May 31 (Bloomberg) -- Bureaucratic obstacles are helping prop up Australia’s A$4.5 trillion ($4.4 trillion) housing market and neutralizing the biggest risk to the country’s mortgage bonds.
While affordability measures such as household debt and home cost-to-income multiples exceed peaks seen in the U.S., U.K. and Spain, prices in Australia are showing signs of stabilizing after dropping 7.6 percent from their November 2010 high. That’s because there’s one missing ingredient for a property collapse: oversupply.
Limited land availability, caps on density and higher levies on developers along with scarce financing have driven the median capital city price for houses and apartments to A$462,500 and created a housing shortage that’s set to exceed 600,000 dwellings in 20 years. That’s reducing the likelihood of a price rout, which Fitch Ratings analyst James Zanesi sees as the only threat to mortgages in an otherwise stable economy.
“Australia has had a decade of severe underbuilding,” said Matthew Hassan, senior economist at Westpac Banking Corp., Australia’s second-biggest lender with A$287 billion in housing loans. “Without the accumulated severe shortage of stock, there wouldn’t be the substantial latent demand for dwellings that has been a strong support for prices.”
Prime Australian home loans that were more than 90 days late fell to 0.61 percent in the fourth quarter of 2011, the latest data available from Fitch, from 0.63 percent in the previous three months. That compares with 5.32 percent in the U.S., according to data compiled by Bloomberg and 10.2 percent in Ireland.
Approvals to build private houses fell 11.1 percent in April from the previous month, according to statistics bureau data today.
Home Ownership Rates
Australia has one of the highest rates of home ownership in the world, with more than 60 percent of people owning a home in a market valued at A$4.5 trillion, according to Brisbane-based research company RP Data. In the U.S., the rate is 65.4 percent, after declining from a high of 69.2 percent in 2004.
In Sydney, Australia’s biggest city with a population of about 4.5 million, direct and indirect taxes add 42 percent to the cost of the average new house, according to an April study commissioned by Canberra-based Housing Industry Association. A new home costing A$639,533 will incur federal, state and local government levies of A$75,422; indirect taxes on land, labor and capital of A$86,180; and zoning, infrastructure and planning costs of A$106,276, the study found.
The median price of a plot of land in Sydney, Australia’s most expensive market, rose 3.6 percent in the three months to December to A$285,000, according to the HIA. The average plot in Australian capital cities cost A$219,001, up 1.5 percent from a year earlier, HIA data shows.
With interest rates, living costs and unemployment remaining stable, a softening in home prices is “the only threat” to Australian mortgage performance, Fitch said in a March report. Home price declines and values are “well within” the rating company’s modeled scenarios, which include the possibility of a sharp fall, it said.
“If your current house is worth more than when you bought it, before becoming delinquent or going into default, you’ll probably be able to sell your property and get a gain,” Zanesi, associate director for structured finance at Fitch in Sydney, said in an interview.
Only 6.4 percent of homes across Australia were valued at less than their owners paid for them as at Dec. 31, while 41.7 percent were worth at least double their purchase price, according to RP Data.
Almost a third of U.S. homeowners with a mortgage owed more than their homes are worth in the first quarter of 2012, according to real estate data provider Zillow Inc.’s, after property prices dropped more than 35 percent below their 2006 peak. In Spain, prices have decreased about 22 percent from the high in the third quarter of 2007 according to the National Statistics Institute in Madrid and in Ireland, values have plunged about 60 percent since the height of its property boom.
In the few areas where new developments in Australia have outpaced demand, such as in Queensland state’s Gold Coast, price declines have outstripped the national average. The median house price on the Gold Coast fell 7.7 percent as of Feb. 29 from a year earlier, according to RP Data, compared with a drop of 4.5 percent across the nation’s eight state capitals in the same period.
Debt markets are also signaling investors don’t foresee a collapse in the nation’s $1.1 trillion mortgage market.
Investor confidence in Australian mortgage debt has improved this year with relative yields declining 20 basis points to 165 basis points more than lending benchmarks, according to JPMorgan Chase & Co. data.
Credit-default swaps on the four biggest banks which account for 86 percent of outstanding mortgages cost an average 190 basis points, according to data provider CMA. An index of contracts on global lenders costs 358 basis points, U.S. banks 244, and Europe’s 463.
The four banks -- Commonwealth Bank of Australia, Westpac, Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. -- hold a combined A$945 billion of housing loans, according to data from the banking regulator.
Westpac, AMP Bank Ltd. and Pepper Homeloans Pty this month sold A$2.1 billion of bonds backed by Australian mortgages, the most since October, after the central bank made its biggest interest-rate cut in three years. Resimac Ltd. is marketing the sale of about $447 million of residential mortgage-backed securities in both U.S. and Australian currencies, a person familiar with the matter said yesterday.
Mortgage bond sales reached a four-year high of A$22 billion in 2011 as the market recovered from the U.S. subprime collapse, according to Standard & Poor’s data.
“The credit quality of underlying pools of recent mortgage-backed securities has been strong,” said Gavin Goodhand, a Sydney-based senior portfolio manager at Altius Asset Management Pty Ltd. “These deals prove the market is reopening and that people are getting more comfortable with mortgage-backed credit.”
Moody’s Investors Service today said it is reviewing its ratings of QBE Lenders Mortgage Insurance Ltd. and Westpac Lenders Mortgage Insurance Ltd. for possible downgrade, citing potential losses in some regions.
Still, “risk scenarios involving a sharp correction in the housing market are unlikely to eventuate,” the group said. “Moody’s does not expect the review of the mortgage insurance sector to broadly affect its ratings of Australian banks and building societies.”
Australia’s central bank, which reduced its key rate by a half-percentage point to 3.75 percent on May 1, will cut the benchmark to a record low 2.75 percent by September to bolster growth amid stagnant consumer sentiment, debt markets expect. About 90 percent of mortgage-holders have variable rate loans.
In its statement on monetary policy three days after this month’s rate cut, the RBA said the near-term outlook for residential building activity had been revised lower.
“Liaison contacts cite three main reasons for subdued housing activity: poor sentiment regarding job security, notwithstanding recent low levels of unemployment; softness in established housing markets, consistent with expectations of flat or declining house prices; and relatively tight credit conditions for developers,” the RBA said.
The value of residential construction in the first quarter fell 8.3 percent from a year earlier, according to statistics bureau data yesterday.
Even as building activity remains subdued, recent data shows prices are stabilizing. Across Australia’s eight state capitals, home prices rose 0.3 percent in the three months to April 30 and sales of newly-built homes in April rose 6.9 percent from a month earlier, the most in more than two years.
Australia has had a cumulative shortfall of 186,800 homes since 2001, with the number expected to widen to 640,200 dwellings by 2030, the government’s National Housing Supply Council said in its State of Supply report in December.
Planning hurdles, such as height restrictions, high taxes and requirements that developers pay for community facilities have pushed companies including Stockland and Australand Property Group away from higher-density developments.
“You can be up to four years trying to get a parcel of land rezoned even though it’s been designated for a growth area,” said Melbourne-based Julie Katz, national president for the Urban Development Institute of Australia, a developers’ industry body based in Canberra. “The other issue is trying to get the approvals through a very complex system, which needs to be much more streamlined.”
The nation of 22 million people has the second-least affordable homes behind Hong Kong’s, with dwellings in its cities costing 6.7 times the median household income, according to a Demographia study of prices in Australia, New Zealand, Ireland, the U.K., the U.S., Canada and Hong Kong. Homes in the U.S. cost 3.1 times income, and 5 times in the U.K., it said.
Australian households’ gross debt accounted for 184 percent of disposable income in the third quarter of 2011, compared with 141 percent in Spain, 118 percent in the U.S. and 98 percent in Greece, according to an Organization for Economic Cooperation and Development report this month. Australia’s level exceeds the 2007 peaks in those countries and the U.K., though remains below Ireland’s 229 percent.
“We see overvalued Australian house prices as primarily a medium-term risk to housing credit growth rather than to housing credit losses,” Sydney-based Credit Suisse Group AG analyst Jarrod Martin wrote in a report this month. “Many of the classic hallmarks of an approaching mortgage arrears crisis are currently not present,” including an acceleration in the turnover of housing, an increase in the pace of home building, and a credit boom and related price boom, Martin wrote.
The annual pace of owner-occupied home loan growth in Australia declined to 5.4 percent in April, the slowest pace on records dating back to 1977, according to central bank data.
Paul Bloxham, chief economist at HSBC Holdings Plc in Sydney, said he doesn’t expect a sharp fall in home prices.
“Housing undersupply is likely to keep Australia from having the sorts of destructive feedback loop that affected the U.S. and Spain,” he wrote in a report on May 22.
To contact the reporter on this story: Nichola Saminather in Sydney at firstname.lastname@example.org