The Housing Bubble

A report from Bloomberg on Australia. “Prices Australia-wide have fallen for nine straight months as the housing boom goes into reverse. Sydney, where affordability is most stretched and investors had the biggest influence, is being hit hardes. ‘Sydney is at the epicentre of the housing market downturn,’ said Stephen Roberts, an economist at Laminar Capital. ‘Much of the decline in house prices seems to be related to housing investors and the tightening of lending standards.’”

“The biggest single factor weighing on house prices is credit availability, according to the survey. Regulators have gradually tightened curbs on riskier loans, such as interest-only mortgages, while also enforcing stricter expense and debt verification for borrowers. It is not the only factor, with weak wage growth, higher utilities prices and an already high debt burden also affecting prices, says NAB’s chief economist Alan Oster.”

“The ongoing banking royal commission could put further pressure on the market, with Oxford Economics’ Sarah Hunter says if new regulations are introduced, it could lead to a ‘larger correction.’ The key takeaway from economists: the ‘fear of missing out’ is now over.”

From Reuters. “It’s a winter weekend in Sydney’s bustling northern suburb of Chatswood and a three-bedroom family house sporting an endless garden is up for auction. It’s priced to sell at A$1.88 million ($1.4 million) but no buyers bite and the sale is abandoned. On the same day, in the heart of the harbor-hugging city a two-bedroom apartment with panoramic views fails to sell as no bidders turn up.”

“Auctions are a bellwether of demand in property-obsessed Australia, where attending sales is almost a national pastime. It is therefore telling that only just over half were successful the weekend last month a Reuters reporter visited some of Sydney’s auctions, compared to more than two-thirds for all of last year. And while that week was the worst since 2012, it wasn’t a one off. Auction clearance rates have averaged in the mid-to-low 50 percent range for each of the past nine weeks.”

“The recent weakness in the Australian housing market, which has been one of the drivers of an economy that has now grown for 27 years without a downturn, has some economists warning of heightened risks of a recession and even a financial crisis. With prices now in decline, the wealth effect could easily turn into a headwind. Already, households suffered the largest loss on land and dwellings in six years in the first quarter. ‘The consumer was already the weak link in Australia’s growth story,’ says Westpac senior economist Matthew Hassan. ‘The housing correction represents additional downside risk to the outlook.’”

The New York Times. “A real estate bacchanalia in recent years in Sydney and Melbourne turned some home owners into millionaires and left many millennials believing they would never be able to afford homes, sometimes leading to rifts between the two groups. Now the market’s party is taking a pause. The decline has a number of causes, including new restrictions on foreign buyers, which hindered wealthy émigrés and investors from China. But a major factor is that Australians probably could not take much more. Prices, many experts say, simply rose too high too quickly.”

“‘We are on the edge of a precipice,’ said Martin North, principal analyst for Digital Finance Analytics, an independent research and advisory firm. ‘All of the forces that have driven the home sector and the debt sector higher in the last 20 years are all coming to a critical inflection point.’”

“All of this has taken some air out of what some experts describe as a bubble, as a recent Saturday-morning auction in the Sydney suburb of Ryde showed. The owners of a three-bedroom villa there were hoping it would fetch $1.25 million. In June 2017, as many as 90 per cent of homes put up for auction each week were sold. These days, less than half are selling. When the auctioneer asked for an opening bid, he received only tight-lipped smiles and an awkward silence. A kookaburra cackled. No sale was made that day.”

“‘It’s a bit nerve-racking’ said Chris Jabbour, a young real estate agent who welcomed people through the door before the auction. ‘You don’t really know what’ll happen next.’”

“Like many young Australians, Georgia Blackie felt she needed to buy it or rent for the rest of her life. She lives in Melbourne, one of the world’s wildest and most expensive real estate markets. The values of dwellings there have risen by more than 50 per cent in the past six years alone. Lately it has cooled off, though, and people like Ms Blackie may pay the price.”

“She and her partner closed on the townhouse in August for $720,000. But since the market’s peak in November, neighbourhood home values have slipped about 6 per cent. ‘If property prices do go backward,’ said Ms Blackie, a 31-year-old lawyer, ‘where does that leave you?’”

From ABC News. “Sydney renters have the greatest choice in at least 13 years, with vacancy rates at the highest level on records that go back to 2005. SQM’s managing director Louis Christopher said there is a typical seasonal rise in rental vacancies early in winter, but these figures were much worse than usual. ‘I think this is the only time in my career that I can say with certainty that Sydney is now a buyer’s and a renter’s market, simultaneously,’ he noted.”

“Mr Christopher said the city had been flooded with a large supply of new apartments at the same time as population growth was easing slightly as many people moved to cheaper cities and regions. ‘Sydney rents are now down for the year and it is likely rents will continue to slip as there is still a lot of supply coming in the pipeline,’ he observed in the report. ‘I believe Sydney will shortly record a fall in its population growth rate due to a relatively recent steep rise in interstate migration towards Queensland.’”

The Daily Telegraph. “A record glut of vacant apartments across Sydney suburbs is creating ‘zombie blocks’ where one-in-four flats are now empty. Figures released yesterday showed there are 19,572 properties sitting vacant — with Kellyville in the Hills region the worst hit area. But even the eastern suburbs has more homes up for rent than ever before. And housing experts said the oversupply was only going to get worse as high-rise projects committed to during the housing boom still only halfway through construction are finished.”

“The Daily Telegraph found ‘For Lease’ signs erected all over apartment blocks across Kellyville yesterday. Analysis of CoreLogic records shows many buildings in Kellyville had more than 10 properties advertised for rent. At one 90-home block in Hezlett Road, 20 places were for rent. At a block in nearby Rouse Hill, 12 apartments were for rent. Windows on empty flats were so dusty they couldn’t be seen through, and landscaped gardens were empty and overgrown.”

“SQM Research director Louis Christopher said the vacancy rates were no seasonal blip, and landlords would have to get used to the idea that renters now have the upper hand in negotiations. ‘Its likely rents will continue to slip as there is still a lot of supply coming in the pipeline,’ he said. ‘Renters are in a good position now. They should consider haggling.’”

“Realestate.com.au chief economist Nerida Conisbee said the drop in demand may signal a larger slowdown. ‘Rental demand typically declines when there is job loss. It may start to show up in employment numbers soon,’ she said.”

“Rouse Hill mother-of-three Tanya, 45, said apartment living was ideal for her family but was surprised so many units in her block were empty. ‘No one wants them sitting there abandoned,’ she said. ‘If there’s no one to live in them, why do they keep building them?’”