Australia’s Home Price Slump Pits Local Bank Bulls Against Foreign Bears
Australian home prices in 2011 have fallen the most in three years, pitting local banks which say the drop will be short lived against overseas investors betting it’s the start of an overdue rout.
The nation’s four biggest lenders, which account for about 87 percent of outstanding mortgages, are forecasting prices will be underpinned by a housing shortage, population growth and an economy boasting near full-employment. Overseas investors say high debt, unaffordable homes and rising interest rates could cause home prices to tumble as much as 40 percent.
Government handouts to new home buyers helped Australia avoid the rout seen in the U.S., U.K. and Irish property markets after the collapse of Lehman Brothers Holdings Inc. in September 2008 triggered the worst global recession since World War II. Prices surged in the past two years, leaving Australia with the developed world’s costliest homes, highest interest rates and among its most indebted households.
“Australia stands out as the one developed housing market that didn’t have a meaningful correction,” said Ben Jarman, an economist at JPMorgan Chase & Co. in Sydney. “The thinking among market bears is that surely that domino has to fall as well, particularly when you saw a very strong year for price growth in 2009 and 2010.”
The median home price in the nation’s eight capital cities, where two-thirds of the population lives on less than 0.5 percent of the country’s land mass, was A$470,000 ($503,000) in May, according to Brisbane-based property researcher RP Data. That compares with $169,588 in the U.S. in April, according to real estate website Zillow.com.
Australian home prices slid 1.7 percent in the first quarter from three months earlier, the biggest drop since the third quarter of 2008, government data in May showed. Prices fell 0.3 percent in both April and May, according to RP Data.
Demand for mortgages, which account for about 63 percent of banks’ outstanding loans in Australia, slowed in April to the weakest annual growth rate since data began in 1977. Home loans more than 30 days late hit a record 1.79 percent in the first quarter, Fitch Ratings said on May 26, and “low-doc” loans that were more than 30 days overdue climbed to 6.74 percent.
Fitch conducted a stress test of Australian banks last year in response to overseas investors’ concerns about the sustainability of home prices. Moody’s Investors Service cut the nation’s four-largest banks’ credit ratings by one level in May, saying their dependence on wholesale debt markets, rather than deposits, made them vulnerable to confidence swings.
Doom & Gloom?
Marc Faber, publisher of the Gloom, Boom & Doom report, last month urged investors to short-sell Australia & New Zealand Banking Group Ltd. (ANZ) shares, citing excessive household leverage and an overvalued property market. Faber, who made the call in Barron’s Mid-Year Roundtable, didn’t respond to e-mails seeking comment for this story.
Philip Chronican, Australia chief executive officer at ANZ Bank, said on June 2 that of the approximately 800,000 home loans held by the lender, only about 100 are facing repossession. Melbourne-based ANZ Bank, Australia’s third-biggest lender by market value, has A$155 billion of outstanding home loans, according to data from bank regulator the Australian Prudential Regulatory Authority yesterday.
About 1.7 million U.S. homes were in the foreclosure process and expected to be put on the market as of April, Santa Ana, California-based real estate information company CoreLogic Inc. said June 22.
John Taylor, founder of FX Concepts LLC, the world’s largest currency-hedge fund, says Australia’s banks, which remained profitable throughout the financial crisis without government bailouts, are now overextended and will cut back on credit, helping spark a recession.
“Banks sailed through 2008 like the rest of us were all idiots,” New York-based Taylor said. “They’re not looking as pretty now.”
The nation of 22.5 million has the most unaffordable housing in the English-speaking world, Illinois-based consulting company Demographia said in January, with the median Australian home costing 6.1 times gross annual household income, compared with 3 times in the U.S. Debt in Australia is equal to 155 percent of household disposable income, according to central bank data, compared with 133 percent in the U.S. before the crisis.
Jack Foster, global head of real estate at Franklin Templeton Investments, said he’s switched from a bearish view on Australia’s housing market as the resilience shown by Australia’s banks following the collapse of Lehman Brothers convinced him a slump is unlikely.
“It was hard to believe, given the weakness in so many housing markets around the world, that Australia wouldn’t suffer,” said New York-based Foster. “But what I missed was the discipline of the banks,” which raised down payment requirements and avoided reliance on loan securitization.
John Kim, an analyst at CLSA Asia Pacific Markets in Melbourne, said there is a speculative problem for residential investment properties driven by the “negative gearing” tax structure. Property investors in Australia can claim tax deductions on losses from property investments and offset those against other income, encouraging property purchases that otherwise don’t make economic sense. Kim said Australian home prices could fall 15 percent in a worst-case scenario.
Australia has the highest interest rates in the developed world after seven increases from October 2009 to November 2010. Reserve Bank of Australia Governor Glenn Stevens said last month the bank will likely need to raise interest rates and is weighing Europe’s sovereign debt crisis against a forecast pickup in domestic growth and inflation.
Jeremy Grantham, chief investment strategist at Boston- based Grantham Mayo Van Otterloo & Co., last year called the Australian housing market a “time bomb” set to blow when rates climb. Grantham declined to comment for this article.
Gerard Minack, global developed markets strategist at Morgan Stanley, has said house prices are as much as 40 percent overvalued. Bank of America Merrill Lynch forecast last month that home prices will drop 10 percent from their June 2010 peak.
“The thought of higher rates continues to impact household sentiment and is likely to keep growth subdued over the near term,” Matthew Davison, research analyst at Merrill Lynch in Melbourne, wrote in the June 8 report.
New home sales in May fell 0.2 percent from the previous month, according to the Housing Industry Association.
Rob Brooker, head of Australian economics and commodities at Melbourne-based National Australia Bank Ltd., said the “soft patch” is temporary. Prices will climb 3 percent to 5 percent over the next two years, driven by an investment boom, he said.
National Australia accounts for more than A$166 billion of mortgages, APRA data shows. Australia’s fourth-biggest lender by market value is currently seeking to grow its mortgage loan book by undercutting interest rates and scrapping fees.
The Australian government forecasts mining investment of A$76 billion next fiscal year as companies including BHP Billiton Ltd., the world’s No. 1 miner, expand output to meet demand from China and India.
“There is a tendency for people overseas to extrapolate their experience of their own market to the Australian market, without really understanding the strength of our economy, the strength of demand, our connection to China and their growth story and the shortage of housing here,” Brooker said.
FX Concepts’ Taylor said Australia’s dependence on China, its biggest trading partner accounting for about 25 percent of exports, may soon be a drag, rather than boost, as Beijing attempts to cool the economy.
“This is the beginning of a recessionary period for Australia and housing will be one of the markets to get hit,” Taylor said in a telephone interview.
James McIntyre, an economist at Commonwealth Bank of Australia (CBA), the nation’s biggest mortgage provider, said income growth, and low unemployment of 4.9 percent, will support the housing market. McIntyre forecasts “subdued” growth for housing over the next year as the central bank raises interest rates to contain inflation. The mortgage book of Sydney-based Commonwealth Bank, including its BankWest unit, totals more than A$297 billion, APRA data shows.
Matthew Hassan, senior economist at Westpac Banking Corp. (WBC), said higher interest rates will in some ways support, rather than dent, home prices. He argues that higher rates will curb property development and exacerbate a shortage of homes that stands at 228,300 dwellings according to the government’s National Housing Supply Council’s estimates.
“As long as rates stay above average, demand will be suppressed, but supply will also be suppressed,” said Sydney- based Hassan. He said he predicts a “patchy market.”
Westpac’s home loans total A$279 billion, APRA data shows, making it Australia’s second-biggest provider of mortgages.
Mike “Mish” Shedlock, an investment adviser at Sitka Pacific Capital Management, who publishes the Global Economic Analysis blog, says such shortage claims are “pure nonsense.”
“We heard the same thing in the U.S.,” Sonoma, California-based Shedlock, who predicts Australian home prices will decline by as much as 40 percent, said in an e-mail. “There is always a perceived shortage at the market top.”
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