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

Australia splurges on Melbourne Cup all the while...

Melbourne Cup & Interest Rate Cut

First Tuesday of Novemeber each year is Melbourne Cup - the race that stops the nation.

Only 30 mins before the race begun, the Reserve Bank of Australia (RBA) cut the official interest rate by 75 basis points to 5.25%. This follows a string of bad news starting to filter out about the fragility of the Australia economy. Despite all signs pointing to a economic recession ahead for Australia, we managed to spend over A$100 million on the Melbourne Cup day, a record amount. The winner of the cup was Viewed - at odds of 41 to 1 - Perhaps the same odds of Australia and the world going through a mild world recession.

It was Only a couple of weeks ago the Australia Government announced a $10.4 billion economic stimulus package, and in doing so, halved the avaliable surplus. Could it be that Australia spent a lot of its stimulus package on the gallops today... and whats left over will help pay for Xmas pressies. Afterall, the Government wanted to stimulate the economy. Perhaps they have helped filled the pockets of the bookies instead, and we all know that will somehow help GDP and employment figures...

Bad news Monday (3rd Nov)

Performance of Manufacturing Index (PMI)

The AiG Performance of Manufacturing Index was released yesterday which showed the worst result for manufacturing in Australia for 16 years (since the PMI started in 1992).

Summary:

- this month’s result reflects a combination of the uncertainties and loss of confidence associated with the worsening of the global financial crisis, slower world growth, particularly in the developed economies, and weaker domestic consumer demand.
- These factors were reflected in declines across all components of the Australian PMI® in October. Production fell for the fifth consecutive month and more strongly than in recent months. This reflected the ongoing decline in new orders, which fell for the sixth consecutive month. In line with the easing of production, employment fell for the eighth month in October and at a more rapid pace.
- On the positive side, input and wages costs growth eased significantly in October, while selling price growth also eased solidly.
- Inventories and supplier deliveries fell markedly. Exports fell.
- Manufacturing activity fell in all states.

Housing prices suffer record quarterly fall

Also yesterday the Australian Bureau of Statistics (ABS) released housing activity for the September 2008 quarter.

Last (Sept) Quarter:

- House prices fell by 3.3 per cent in Brisbane, 2.5 per cent in Canberra, 1.9 per cent in Melbourne, 1.8 per cent in Sydney, 1.1 per cent in Perth and 0.1 per cent in Adelaide.
- House prices rose by 0.7 per cent in Hobart and 0.1 per cent in Darwin.

For the 12 months till end of September 2008:

- Perth recorded the biggest annual fall in house prices of any capital city in the year to the September quarter, down 4.1 per cent compared with a 2.8 per cent increase nationally.
- Brisbane's 12 month growth is 5.6 per cent.
- Adelaide has the strongest housing market, growing at 9.7 per cent over the year.
- Melbourne grew by 8.1 per cent over the last year.

So the longer term growth numbers still look rosey and distort the falls over the last 3 months. If the Sept Qtrly figures continue, we could see falls in housing prices across Ausrtralia of 10-15 per cent (mininium) by this time next year.

My next post will go into more detail about the outlook for housing in Australia and why debt levels are of a huge concern...

Cheers,
Scott

(Lets hope my gloomy economic predictions are wrong like my Melbourne Cup picks - Zipping and Mad Rush)

RBA cuts official interest rates by 1 percent

Interest Rates cut by 1 per cent

Today the RBA cut the official cash rate by one hundred basis points, from 7% to 6%. This moved stunned the local market, which was expecting half a point cut. This is the largest cut in rates since May 1992.

I think this move by the RBA highlight their concern for the global economy and the recent events in the United States and Europe. They know confidence in Australia could quickly erode and the global liquidity crisis will likely get far worse, and spread to more countries. Australian interest rates are clearly too high in the current environment and today's move is very assertive.

Australian Dollar

A couple of months ago the media was talking up parity with the US Dollar. As I write its fallen to around US$67c. This is a huge fall in such a short space of time.

The main reason why the Australian Dollar is falling heavily is two fold:

a) The US Dollar is has been appreciating due the illiquidity in the world money markets. US money supply growth has been contracting fast. People are expecting property prices, share prices etc. to fall, and are holding off getting new loans. There is now less US dollars chasing assets.
b) Commodity prices, in particular, have fallen sharply in recent weeks due to expected lower global demand (in China and elsewhere) for commodities, and due to less money floating around (liquidity). Zinc and nickel have been in long-term trends, but now the rest are following suit. Australia is heavily reliant on commodities for its export income, and further expectations of falling prices is driving the Australian Dollar lower.

One benefit of the Australia dollar falling is that Australian should now spend a lot less on imports. We have been binging on the commodities boom and the high Aussie dollar. Our wallet will not go as far this Christmas.