Wednesday, February 13, 2008

End Of Housing Boom?

Hi All,

Here is some interesting reading for you all about the property market. The opinion of the first person interviewed matches the same opinion I have about the potential risks in the current housing market (median house pricing that is) environment, both in Australia and NewZealand.
The second person interviewed has the opposite view. You choose where you sit and feel free to drop me a note on why you swing either way.

It's worth a read if you have some time.

STEVE KEEN

Associate professor school of Economics & Finance, University of Western Sydney

Has the market reached tipping point?

It's actually several markets, and one of them - the working/ lower middle-class suburbs of Melbourne and Sydney - is past tipping point and in decline.

Wealthy suburbs in Sydney and Melbourne may be on the verge, with the declines in the stockmarket bringing to an end the "turn it into bricks and mortar" approach to locking in share trading profits. There may be some major declines there, as people who are being cruci- fied by margin calls are forced to liquidate.

Overall, the market has to be topping. Our bubble almost turned in 2004 - and if it hadn't been for Howard's doubling of the first home buyers grant and halving of the rate of capital gains tax (when owners sell an investment property), it probably would have. Those populist policies restarted the bubble as it began to falter. It might have another year left in it, by which time house prices would have tripled in less than 20 years - whereas the dreaded consumer price index (and wages!) has risen by just over 50 per cent.

When it does turn, what's in store?

It has to fall at least as far as the US market will, and probably a lot more. Some conservative pundits think US prices need to fall another 25 per cent to restore pre-bubble valuations, and they've already fallen 8%.

That means a 33% decline from a peak that's 30% lower than ours. Given that our economy is in slightly better shape than theirs, it still puts a minimum on the price decline needed of about 33%, and a maximum of 50% could apply if the China boom comes to an end.

Rates hit 17% under Keating. So 7% isn't nearly as bad - is it?

For mortgage stress to be the same today as it was in 1990, mortgage rates would need to be 3%! So 7% now - and 8-10% on mortgages themselves - is three times worse than 17% under Keating.

Is it time the Government bit the bullet on capital gains tax breaks/negative gearing?

Definitely. But the cautious approach of tinkering with rebates and subsidies is bound to win out over the hard policy of removing, once and for all, the incentives that have so distorted our housing market.

This would be predictable, timid, and ultimately useless policy. Almost every such trick simply boosts some sector of the market's demand capacity - when what we need to do is drive down the demand price.

Removing capital gains and negative gearing would slash demand, but the Government will hold off because many people who still anticipate real estate profits would scream blue murder. So to placate the winners, the losers will suffer.

We've heard a lot about "mortgage stress", but it's often associated with traditional "battler" locations. Is this going to change?

Yes. The stockmarket collapse and the margin calls that are part and parcel of it will cause the top end to tank - possibly more severely than the battler end. This market decline still has legs, and it will take the upper housing market with it.

What's in store for renters - won't higher rates fuel rent and thereby inflation?

Yes! This is the comical thing about trying to control inflation using interest rates. The three main contributors to the latest CPI figure in order were transportation (5.6%), financial and insurance services (4.9%), and housing (4.8%). With them removed from the index, the rate might well be still within the RBA's target range.

Of course, at some point the rates will turn the screws so thoroughly that the economy will tank, and then distress sales will drive prices down.

Where to for rates?

Up for the next six months to a year, as the RBA pursues its inflation obsession, and then down like a brick in hot pursuit of a declining economy. This is where the US is now, and we are only time away from joining them.

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