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The Daily Reckoning Australia | London, England - Melbourne, Australia
Tuesday, 27 January 2009
From Dan Denning, at the Old Hat Factory:
Australian house prices are severely and seriously unaffordable...Pink Monday in the U.S. costs 79k jobs...the decline and fall of consumer credit and its effect on prices...and more!
--Stocks in the U.S. were up overnight. The only really positive news on the day was that existing home sales in the U.S. were up 6.5%. It was unexpected news. A lot of short sales and foreclosure sales boosted the market.
--See. Markets work if you let prices function. Median house prices have fallen over 15% in the U.S. in the last year, according to the National Association of Realtors. The median price of US$175,400 is obviously starting to clear some of the inventory over-hang. If prices fall even more, you can expect more buyers to come in off the sidelines and back into the market.
--The alternative is to keep those new buyers out of the market by propping up prices through various government-backed lending initiatives. If you want to make homes more affordable, you should let home prices adjust lower, to a level that reflects tighter credit. How hard is it to figure out that if you take away copious amounts of credit from the housing market (in Australia or America) prices are going to fall?
--But is that such a bad thing? Well, it is if you own a house and have a large mortgage on it. But let's consider a new study on global housing affordability by Performance Urban Planning. The report concluded that Australia has the most unaffordable housing of all the nations surveyed. Not only that, but according to the report, Australia doesn't even have a single urban area in which housing is merely "moderately unaffordable."
--Now before you write in defending the honour of Australia's housing market, let's be clear what the survey's designers consider unaffordable. They use a ratio of Median House Price to Median Household income. A house is "Affordable" if the ratio is 3.0 or less. It's "Moderately unaffordable" if the ratio is 3.1 to 4.0. It's "Seriously Unaffordable" if the ratio is 4.1 to 5.0. And it's "Severely Unaffordable" if the ratio is 5.1 or more.
--Australia sports a ratio of 6.3, which is both "Severely Unaffordable" and "Seriously Daloob." New Zealand comes in next t 5.7, followed by Ireland at 5.4 and the U.K. at 5.3. Owing to its large number of metropolitan areas in which there is a wide variety of median prices and incomes, the U.S. nationwide ratio is just 3.2.
--Part of the problem in the other countries is that national median incomes and house prices are derived from just a small number of densely populated urban areas. It's a pretty common occurrence in America to pack up your car, change states, and change jobs. You trade lower wages for a lower cost of living. That may be harder to do in more homogenised labour and housing markets, like, say, Australia.
--So is today's ratio any higher than historically? You bet it is! According to the study, "In recent decades, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices being generally 3.0 or less times median household incomes."
--"This historic affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in Australia, Ireland, New Zealand and the United Kingdom and in some markets of Canada and the United States."
--There are other ways to measure affordability, of course. But it really comes down to the mortgage payment. Looking at house prices in terms of household earnings and income, then, is the method that makes the most sense to us. And by that measure, Australia has some of the most expensive housing in the world.
--In fact, according to the table below, Australia has over a third of the sixty housing markets ranked "Severely Unaffordable" by the survey. Two of the top three "Severely Unaffordable" markets are in Queensland. And eight of the top twenty "Severely Unaffordable" markets are in Australia, according to the survey.
Source: 5th Annual Demographia International Housing Affordability Survey
--If you're in the market for something "Seriously Unaffordable" you should try Bendigo (4.
, Wagga Wagga (4.9). or the goldfields in Ballarat (5.0). The other 24 major urban areas surveyed are either prohibitively expensive, or overvalued, depending on your point of view. So why haven't Aussie house prices fallen more?
--"Unlike the other national markets in the Survey," the survey surmises, "Australia has thus far been able to avoid material house price declines. It seems likely that, sooner or later, the inherent instability and unsustainability that characterizes bubbles will lead to house price declines in Australia. However, were it possible for Australia to retain its highly over-valued house prices, there would still be a significant cost. Future generations would pay far more for housing than in the past, and Australia's relative standard of living would decline."
--Far be it for us to suggest that Australia's love affair with homeownership could be financially ruinous at these prices. Besides, we don't have to say it when you can see it for yourself in the image below. But the generation psychology of getting rich in property is hard to break. It's worked for the Boomers. Now everyone thinks it will work. Hmmn.
Source: 5th Annual Demographia International Housing Affordability Survey
--The other side of the affordability ratio is household incomes. And if the job market data from the U.S. on Monday is a preview of what's ahead for Australia, median incomes are going to decline for the people who got fired. In the U.S. alone, over 79,000 pink slips were handed out to start the week.
--Maybe it will be remembered as "Pink Monday." Corporations are hoping to stem the rising tide of red ink by slashing jobs. Caterpillar is cutting 20,000 people loose. Sprint ****** fired 8,000, Home Depot, 7,000. Pfizer is laying of nearly 19,000. And American Express, after reporting an earnings drop of 79%, is sacking 7,000 workers too.
--It's a lot of bad news. But the Amex news shows just how bad things are getting in the real economy. "Our fourth-quarter results reflect an operating environment that was among the harshest we have seen in decades," Amex CEO Ken Chenault said. Card member purchases declined by ten percent, year-over-year. Amex reported rising late payments, delinquencies, and is expecting larger default rates by its customers.
--Do you see what's happening? Consumers are cutting back their use of credit cards. But even so, they are having trouble servicing their outstanding credit card debt. Households have a cash-flow problem too. They too, are overleveraged and have to reduce the amount of debt they are carrying.
--The only way to do that is to cut spending. Thus a double whammy for the retail economy. With one hand, households cut spending, damaging business profits. With the other hand, businesses lay off workers, further reducing household income. And on the cycle goes.
--The cycle of rising unemployment, negative earnings news, and recession is obviously a big downer for the stock market. Of course, as we write that, stocks are up on the day. But in a credit depression, asset values fall faster than government efforts to reinflate the money supply.
--As we pointed out last week, the value of credit outstanding dwarfs the patchwork efforts of various government spending programs to prop up banks and house prices. We'd expect weaker stock prices, falling house prices (yes, even with interest rate cuts from the RBA), and the build up of a big inflation trade. More on that tomorrow.
See below for caveat on their email service...
Cheers
Marc
Tuesday, 27 January 2009
From Dan Denning, at the Old Hat Factory:
Australian house prices are severely and seriously unaffordable...Pink Monday in the U.S. costs 79k jobs...the decline and fall of consumer credit and its effect on prices...and more!
--Stocks in the U.S. were up overnight. The only really positive news on the day was that existing home sales in the U.S. were up 6.5%. It was unexpected news. A lot of short sales and foreclosure sales boosted the market.
--See. Markets work if you let prices function. Median house prices have fallen over 15% in the U.S. in the last year, according to the National Association of Realtors. The median price of US$175,400 is obviously starting to clear some of the inventory over-hang. If prices fall even more, you can expect more buyers to come in off the sidelines and back into the market.
--The alternative is to keep those new buyers out of the market by propping up prices through various government-backed lending initiatives. If you want to make homes more affordable, you should let home prices adjust lower, to a level that reflects tighter credit. How hard is it to figure out that if you take away copious amounts of credit from the housing market (in Australia or America) prices are going to fall?
--But is that such a bad thing? Well, it is if you own a house and have a large mortgage on it. But let's consider a new study on global housing affordability by Performance Urban Planning. The report concluded that Australia has the most unaffordable housing of all the nations surveyed. Not only that, but according to the report, Australia doesn't even have a single urban area in which housing is merely "moderately unaffordable."
--Now before you write in defending the honour of Australia's housing market, let's be clear what the survey's designers consider unaffordable. They use a ratio of Median House Price to Median Household income. A house is "Affordable" if the ratio is 3.0 or less. It's "Moderately unaffordable" if the ratio is 3.1 to 4.0. It's "Seriously Unaffordable" if the ratio is 4.1 to 5.0. And it's "Severely Unaffordable" if the ratio is 5.1 or more.
--Australia sports a ratio of 6.3, which is both "Severely Unaffordable" and "Seriously Daloob." New Zealand comes in next t 5.7, followed by Ireland at 5.4 and the U.K. at 5.3. Owing to its large number of metropolitan areas in which there is a wide variety of median prices and incomes, the U.S. nationwide ratio is just 3.2.
--Part of the problem in the other countries is that national median incomes and house prices are derived from just a small number of densely populated urban areas. It's a pretty common occurrence in America to pack up your car, change states, and change jobs. You trade lower wages for a lower cost of living. That may be harder to do in more homogenised labour and housing markets, like, say, Australia.
--So is today's ratio any higher than historically? You bet it is! According to the study, "In recent decades, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices being generally 3.0 or less times median household incomes."
--"This historic affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in Australia, Ireland, New Zealand and the United Kingdom and in some markets of Canada and the United States."
--There are other ways to measure affordability, of course. But it really comes down to the mortgage payment. Looking at house prices in terms of household earnings and income, then, is the method that makes the most sense to us. And by that measure, Australia has some of the most expensive housing in the world.
--In fact, according to the table below, Australia has over a third of the sixty housing markets ranked "Severely Unaffordable" by the survey. Two of the top three "Severely Unaffordable" markets are in Queensland. And eight of the top twenty "Severely Unaffordable" markets are in Australia, according to the survey.
Source: 5th Annual Demographia International Housing Affordability Survey
--If you're in the market for something "Seriously Unaffordable" you should try Bendigo (4.
, Wagga Wagga (4.9). or the goldfields in Ballarat (5.0). The other 24 major urban areas surveyed are either prohibitively expensive, or overvalued, depending on your point of view. So why haven't Aussie house prices fallen more? --"Unlike the other national markets in the Survey," the survey surmises, "Australia has thus far been able to avoid material house price declines. It seems likely that, sooner or later, the inherent instability and unsustainability that characterizes bubbles will lead to house price declines in Australia. However, were it possible for Australia to retain its highly over-valued house prices, there would still be a significant cost. Future generations would pay far more for housing than in the past, and Australia's relative standard of living would decline."
--Far be it for us to suggest that Australia's love affair with homeownership could be financially ruinous at these prices. Besides, we don't have to say it when you can see it for yourself in the image below. But the generation psychology of getting rich in property is hard to break. It's worked for the Boomers. Now everyone thinks it will work. Hmmn.
Source: 5th Annual Demographia International Housing Affordability Survey
--The other side of the affordability ratio is household incomes. And if the job market data from the U.S. on Monday is a preview of what's ahead for Australia, median incomes are going to decline for the people who got fired. In the U.S. alone, over 79,000 pink slips were handed out to start the week.
--Maybe it will be remembered as "Pink Monday." Corporations are hoping to stem the rising tide of red ink by slashing jobs. Caterpillar is cutting 20,000 people loose. Sprint ****** fired 8,000, Home Depot, 7,000. Pfizer is laying of nearly 19,000. And American Express, after reporting an earnings drop of 79%, is sacking 7,000 workers too.
--It's a lot of bad news. But the Amex news shows just how bad things are getting in the real economy. "Our fourth-quarter results reflect an operating environment that was among the harshest we have seen in decades," Amex CEO Ken Chenault said. Card member purchases declined by ten percent, year-over-year. Amex reported rising late payments, delinquencies, and is expecting larger default rates by its customers.
--Do you see what's happening? Consumers are cutting back their use of credit cards. But even so, they are having trouble servicing their outstanding credit card debt. Households have a cash-flow problem too. They too, are overleveraged and have to reduce the amount of debt they are carrying.
--The only way to do that is to cut spending. Thus a double whammy for the retail economy. With one hand, households cut spending, damaging business profits. With the other hand, businesses lay off workers, further reducing household income. And on the cycle goes.
--The cycle of rising unemployment, negative earnings news, and recession is obviously a big downer for the stock market. Of course, as we write that, stocks are up on the day. But in a credit depression, asset values fall faster than government efforts to reinflate the money supply.
--As we pointed out last week, the value of credit outstanding dwarfs the patchwork efforts of various government spending programs to prop up banks and house prices. We'd expect weaker stock prices, falling house prices (yes, even with interest rate cuts from the RBA), and the build up of a big inflation trade. More on that tomorrow.
See below for caveat on their email service...
Cheers
Marc
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