Sunday, November 27, 2011

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Friday, November 18, 2011

The Weakest Link

As we all know a chain is only as strong as it's "Weakest Link" & that is true with Property Markets & Property prices.

The "Weakest Link" in the Australian property market is the "Recent Homebuyers" who has bought in the last 3 years. 

The price of all our Houses - Units - Apartments - Land  or Investment Properties are determined by what people have paid for them in recent times as well as the ability of Vendors to be able to wait in the market for their high prices. 

A Vendor having difficulty affording to hold a asset is very likely to slash prices.

If Recent Home Buyers do strike financial difficulties & start flooding our housing markets with housing that they are no longer able to afford to carry the prices of all of our properties will fall.

In the US / Ireland / Spain & UK it was Recent Home Buyers who had bought at the tail end of the  property cycle that drove prices down as they could no longer afford to keep their homes with rising costs of living & interest rates combined with a economic slowdown reducing hours worked & employment.

Most of  Recent Home Buyers in Australia have borrowed to the maximum capacity their incomes would allow. 

They did so at 30-40 year historically low interest rates leaving little room for unforeseen circumstances like reduced overtime,  unemployment , sickness, pregnancy or interest rates returning back to their 30 year historic average of over 10%.

Many of these "Recent Home Buyers" have only managed to enter the home market with the assistance of the Rudd Governments 2008 - 2009 GFC First Home Buyer stimulus handout of either $14,000 or $21,000. 

Prior to these FHB handouts they were not able to enter housing markets because their incomes prohibited them from SAVING a deposit quite simply because their day to day living costs were only just covered by their low incomes & this was when they were renting accommodation at only half the cost they now find themselves paying for home ownership!!. 

Another factor that excluded these FHB from entering the market was interest rates, at a normal interest rate in the vicinity 8% 9% or 10% they did not qualify to borrow enough to enter the market & it was only because interest rates were cut to record low rates around 5% that they were able to qualify for a home loan. 

Banks at the time proudly boasted that they were being  "PRUDENT" by  applying a 2% stress test on a 5% Interest Rate!! 

Oh Please!! ... How much sense would it make to apply a stress test to the 30 year historical interest rate average?

Owner occupiers or investors who bought in 1990, 2000 or even 2005 will have only borrowed a fraction of the amount borrowed by "Recent Home Buyers" so they will be able to cope with the unforeseen relatively easily, however this cannot be said about "Recent Home Buyers" & it will be them who struggle to pay for their houses when rates revert to normal levels of 8% - 10%.

 The ABS have just released a publication that makes interesting reading on the Australian housing sectors.
Below is a link & Extracts from this publication that highlights the point I make. 


This publication presents data from the Survey of Income and Housing (SIH) onAustralian housing occupancy and costs, and relates these to characteristics of occupantsand dwellings such as tenure, family composition of household, dwelling structure, age,income and main source of income. It also includes value of dwelling estimates, and information on recent home buyers.The publication includes a feature article on first home buyers in Australia.

RECENT HOME BUYERS

More than 1.07 million households purchased their dwelling in the three years prior to the 2009–10 survey. These households are divided into first home buyers (40%) and changeover buyers (60%). Most first home buyers were young households with a reference person aged under 35 years (67% ***). Less than 10% of first home buyer households had a reference person aged 45 years and over. In contrast, more than half (52%) of changeover buyer households had a reference person aged 45 years and over.
Note: There are 8.8 million households so 1.07 million  is quite a significant number of households & then add to this the number of new entrants between July 2010 & June 2011 which are not counted here.
*** 85% of this number is under 27 years of age & 60% of this number have ZERO children & are managing to cope because they have 2 incomes. But Women are Women (Sorry to offend) & when the maternal instinct to have children kicks in the expensive house gets the flick or they don't have kids till what 40? 45?.

As you can see from the extract above around 10% of Recent Home Buyers are paying more than 50% of their "GROSS" incomes for housing & a further 26% are paying between 30% & 50% of their "GROSS" incomes for housing.
{It's is also worth noting the 6% of Changeover buyers are now also paying more than 50% of incomes for housing costs}

The Inside banking sources that I know estimate that close to 30% of Recent home buyers are now paying more than 45% of their  "Gross" household incomes to cover "Household Costs" (See explanation of Household Costs in extract above) Furthermore the percentage of incomes to service is growing each year as Property Taxes, Insurance, Water Rates etc increases exceed wage growth.

Remember that is 45% of G*R*O*S*S incomes when you take out taxes well over 55% of Recent Home Buyers incomes are going to cover their costs of housing. 

Quite simply this is unsustainable people have to have money to live "LIFE" & do simple things like have children, take them on holidays, pay for sporting activities, dental care for the kids, health care etc etc etc.

Might come in handy keeping a tin of this stuff in the house if you plan to sell next year.



 





Tuesday, November 8, 2011

Bank's Spruiking Confidence Returning

 Have a look below at how desperate things are getting at our Financial institutions. 



Item #1 
Housing Loan approvals up?  True statement perhaps but let’s say home loans are down 50% from peaks & then they rise 1% per month for 5 months the statement is technically correct? But is confidence really back if home loans are down 30% -40% from long term historical averages?

Item #2  
Australians intending to buy a investment property has risen to 9%?? 
Well investors traditionally make up 20% -25% of all buyers. 
Talk about putting a spin on bad news. 
In reality they are confirming Investor activity is down 50% if only 9% of Aussies are considering investing in property.  
Just imagine all these apartments coming on the market targeting investors & this bank is confirming demand is down by 50%?

Item #3   
Says 750,000 more people joined the workforce?? 
They fail to mention that the unemployment rate is still higher than before the GFC & hours worked & overtime is down. Most of these jobs are casual or part time employment. Effectively peoples incomes are down 7% -10% on pre GFC levels. Then there is the little fact that rising Power / Food / Health costs have eroded peoples spending power.

This article completely ignores the fact that Retail Spending is down, Land Sales are at Record lows, New Housing Starts are at record lows,.

Just how bad are our markets when financial institutions are resorting to distorting the truth to try & build up confidence in the average consumer so that they go out & borrow money?

Reminds me of the desperate tactics undertaken by the NAR (US equivalent of our Real Estate Institutes) See the attached adverts they put out in 2006 trying to get US consumers to buy houses with their “Positive Spin” Unfortunately anybody sucked in by this spin saw the value of their homes drop 30% to 40%.


 These folks might as well get a box of these & give that a try?