What Housing Price Crashes Really Look Like

– from ‘Australian House Prices down 10% from Peak’, Steve Keen at debt deflation.com, 1 May 2012

Show these charts to anyone still claiming that the Vancouver RE price hiccup of 2008-2009 was the popping of our bubble.
Like Australia, Vancouver is very likely at the very beginning of the process you see charted above.
– vreaa

One Of These Things Is A Lot Like The Other – “Australian prices matched other countries’ bubbles until 2008. But while the real estate process elsewhere has since been deflating, Australian prices marched higher after a brief respite. The sharp deviation of rents from rapidly growing house prices completely refutes the bullish case for a housing/land shortage.”

.

Australian fundamentals, or lack of them. Enough to make a Canadian homesick.
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“It’s different from the US. The Australians have a very strong economy. China is buying our coal and iron ore like crazy! That’s not going to stop any time soon.”
…
The Australian economy today
What the bulls will tell you:
“The Australian economy is a true success story compared to those of other developed countries. It almost completely escaped the “Great Recession” and with its GDP slightly dipping for only one quarter in late 2008, its unemployment stands today at an enviable 5.1%. Real estate is booming. Until recently, the Reserve Bank of Australia was raising rates to fight inflation and “economic overheating.”
Reality:
The reality is starkly different: Australia has a very vulnerable economy where upcoming bad news has not been “priced in” at all. The country suffers from an epic real estate bubble that greatly exceeds those of US, Ireland, and Spain. The average Australian consumer is completely tapped out. Take out a “consumer credit” punchbowl and reduce the Chinese voracious appetite for iron ore and coal, and the Australian economy will collapse like a house of cards.
…
Australian Real Estate Bubble
What the bulls will tell you:
“We hear bubble warnings all the time today as many people see bubbles everywhere where a price has appreciated. You can hear about “commodity bubbles”, “treasury bonds bubbles”, “new dot.com bubbles”, etc. Australian housing is built on solid fundamentals due to economic and population growth. There is not enough land in large cities to build houses to meet ever-increasing demand.”
Reality:
It’s always instructive to take a look at historical trends and plot a “mean-reversion” graph before concluding that something is significantly overpriced.
Optimist’s claims are not supported by any other data such as high GDP growth rate, rising rates, or increasing construction costs.
What’s truly remarkable is that the Australian economy had sub-par GDP growth rate (under 2% vs. USA over 3%) for the last 30 years, while real estate prices significantly outpaced those in the USA. The fact that the Australian real estate bubble is probably 30 years old is missed by many observers who plot data from the year 2000.
Australian prices matched some of the other country’s bubbles until 2008. But while the real estate process elsewhere has been deflating, the Australian prices marched higher after a brief respite.
The sharp deviation of rents from rapidly growing house prices completely refutes the bullish case that Australia is experiencing a housing/land shortage. The rising income and rising construction costs were (at best) only minor contributing factors to the price rise.
…
What may “pop” the bubble
The Australian real estate bubble has run longer and deeper than recent property bubbles in the USA, Ireland, and Spain. Heavily indebted Australian consumers, just like those in America, have a large portion of personal wealth tied-up in real estate. The price correction has not yet run its course (the mortgage defaults hover around 2%). When it does, it will certainly plunge the Australian economy into a severe recession.
…
– from ‘An Epic Australian Bust’, Igor Novgorodtsev, Seeking Alpha, 27 Feb 2012 [hat-tip Farmer]

Australia – High Profile Sydney RE Weakness – No Takers At $1M-Off 2009 Prices

“It was billed as ‘Super Saturday’ but turned out to be more like soggy Saturday for Sydney’s home auction market.
The last Saturday in November is traditionally the most popular day of the year to buy and sell. But this year the clearance rate of 54.6 per cent was well down on estimates.
Actor Toni Collette’s historic Bronte home failed to find a taker, despite being offered at a discount of almost $1 million from the $4.4 million she paid in 2009. Invitations for opening bids of $3.5 million did not raise an eyebrow, let alone a hand.”
– Sydney Morning Herald, 27 Nov 2011 [hat-tip canuckdownunder at VCI]

Any doubt that this market will end up with >50%-off discounts? -ed.

Are economists ignoring Australia’s property bubble? – “Many leading economists whose analysis and commentary the public relies upon have so many conflicts of interest it would fill a small book.”

I view of a related discussion on the ‘UBC housing’ thread yesterday, we note this timely Australian article today [from ‘Are economists ignoring Australia’s property bubble?’, Philip Soos, theconversation.edu.au, 20 Sep 2011].

Excerpts –

“One aspect of housing and stock market bubbles continually repeats: the vast majority of economists either miss or deny their existence.
In recent years, enormous asset bubbles have burst in many countries.”
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“In Australia, our $2 trillion housing bubble has seen prices rise by 127% from 1996-2010, and every fundamental indicator is off the chart.
But while it seems logical to conclude that Australia’s property bubble will inevitably burst, very few observers seem willing to do so.”
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“By definition, an asset bubble requires the vast majority of the public and economists to participate in the mass delusion that prices will endlessly rise.”
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“Many leading economists whose analysis and commentary the public relies upon have so many conflicts of interest it would fill a small book. Consultancies, university chairs, endowments, six-figure salaries, and industry directorships comprise part of the package that ensures economic “thought leaders” within government, industry and universities speak the words pleasing to the rich.”

…and, one might add, in Vancouver, we’re ALL ‘rich’.
-vreaa

Australia – “They claim they never did anything wrong, but of course they did. They paid too much for a house, and they had no cash cushion if one or more of them lost their job.”

From ‘Secretly Broke in Australia’, at Mike Shedlock’s Global Economic Analyst blog, 8 Aug 2011. Transcripts from a ’60 Minutes’ TV feature (‘The Big Squeeze’) on the personal consequences of moves in the Australian housing market. [hat-tip to ‘bubbly’]

ALLISON LANGDON: To the world, Tracy and David Dodd are the very model of Australia’s relaxed and comfortable middle-class. They’re living the dream – three kids, a mortgage and a suburban family home on an acre block. But Tracey and David have been keeping a secret from their family and friends – they’re drowning in debt. No-one to look at you would think that you are struggling.

TRACY: It might look like we have got everything but you don’t see the mortgage, you don’t see the loans. You don’t see everything and nobody wants to talk about it you know, because it is embarrassing.

ALLISON LANGDON: Has it taken a toll on you both?

TRACY: (weeps)

DAVID: Oh it has – it has taken its toll but you’ve just got to do it.

ALLISON LANGDON: Like most young couples, the Dodds invested their heart and soul and every spare cent they had into the ideal of home ownership – the biggest mortgage their double income would allow. But last June, Tracy lost her job in the construction industry and David was made redundant. Just to keep money coming in, he’s taken a lower-paying job. Ever since, the Dodds, like tens of thousands of middle class families have been going secretly broke in the suburbs.

TRACY: We went from having a really great income including a company car, fuel card, phone – things like that – to basically losing all of that.

ALLISON LANGDON: So do you have more money going out each week than what you’ve got coming in?

TRACY: Absolutely.

ALLISON LANGDON: How much difference are we talking about?

TRACY: Probably – it’s getting very embarrassing – probably about 400 bucks…$400.

ALLISON LANGDON: This is the outskirts of the Gold Coast. When you look around and see the big, shiny new houses, the nice lawns and two cars in the driveway, you can’t help but think, ‘life must be pretty good here.’ But this version of the Great Australian Dream is just a facade – nowhere is mortgage stress being felt more keenly than right here. And the figures are staggering – one in 50 families are at risk of losing everything. The number of Australians behind on their mortgage repayments by more than a month is at an all-time high. Areas of mortgage stress can be pinpointed right around the country. Mostly in areas, that just five years ago, were booming. Families who borrowed to the limit in the real estate gold rush are the ones who are now struggling to pay their bills.

—
MISH’s comment: “The story continues with Phil and Sandra Box who claim they never did anything wrong. Of course they did. So did Tracy and David Dodd.
Not only did they pay too much for a house, they had no cash cushion if one or more of them lost their job.”

—
Another extract from the 60 minute piece:
“A generation ago, buying a house was a rite of passage, bricks and mortar were as good as money in the bank. Not any more. Nowadays, renting might just put you ahead of the game.”

—
Note that for the “figures” to be “staggering”,  just “one in 50 families” need to be at risk of “losing everything.” What will the Vancouver area numbers be at 10%, 20%, 25% RE price drops (and with the resultant effects on our  RE-dependent local economy)? – vreaa

Government Policy During RE Bubbles – “Economic policies which encourage people to borrow and speculate into a rising asset markets, causing general economic largesse. They want to have affordable expensive housing, that’s their policy.”

Interview with Steve Keen, Australian economist, on the Australian housing bubble that is now beginning it’s deflation. Keen predicts 40% price drops, over years. Video and transcript of interview at  finnewsnetwork, 25 May 2011.
Excerpt, that could just as well be applied to Canada – “Both parties here… claim that they want to have affordable housing, but really they’ve both had economic policies which, whether they’re conscious of it or not, have been dominated by encouraging people to borrow and speculate into a rising asset markets and that causing general economic largesse. So they want to have affordable expensive housing, that’s their policy.”

—

Further comments of note in the interview:
“I think what you have to do is get to the stage where you actually buy a house to live in, not to speculate on. And, with landlords, if they buy them to make an income from, buy them to make a profit from the rental income, not that of capital gain. Now that implies you’ve got to wait until housing prices have fallen something of the order of that 40 per cent that I’ve mentioned before hand, maybe even more, before it becomes possible for a landlord to borrow money, buy a house, and earn enough money from the rental income to more than service the mortgage and then you have a European situation for rents, which is what we need in this country. That’s why I think Germany hasn’t had a crisis, by the way.”

“One of my best friends has decided to move to Australia. Early 30s, born in greater Vancouver, 2 university degrees. Buying is completely out of the question. Would like to stay but for the high cost of living and low salary.”

human at VREAA 29 May 2011 at 11:38am – “One of my best friends has decided to move to Australia with an Australian woman he is dating. Early 30s, born in greater Vancouver, 2 university degrees (one professional), can’t make enough money as a renter to save anything. Buying is completely out of the question for them. They would like to stay here but the high cost of living and low salary is driving the decision.”

human -> Pity about losing your friends. If it’s any consolation, we do like your handle! (Same race as us here at VREAA; please send us more of your kind.) – vreaa

Australian Housing Market Strikes Out; Canada Is Last Batter Up

From bloomberg.com 13 Apr 2011 – “We have a very overvalued housing market and even a small adverse shock can be magnified by a large adverse impact on property values,” said Gerard Minack, Sydney-based global developed markets strategist at Morgan Stanley, who asserts Australian home prices are as much as 40 percent overvalued. “We’re seeing that now in parts of Queensland.”
Australia’s housing is the most overvalued in the world, the Economist newspaper said last month. The country had the most unaffordable homes among English-speaking nations, with the Gold Coast and Sunshine Coast markets near the top, according to a Jan. 24 report by Belleville, Illinois-based consulting company Demographia, which compared 325 housing markets in seven developed economies.”

Guess who was second to Sydney in the ‘Severely Unaffordable Housing Markets’ category of the Demographia study? Yeah, your home team, Vancouver.
Canada and Australia have been moving lock-step: Resource based economies, strong dollars, and housing bubbles with off-shore buyers. We expect Canada to follow Australia with respect to RE weakness. This could herald the beginning of our crash. -vreaa

The Aussie RE turn is also covered in recent posts at Mish’s ‘Global Economic Trend Analysis’, ‘Australian Home Sales Sink, Luxury Units Sell for Half Cost; New Home Loans at 10-Year Low; Australia Retailers in Deep Trouble; Party Officially Over’, 10 Apr 2011

Australian Home Buyer Strike Campaign – “First home buyers have been duped into entering the bottom rung of a nationwide property ponzi scheme.”

For the chronological record, we note this action here, and also note that this is being discussed on Vancouver and other Canadian RE blogs. For an account, see ‘The homebuyer strikes back’, abc.net.au, 31 Mar 2011. [Hat-tip Don.]
Excerpt:
“The housing market has spiralled off into ridiculous pricing that nobody can possibly afford, and it gets to the point where if nobody can afford it the prices must change,” he added. Mr Collyer says first home buyers have been duped into entering the bottom rung of a nationwide property ponzi scheme. “The first home buyers are the greater fools of the real estate market – that is, the entire edifice of land prices in particular depends upon this constant influx of new first home buyers naively entering into outer suburbs, into lower-priced housing to boost the price of everybody else’s housing up the chain,” he explained. “Now, when you remove that first stage of real estate pricing, the whole edifice collapses – it’s the end of the game.”

While we agree with the sentiment, we don’t believe that campaigns like these have a high chance of working directly. They do, however, spread the word, educating more people about the nature of the bubble, and that is a good thing. “Hey, I don’t HAVE to buy!”; “Hey, if I try to sell, there may not be a buyer!”
Simply seeing ‘Housing’ and ‘Ponzi Scheme’ in the same sentence in the national media is noteworthy enough. We haven’t seen that yet in Canada, to the best of our knowledge. – vreaa