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Australian Housing Crash


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PRESSURE is building on the Federal Government to scale back negative gearing.


The Community Tax Forum, a recently formed alliance of leading national welfare, consumer, union and environmental groups, says too many people are using negative gearing to avoid paying their taxes.


"There's no doubt we've got the most generous system in the world for rental investors borrowing large amounts of money and engaging in property speculation," forum chairwoman Julian Disney said.


"We need to look carefully at whether that hasn't contributed to (property price) inflation."


Professor Disney seized on comments by Treasurer Wayne Swan, foreshadowing a shift in the focus of tax incentives.


In a speech in Canberra last month, Mr Swan said tax incentives should be directed to promoting productivity, rather than speculation. "We need to address tax biases that encourage speculation and other unproductive investments," he said.


Professor Disney said that negative gearing should be limited so that interest payments on rental properties could only be claimed against earnings from the same activity.


"You should not be able to claim it against your income as a doctor or a lawyer or whatever," he said.


The issue has already been raised with Treasury Secretary Ken Henry's tax review. The Brotherhood of St Laurence said that negative gearing "disproportionately" benefited higher-income groups.


In another submission to the Henry review, the Australian Council of Social Service said negative gearing had contributed to house price inflation and excessive household debt.


But both Master Builders and the Property Council defended negative gearing, telling the Henry Review it was mostly used by mum and dad investors and provided the major source of affordable housing.


"Any change can only create a housing affordability crisis," Master Builders Australia said.


The Henry review will conduct a series of public meetings around the country, starting in Brisbane on Monday. Its final report is due in December.

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Some more food for thought?


David McIntyre

March 15, 2009 - 10:49AM

Low interest rates, population growth and a shortage of new home construction is the perfect mix for a fresh house price bubble, says Firstfolio chief executive Mark Forsyth.


Australian might be on the brink of recession but Mr Forsyth believes a new housing boom could begin as early as in the second half of 2009.


"If you combine the last rate decrease with news that there's going to be another decrease, rental yields going through the roof, shortage of supply of property and the first home owners grant, it's a perfect storm of a positive nature," Mr Forsyth told AAP.


"We're creating the next housing boom, or bubble potentially."


After the Reserve Bank of Australia cut the overnight cash rate to a 44-year low of 3.25 per cent in February, traffic at Firstfolio's mortgage website eChoice more than doubled to 15,000 hits a day from 6,000, Mr Forsyth said.


While the demand for loans had grown, especially among first home buyers, Mr Forsyth said he feared there weren't enough properties where people wanted to live - in transport corridors and close to employment centres.


And building approvals for dwellings fell in January for a seventh consecutive month to the lowest level in eight years, according the Australian Bureau of Statistics.


The ABS also showed rents rose by 8.4 per cent for the year to December, the fastest increase since 1989, making property investment more attractive.


The shortage wasn't likely to be solved soon as new developments took a long time from start to completion, and the population continued to grow, particularly through immigration, Mr Forsyth said.


Immigration Minister Chris Evans announced last year that Australia would increase its annual immigration intake to about 300,000.


"Unless somebody has it on tap now, we're not going to have any new development," Mr Forsyth said.


Firstfolio wants to harness some of that demand, offering a standard variable rate of 5.24 per cent, well below the major banks, through its eChoice business which lends directly to customers.


Firstfolio bought eChoice last year to expand into selling home loans directly to customers, rather than just mortgage broking and wholesale sales to other home loan providers.


That was the latest stage in growing the business to $12 billion of home loans on the books, from $1 billion in June 2006 when Mr Forsyth started as chief executive.


But Mr Forsyth said his aim was not to create a mortgage business.


"It's great that we started with mortgages, because you create a really strong relationship with customers, but my complete focus has been to build a distribution business."


Firstfolio aims to sell other financial products including superannuation and insurance through the eChoice website and Mr Forsyth has an aim of generating between 10 and 15 per cent of revenue from non-home loan products by the end of the year.


Mr Forsyth also wants to take the eChoice business to Asia, where he believes there are huge opportunities for Australian businesses.


But businesses needed to take a long term view, and Asia would be hit hard by the global recession, said Mr Forsyth, who spent six years living and working in Asia before joining Firstfolio.


"There are no five minute plays in Asia," he said.


"We have the biggest market sitting on our doorstep with daily flights to everywhere, no time difference and our population is increasingly Asian."


Mr Forsyth said he had already received enquires about taking eChoice to the Middle East and also pointed to South East Asia as a desirable next step.


"Thailand would be up on my list, because it has a large domestic population, they're reasonably sophisticated and it has good IT," he said.


"Vietnam, Malaysia, Indonesia, then with the right partner, India and China."


The company reported a first-half 2008/09 profit of $475,000, turning from a loss of $744,000 a year earlier.


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Australian might be on the brink of recession but Mr Forsyth believes a new housing boom could begin as early as in the second half of 2009.


I feel this is on one end of the bell curve. Not sure where the other end of the curve might be.


I have noticed the number of vacant factories and shops in Melbourne appears to me to be increasing. This could be due to a real case of more empty factories and shops or the agents are using more prominent 'for sale' and 'for lease' boards. If business is struggling, unemployment is increasing, the government is threatening negative gearing (this was tried once before wasn't it?) I cannot see where it will go.


What other factors will shake, bolster confidence?


Dave D.

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In the housing slump in the early 90's i clearly remember children living at home much longer than before. I think that was the start of the trend to leave home later. I think that if this recession really bites then we will see this again. Also i read this morning that immigration will be slashed to protect jobs.

This time is no different than other times (in fact it may be worse) so i expect no quick housing boom. It will be a few years away yet. The first home owners grant should however keep the lower end of the market ticking over.

In the early 90's in Melbourne it got so bad you almost expected to see Tumbleweed rolling down Bourke street. I still work in the City and i can say that we are nowhere near getting to the early 90's stage yet. Coffee shops etc are still thriving.

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Well worth a read...



I've copy/pasted a couple of IMO keypoints...


'Between June 1990 and June 1992, full-time employment fell by 7%, and then took a full three years to get back to where it started. So, how far did home prices fall? Actually, they didn't. Average house prices across Australia's state capitals rose - not fell- by about 2% per annum in nominal terms as that early-1990s recession and jobs disaster unfolded.


''It turns out that the downward pressure on home prices from shrinking employment in the early-1990s recession was more than offset by upward pressure on home prices from the halving of mortgage rates, from a record 17% in 1989 to 8.75% in 2003.


''I have no idea if average Australian house prices will fall somewhat or rise over the next five years. But those with their eyes wide open can see that sharply lower mortgage rates this time around - lower than most Australian home buyers ever dared to dream - already are having a strongly supportive effect on housing markets.'...


''Now that mortgage rates suddenly are nearly 400 points lower, the ratio of household interest payments to disposable income has dropped from about 15% to near 10%. That is, Australian households on average now devote about $1 of every $10 of after-tax earnings to interest payments, down from about $1.50 about 10 months ago.


''Australian households' debt burden just dropped dramatically, something that didn't happen in the US or the UK when it mattered.''.....


"To help keep a little perspective on the average Australian home, it's worth remembering that more than 60% of households are mortgage free - even unemployment can't see a bank repossessing them."....


"That's perhaps not the impression you might get from the general media - especially if your local paper is the Mosman Daily."




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hi mm


I actually no longer have a firm view as to whether Aussie house prices will dip (disclosure: belonged to the Steve Keen camp for some time but now am just confused). However a couple of observations on the points made in the article.


The argument that:


...it's worth remembering that more than 60% of households are mortgage free...


somehow is supposed to mean that there can be no price tension is quite specious IMO. The action will be, as always, at the margin so even if only a portion of those households with mortgages get under pressure and a portion of households looking to purchase residential real estate remain spooked then it is still quite possible for there to be a rout in some of the local markets. Another point is that there is a high correlation between households likely to be adversely affected by a downturn and households likely to feel pressures about having or taking on a mortgage. So whilst most of the market will be unaffected there could be lots of action at the margin. In other words you don't have to go home with every girl at the dance to have a good time.


Secondly, there is some chance that now is nothing like 1990 so using 1990 as a comparative base is not so useful. George Soros is of the view that not only are we, or at least the US, at the bottom of a relatively short term housing cycle but the world has also reached the end of a much longer credit cycle that started after WWII. He argues that even during short term post-WWII housing downturns the underlying rise of the credit cycle supported house prices and then allowed a quick recovery. But if the credit cycle is no longer on the rise then perhaps we cannot expect real estate prices to be as resilient as we have come to expect. As an aside, Soros admits that he has made this call a couple of times in the past and been proven wrong.


Thirdly, IMO it is a bit disingenuous of Michael Pascoe to not point out that unemployment and residential real estate are usually lagging indicators in a recession - just like bruising, for the main part they evidence that the economy has been damaged, not that it is in the process of being damaged. Problems in the residential real estate in the US was a leading indicator this time around because unusually it was the banking real estate connection that initiated the problems in the US, but not quite the same here. I would expect that if we are going to hit the wall with residential real estate and with unemployment we are some months away from the main event. Perhaps by then equities, normally a leading indicator, may even have been showing for some time that the economy is on the improve (?).



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Hi Triage,


"somehow is supposed to mean that there can be no price tension is quite specious IMO"

I'd have to agree. The other issue is how many of those 60% have been used as credit guarantees against other investments (including property)


"Problems in the residential real estate in the US was a leading indicator this time around because unusually it was the banking real estate connection that initiated the problems in the US, but not quite the same here"


That IMO is a very important point, it's something I've been trying to highlight for months. The conditions that effected the US/UK property market didn't occur in Australia. IMO If the "supportive effects" remain (low interest rates, FHOG) the market will drift gently downwards until the equity markets improve (early 2010).


As I've said many times before... mid April will be the real indicator, we'll know then what big business are planning on doing over the next 6-12 months.




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Thanks for the comments in this thread as it is a topic close to my heart.


IMO If the "supportive effects" remain (low interest rates, FHOG) the market will drift gently downwards until the equity markets improve (early 2010).


As I've said many times before... mid April will be the real indicator, we'll know then what big business are planning on doing over the next 6-12 months.



I tend to agree and wonder when the right time to upgrade. In my case it is more about the location than the change over cost if the house is the right one. So my judgement is based on more than just a finacial decision.


What are the current expectaions for the April reports?

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The following are weekly charts of various ASX stocks that have one way or other exposed to the property/construction/materials secotrs. Some like SGP, LLC and ALZ from memory, they seem to have spent a lot of $$$ buying up lands along the "growth corridor" NW(?) of Melbourne. If I am wrong on this, correct me please since I am too lazy to check. From what I can recall these lands were bought with debt and since the last time I checked, these stocks are mostly abyss dwellers, probably suffering from debt over hang, poor demand, poor result and generally are starved of Vitamin M(oney)...


The best among them is still down 75% or more from its recent peak. The rest, I believe I am not exaggerating if I were to use the word "CRASH" to describe their state of financial health.


The question I have been asking and am still asking is: if all these stocks are lying near death, and if they are near death because of poor market condition, etc... is it logical to believe the Aussie residential market is booming? Or there is a supply shortage? And the Aussie residential market is crash proof, unlike its US, UK cousins?



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