Australian house prices fall average $150K at auction

The strongest signs yet of the popping of the largest housing bubble in Australian history are gaining traction. The Australian reported yesterday (ABS data):

HOME prices have crashed across the country, with the number of properties sold at auction falling dramatically in the first three months of the year.

The Australian Property Monitors group says Sydney and Perth showed the sharpest falls, with average prices dropping by more than $150,000.

The top end of the market has been labelled as "dead".

The falls are based on 1st quarter 2009 vs. the 1st quarter 2008 and are based on auction values.

Average price changes by city (1st Qtr 2009)

Sydney – $616,237 (from $786,682),
Down 22%
(1742 homes sold vs. 2230)

Melbourne - $476,677 (from $513,304),
Down 8%
(2251 homes sold vs. 3211)

Brisbane - $439,000 (from $596,000),
Down 26%
(195 homes sold vs. 350)

Adelaide - $372,000 (from $452,000),
Down 18%
(123 homes sold vs. 598)

Perth - $372,000 (from almost $572,000),
Down 49%
(34 homes sold at auction over last 3 months)

The above figures are based on auctions. As the following numbers show, liquidity has fallen out of the auction market. The above data may not represent what many houses are selling for at the lower end of the market as they tend to be sold through private treaty.

Hello asset deflation!

Expectations have changed. Sellers are becoming more desperate. Buyers are drying up. This is asset deflation at its best. When the market is booming, buyers are in control and there is very small spreads (the difference between the buyers price and the sellers price). Indeed, buyers outbid each other which pushes the housing prices higher and higher each year. We have now hit reverse. The spreads have widened by $100,000s. People in Sydney may think their house is worth $800,000 – but the nearest buyer is around $600,000. Your house is only worth what the nearest buyer is willing to pay!

The lower end

The lower end of the housing market has also been very receptive to the extension of the first home owner grant in the last 12 months. Statistics show that first home buyers have been using the grant to lift their mortgage (DEBT) in many cases by more than the grant itself to secure the properties they really want. In a large amount of cases, over 90 to 95 percent of a purchase has been tied to a mortgage.

Chart 1: In February 2009, first home buyers accounted for 27 percent of all loans, with the average loan up 23 percent from a year ago.source: ABC News

Government Incompentance

Essentially the Government (Federal and States) and the banks have orchestrated a perfect storm. A sub-prime for young Australians. Young Australians who are at the start of their working life, have very little savings and tend to spend heavily on credit. It is also the generation more likely to be laid off in the current economic environment.

Wake up! About a month ago the Federal Labor Government shouted out across the chamber in Question Time preaching the success of the extension of the first home owners grant. The Prime Minister was first, followed by the Housing Minister, and the Treasurer. One by one they put on the record how proud they were at getting young Australians into the great Australian Dream. What they failed to mention was that added and abetted young Australians to acquire a life long debt burden. There are two tiers to the manipulation. A) let the RBA artificially lower interest rates (this is how the US got sub-prime remember?) B) Making the carrot bigger (First home grant). Governments worldwide are doing the same. In the end the market will win once again. Government's can't fight the market.

In addition, the May budget is almost here, and my bet is the first home owner grant will stay in place (possibly extended..) – just to try to keep the bubble going that little bit longer…

The Federal and State Governments will come to regret their words and actions. They have added more fuel onto Australia's largest housing bubble. Now the grants and the indebted mortgages will sink into the (asset) deflation black hole. There are lessons to be learnt here... Didn't anyone pay attention to the housing problems in the US, UK, European housing markets?

Australian media cover up?

Today and yesterday the media was more interested in a 27-year old entrepreneur from Melbourne who took on BrisConnections and gained a nice $4.5 million in only 5 months. However, there is next to nothing on this housing price/auction data in any of the major newspapers. It hasn't even made the top headlines in the evening news. What the hell is going on here? Auction prices have fallen 22% in Sydney in 12 months – and we've heard almost nothing… Is this selective censorship?

Regardless of the games of the Govt and media, the tide has well and truly turned on Australian property. Monetary policy and carrots have not and will not work this time.

~ Scott

Bull bounce in bear market

The Australian sharemarket is up almost 20 percent from the lows made just over a month ago chart. We've had a bull move in a bear market. More often then not referred to as a Bear Trap. Many market commentators are asking if this is the bottom? Whether it’s the bottom or not is trivial. Traders can make just as much money in a falling market than one which is rising. We should be more concerned about the fundamentals of the world economy. The structural problems of the broken world monetary system and the solvency of the United States and other countries.

Chart 1: The All Ords is up around 20 percent in the last month.

Chart 2: Longer-term, the 200 moving daily average provides a major resistance point.

Predictions

Short-term: If the All Ords can hold and stay above 3700, it will likely then push over 3900. Most likely, the All Ords will push back towards 3300 and resume its sideways channel.

Longer term: Expect the All Ords to push sub-3000 as the world economy slips closer to depression.

Longer-longer term: The printing presses are continuing to run hot and the paper will eventually find its way into the sharemarket (property market, commodities etc).


Some good news

Some of the best moves in the last month have come from the resources sector, in particular, copper companies. On the rocket list include: PNA, ABY, KZL, IVA.

If we examine the latest LME warehouse charts (below), its interesting to note that copper, zinc and lead have all made a plateau (in supply). Could it be that enough mines have closed to bring supply and demand into equilibrium? If so this could continue to be a short-term positive for the sector.

Chart 3:Copper, Lead and Zinc have plateau in stockpiles (for now) while nickel and aluminium are still in oversupply.

Some bad news

Much of the gains in the last month have come from stocks you wouldn't want to be holding in a bear market: the banks, property trusts, and other high debt or high liability companies (eg. RIO, OZL).

[As a rule of them, you need only look at what the top 4 banks, and BHP do on any given day, week or month to find out a general direction for the market. BHP alone makes up around 10 percent of the All Ordinaries Index)].


More bad news

We are now heading into the reporting season in the United States. There will be surprises. White elephants will continue to fall from the sky. Will the US actually let more big companies fail? Will they finally let GM die soon?


Add a little G20

The recent talkfest at the G20 nations meeting should provide little confidence to the world markets. The G20 is a farce. It's made up of debtor nations and printing presses. Their goal is to reinflate the world economy to create the next bubble, to create the next imaginary wealth effect. Instead of making structural adjustments to the monetary system, they think it will be easier to reinflate asset prices at the cost of taxpayers. Their actions will only worsen the current economic situation and intensify the structural problems of the world monetary system.

One of the outcomes of the G20 meeting:

use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries

In otherwords, continue to use IMF as a pawn (much like the World Bank) to provide more loans (debt) to poor nations, so that they remain in debt.

The other key point is that the G20 (particularly led by the US) need to keep the gold price down. A surging gold price threatens the viability of the current monetary system and purchasing power of the world's fiat currencies. The US, UK and many other G20 countries (including Australia) have already sold much of their gold reserve holdings over the last 20 years. The IMF must pull its weight… (the longer they can keep gold price down, the more time there is for private investors to accumulate).

Over $2 Trillion has been pledged by G20 nations in the last year! This does not include any additional 'quantitative easy' (printing money). What will the number be in a years time? (about $5 trillion perhaps..)

See this article on what each G20 nation has committed so far.


The Banks

The following chart visualises what has already happened to to some of the world's largest banks.

Chart 4:
Ausrtalian Banks

In contrast, the Australian banks have held up well, albeit they have fallen less than most banks worldwide and they are still alive and profitable. Indeed, the Australian banks may look tempting to an investor. The sector (XFJ.ax) has risen some 36 percent in the last month as the following chart illustrates.

Chart 5: Our banks are up, but still in a bear trend.
Australia's top four banks are now amongst the largest in the world. In late January 2009, the Australian reported that the big four were now in the top 20 banks world wide by market cap.

Westpac - 9th, worth of $US28.2 billion ($43.2 billion)
Commonwealth - 15th
NAB - 17th
ANZ - 19th

All four banks are ahead of previous mega-banks: Citigroup (US), Morgan Stanley (US), Barcalays (UK) and Deutsche Bank (Germany). It's almost the last man standing! Something is wrong... very wrong...


Lets say they got lucky

Former RBA Chairman Ian Macfarlane recently stated this about why the Autsralian banks are holding up so well (see the Business Spectator for full article).

the relative health of Australia’s banks is not much a result of their superior management, but pure luck: that they aren’t allowed to take each other over, and they haven’t had enough funds to invest in US sub-prime mortgages and CDOs.

There is probably a lot of truth to this statement. Australia and our banks have been somewhat lucky so far. I feel a lot more nasty surprises to come out in the next couple of years (B&B, Allco, ABC Learning types). The biggest ongoing concern by far is the property market (commercial, industrial and importantly, residential markets).

The Intelligent Investor has a great article which examines the balance sheet of Westpac in 2008 and compares it to 1989 (just before the last recession). Here are some of the key, concerning points.

1) Westpac no longer has any gold bullion
2) Is heavily exposed to the housing market. (54% of all loans in 2008 compared to 25% in 1989)
3) Now has tens of billions in Derivatives

Further:

The result would be devastating if Westpac were to write off 8.9% of its loan book over the next four years, as it did in the four financial years from 1990 to 1993 (see Table 3). Taking 8.9% of Westpac’s $313.5bn of loans and acceptances as at 30 September 2008 would imply $27.9bn of provisions.

Something smells funny

We can’t say categorically that Australia’s banks are making grave errors in their risk modelling. But we can say that something smells funny when the most a bank thinks it can lose on a $145bn mortgage portfolio in stress is $201m, or 0.14% of the portfolio. In fact, it sounds eerily similar to the thinking in North America before its real estate collapse.

At the least, it’s sensible to countenance the possibility that the banks have underestimated the risks, or perhaps the correlation of certain economic and financial factors under extreme scenarios. That being the case, the recent rally in bank stocks may provide a great opportunity to revisit your portfolio’s weighting in this sector.

Yes, I think Australia has been somewhat lucky so far, but its now starting to set in as the newspaper fill their front pages with job loss reports. Today it was Qantas (1,750 jobs gone). Just wait till the papers start reporting daily on the housing (price) crisis.

Cheers
Scott