to have an arrangement between the Federal Government, state government and local government. The Federal Government already has a very good scheme called the Housing Affordability Fund, but unfortunately the level that's been pitched in for that isn't really enough, and we know the housing shortage issue has only gotten a lot worse."

Clearly I agree with this from the HIA. My only fear is that it is done in such a way that competitive pressure comes to bear and we actually get lower prices. Giving a handfull of developers access to this will not change prices, just give windfall profits to the developers involved.

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I agree with everything that you say hamish except Luci is a girl.

:blush: I should apologise to him...

I'd like to blame the beer for my gender discernment issues :beer:

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Perhaps Luci wasn't always a girl?

Gotta wonder why the RBA is saying this now? Just over a month ago they were trying to talk confidence out of the market, now they are trying to talk confindence into it. Speed wobbles galore.

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Luci is a dickhead (cross gender)..

"If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment - or worse."
:bangin:

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:blush: I should apologise to him...

I'd like to blame the beer for my gender discernment issues :beer:

Man, that's some funky beer goggles you've got!

Back on topic, I remember Ric "there's no housing bubble in Australia" Battelino trotting out the same line in 2008.

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Luci is a dickhead (cross gender)..

:bangin:

I am a bit suspect of her now I read Joye thinks he is mates with her. Joye might be one of these wankers though who pronounces his freindship with all the important people, her comments on subprime mortgages and thoughts on effects to long term affordability would suggest she almost certanily does not approve of his shared equity products.

In her defence as she works her way up the beurocracy food chain, she is only getting her point across without destroying her chances down the track. This on the subprime situation in the USA describing sub prime banks as cane toads is pretty good form in my books:

But as millions of American households lose their homes to foreclosure, and the owner-occupation rate declines to rates last seen in the mid 1990s, it would seem that they are worse off from this experiment. Sub-prime lenders could be seen as the cane toads of the US mortgage market: they were designed to battle one problem, but they created a bigger problem.

Basically her messages of, prudent lending standards and more flexible supply arrangments so less is taken up in price are both not going to hurt housing affordability in the long run.

From her speech:

Final Thoughts

To conclude, housing prices have been under upward pressure in Australia. The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices. Some of that pick-up in construction does seem to be happening.

Every cycle starts with something real, something fundamental. Recent data suggest that we do not have a credit-fuelled speculative boom on our hands. It would not be desirable for the current situation to turn into one. It will therefore be important for lenders to remain prudent in their standards. It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts.

Thank you.

http://www.rba.gov.au/speeches/2010/sp-so-180510.html

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I should have said above also, that Luci is just saying data suggests we do not have a bubble. She is certainly leaving the option open that we might do and the very fact all this data is being analysed to explore the possiblity is insigtfull of itself.

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Well, he didn't say 'no bubble'

That was the title on the front page of the ABC news web site.

Edited by Mr Medved

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Better tell the foreign Bond investors Luci...

May 18 (Bloomberg) -- Foreign buyers of Australian bank bonds are increasingly concerned a bubble is developing in the nation’s property market, according to Fitch Ratings.

Offshore investors have been asking whether there’s “an asset bubble forming in the housing market,” John Miles, a senior director at Fitch, said at a conference organized by the ratings firm in Sydney today. “If the investors perceive there is, then that could be a problem.”

More in link.... http://www.businessweek.com/news/2010-05-18/australian-bank-bond-buyers-query-bubble-fitch-says-update1-.html

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That was the title on the front page of the ABC news web site.

SMH ran with that headline as well, but then you read the story, and it's not really what he/she said, which was just another variation on the 'it's different here', 'massive shortage', and 'permanently high plateau' themes, which I'm sure has left beartrap, sherlock and their poster boy C Joye, overwhelmed with priapism...

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Just for a little perspective. From October 2005

full text at: (link)

Bernanke: There's No Housing Bubble to Go Bust

Fed Nominee Has Said 'Cooling' Won't Hurt

By Nell HendersonWashington Post Staff Writer

Thursday, October 27, 2005

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Clearly being head of the Fed - or the RBA - doesn't make one omniscient in terms of bubble-spotting.

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Nice little find there Urchin. smile.gif Even the excuses are much the same...

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Nice little find there Urchin. smile.gif Even the excuses are much the same...

heh, just google "bernanke no housing bubble" - it's the very first one to pop up :)

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This is quoted, from Luci Ellis' speech --

As we noted in the most recent Financial Stability Review released in March, Australian housing debt is higher relative to housing assets now than in the past (Graph 4). We should expect this ratio to be higher than in the 1970s and 1980s. The financial regulation of that period artificially restricted household borrowing. For example, unmarried women found it hard get mortgages back then. The question is whether this measure of leverage is higher than can be sustained. After all, it is much lower than in the United States, even before their boom-bust cycle. But we should expect that to be true. Because they can claim home mortgage interest against their tax, American owner-occupiers have less incentive to pay their debt down than their Australian counterparts.

http://www.rba.gov.au/speeches/2010/sp-so-180510.html

The chart, shows mortgage debt, as a percent of housing assets, was 33 percent higher in USA, than in Australia, before the USA crashed (40 percent is 33 percent higher than 30 percent, 30 x 1.33' = 40) -- a large difference!! It took ~20 years, for the USA, to rise from 30 percent to 40 percent.................

sp-so-180510-graph4-small.gif

I wonder, will it take ~20 years for Australia, to reach 40 percent, from the current 30 percent, and then a crash follows here??

This if we will follow a similar path, to the USA, in other words, it is not "different here". Yet, it may be "different here".

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Th

The chart, shows mortgage debt, as a percent of housing assets, was 33 percent higher in USA, than in Australia, before the USA crashed (40 percent is 33 percent higher than 30 percent, 30 x 1.33' = 40) -- a large difference!! It took ~20 years, for the USA, to rise from 30 percent to 40 percent.................

According to your chart it took 9 years to go from 30% (1983) to 40% (1992). More significant is the length of time it took the US to go from 40% to 65%... virtually overnight. Interesting how quickly things can unravel....

But yes, as you say, if it is not different here it is not different here. if it is different here it is different here.

It goes without saying, of course, that if our housing assets are even more inflated than those of the US were the ratio of debt to assets would be lower...

Edited by urchin

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According to your chart it took 9 years to go from 30% (1983) to 40% (1992). More significant is the length of time it took the US to go from 40% to 65%... virtually overnight. Interesting how quickly things can unravel....

But yes, as you say, if it is not different here it is not different here. if it is different here it is different here.

It goes without saying, of course, that if our housing assets are even more inflated than those of the US were the ratio of debt to assets would be lower...

It is the rate of change which helps Australias curve.

We have had a rapid rise to the bubblesphere when it comes to prices, meaning it will take some years even at current prices to see this lvr increase.

But even if prices do not correct the leverage in aggregate will continue to increase as more new entrants join the property "ladder" at these upper rungs.

OF course if property doubles again from here than our chart looks "healthy" again. I don't see that any of this is sustainable for the long term based on the US experience.

Edit: also as luci herself points out their are taxation reasons why in the US you dont pay your house off rather like investor homes in Australia. In Australia your PPOR is as good a place as any so far as tax treatment goes to park your savings. Of course this is assuming you do not get a 40% correction on your "investment".

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According to your chart it took 9 years to go from 30% (1983) to 40% (1992). More significant is the length of time it took the US to go from 40% to 65%... virtually overnight. Interesting how quickly things can unravel....

But yes, as you say, if it is not different here it is not different here. if it is different here it is different here.

Yes --- what I mean is, 20 years, to rise from 30 percent, through to 40 percent, and on to the crash, because it stayed at 40 percent, for a long time, upon getting there.............

It goes without saying, of course, that if our housing assets are even more inflated than those of the US were the ratio of debt to assets would be lower...

Not strictly -- because if the assets are even more inflated, the debt also would be even more inflated, along with the assets...................

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Not strictly -- because if the assets are even more inflated, the debt also would be even more inflated, along with the assets...................

Yes but it is time and volume dependant.

If prices doubled tonight then our current aggregate LVR would halve. But given ten years at this level our LVR would gradually increase.

To put it simply a fast rate of change upward will be good for this number, high prices for a sustained period bad. But just because a rapid change is good for this number does not mean it is sustainable or affordable!

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Bottom line -- I do not believe, comparing Australia with USA, or any other country, tells us much, about what will happen in Australia. Things are different, everywhere. Australia, will follow her own path!!

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Yes --- what I mean is, 20 years, to rise from 30 percent, through to 40 percent, and on to the crash, because it stayed at 40 percent, for a long time, upon getting there.............

always good to be careful to say what one means, though it's not always easy. Are you suggesting that an extended 40% debt/asset ratio in housing will be the trigger for a crash? Or are you suggesting that a seemingly stable situation that had continued for years could suddenly collapse?

Not strictly -- because if the assets are even more inflated, the debt also would be even more inflated, along with the assets...................

debt would only be inflated on new purchases whereas the increase in asset values would be across all homes, no? the value of new purchases vs. the value of the entire housing market would seem to be rather small. for upgraders, too, the difference would not be all that significant as they would be selling one inflated home to buy another inflated home.

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Bottom line -- I do not believe, comparing Australia with USA, or any other country, tells us much, about what will happen in Australia. Things are different, everywhere. Australia, will follow her own path!!

Well then you won't be interested in reading this

Lots of gems in there about how/why America wasn't in a housing bubble in 2005. And pretty graphs too. Some of them look awfully similar to the situation of Australia. But nobody's asking you to believe anything Sherlock--makes no difference to me.

For those who are interested in data rather than beliefs, i found this bit to be interesting:

Home mortgage debt, including home

equity lines, has grown from $4.5 trillion in

1999 to $7.3 trillion at the end of September

2004.

So, from 1999 to 2004 home mortgage debt grew 62%. But on Shad... erm, Sherlock's graph there is very little movement at all in the ratio (maybe from 38% to 42%?). could it be that the debt to asset ratio is completely meaningless as an indicator of bubbles? it would appear so...

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always good to be careful to say what one means, though it's not always easy. Are you suggesting that an extended 40% debt/asset ratio in housing will be the trigger for a crash? Or are you suggesting that a seemingly stable situation that had continued for years could suddenly collapse?

Neither -- I think the USA situation, tells us nothing, about what will occur in Australia, or anywhere else.

debt would only be inflated on new purchases whereas the increase in asset values would be across all homes, no? the value of new purchases vs. the value of the entire housing market would seem to be rather small. for upgraders, too, the difference would not be all that significant as they would be selling one inflated home to buy another inflated home.

Time, and volume dependent -- as Tom said............... and also depends on levels of equity redraw, for consumption, or further investment.

Well then you won't be interested in reading this

Lots of gems in there about how/why America wasn't in a housing bubble in 2005. And pretty graphs too. Some of them look awfully similar to the situation of Australia. But nobody's asking you to believe anything Sherlock--makes no difference to me.

For those who are interested in data rather than beliefs

RBA belief is there is not a bubble. Do you think there is a bubble -- and why do you think this?? Instead of asking others, to prove there is not a bubble, can you demonstrate, there is one??

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