It’s two months since Reserve Bank deputy governor Ric Battellino delivered a myth-busting speech that included an effective defence of the Australian housing market and the sustainability of the present level of household debt. Minack’s latest newsletter to clients seems to take direct aim at that Battellino speech, but doesn’t go as far as
Sydney academic Steve Keen’s Doomsday forecasting.

Minack produces plenty of evidence that Australian housing is expensive on any number of counts – and there’s no news in that for anyone looking for a home in the capital cities. That process of becoming expensive made housing a rewarding investment over the past decade, but Minack thinks being expensive will make it a poor performer in the years ahead – if we’re fortunate.

The Morgan Stanley economist says there are two potential pins that might pop the bubble. The first is Keen’s dire prediction of large-scale job losses, but Minack doesn’t think that’s likely in the foreseeable future. The second though is that the nation’s landlord class might realise en mass that they’re losing money and bail out.

Minack notes that bubbles more often pop than subside, but sometimes the less dramatic path is followed.

”Sydney, for example, has seen two periods – from late 1980s and from 2004 – where inflation-adjusted house prices were flat or declined,” he writes. And we’ve had a previous look at just that phenomenon of how an Aussie housing bubble deflates.

”This is a best-case outcome. Even so, it would make for a very unusual domestic cycle. Homeowners and investors are banking on steady increase in house prices. Flat or moderately declining nominal prices would presumably affect confidence and spending. Banks have relied on mortgage lending as their bread-and-butter. Growth will be structurally lower.

”Moreover, this underscores an obvious point: while we can debate the macro risks surrounding housing, it is likely to be a very poor investment given current valuations. House prices can – indeed, often do – show no growth in real terms for a very long period. To take an extreme example, real house prices in Melbourne did not surpass their 1891 peak until 2001. Buying a bubble is an extremely bad investment. I expect that the real returns on residential investment will be negative over the next decade.”

RBA’s early move

Minack reckons the RBA appreciates the risk of our housing bubble and that capping house prices was a key aim of RBA policy tightening earlier this year.

”Better to slowly deflate a bubble than to see it pop. If Australia could achieve a cycle where house prices are steady or see moderate nominal declines, while growing incomes at a trend 6 per cent growth rate, it could reduce the over-valuation and financial risks associated with excess debt,” Minack writes.

While appearing to welcome that policy aim, Minack says it was a major error by policy makers to let this bubble inflate in the first place.

”There is no value to society from rising house prices. It is simply a wealth transfer to existing owners from potential buyers. Pumping up house prices creates no more wealth than the RBA printing an extra six zeros on every piece of currency.

”’Worse, by increasing the leverage in the household sector and financial system, it increases the financial risks in the economy, as the last two years have demonstrated elsewhere. In short, there seems a strong case for policy-makers to aim to cap house prices.”

What Minack isn’t sure about is whether the large number of negative-carry property investors could create selling pressure if nominal house prices are flat for an extended period.

Hanging on

I’d argue that the Australian experience is that residential real estate owners, both owner occupiers and the landlord class, tend to hang on grimly as long as they can service the debt (i.e. unemployment remains relatively low) rather than facing up to the on-going financial drain. What Minack does, though, is debunk the real estate spruikers’ claim that “you can’t go wrong with bricks’n'mortar

”Australian Tax Office data confirm that residential investment is a poor investment: total rent has not covered total costs since FY2000 (the date the bubble started to inflate). In short, this is an investment that depends on capital gain for its payback.

”With net income not even covering interest charges, this is a classic Hyman Minsky Ponzi scheme. Ponzi owns the house, and he’s betting that house prices keep rising.

”Not only is the aggregate private rental market a loss-making affair, but a rising share of landlords are making rental losses. The percentage of landlords claiming a rental loss (that is, rent not covering interest and other costs) has increased from 50 per cent to 70 per cent over the past decade. It’s not just that there are more landlords, there are more loss-making landlords.

”This matters a lot. Much of the discussion on the residential market concentrates on owner-occupiers. But arguably property investors represent a significantly larger risk if they became widespread sellers of their loss-making investments.”

Middle-class exposure

A key part of the Battellino defence of household debt sustainability was simply that it tends to be the wealthy who have borrowed the most and therefore they can afford it, but that’s not the case when it comes to residential landlords, claims Minack.

”Certainly property investment is more prevalent at higher income scales. But it is simply wrong to assert that rental properties are largely owned by high-income households: losing on residential property investment is largely a middle-class affair.

”Only 3 per cent of all loss-making properties are owned by taxpayers with a taxable income of over $200,000. Taxpayers who earn $80,000 or less own 80 per cent of all loss-making properties.”

And there are a lot of residential property investors.

”Australia has become a nation of landlords: in 1988-89, 608,000 taxpayers reported rental income, by 2007-08 1,765,00 taxpayers did – 13.5% of the total. This clearly reflects the widespread belief that property is an excellent medium-term investment.

”Over the past decade property has been an excellent investment. But it is, in my view, extremely unwise to expect such gains to continue given current valuations. The investment fundamentals of housing have sharply deteriorated.”

There was a total of 519 auctions reported this weekend of which 354 sold and 165 were passed in, of those 93 were passed in on a vendors bid.

This weekend last year saw 504 auctions held and a clearance rate of
85 per cent; interestingly this weekend is almost a repeat of 2008 when there was 465 auctions and a clearance rate of 65 per cent.

Auction listings drop next weekend to just over 300 due to the Federal Election

The clearance rate this weekend is 67 percent, from a total of 467 reported auctions.

There was a total of 311 homes sold and 155 passed in, 97 of those on a vendors bid.

This weekend last year saw 424 auctions and a clearance rate of 85 per cent achieved.

The REIV expects around 580 auctions next weekend and then a drop to 320 on the weekend of the Federal Election.

Area Profile

Median Growth Trend

House Statistics

	Capital Growth in Median Prices
			Blairgowrie		Mornington Peninsula LGA
	period		% Change		% Change
	2010		12.7%		10.8%
	2009		5.9%		3.8%
	2008		10.8%		9.6%
	2007		11.4%		6.7%
	2006		12.9%		8.6%

	recent median sale prices
			Blairgowrie		Mornington Peninsula LGA
	period		median price		median price
	June 2010		$ 667,500		$ 475,000
	May 2010		$ 600,000		$ 447,500
	April 2010		$ 491,000		$ 460,000
	March 2010		$ 605,000		$ 452,250
	February 2010		$ 575,000		$ 459,475
	January 2010		$ 582,000		$ 471,000
	December 2009		$ 520,000		$ 465,000
	November 2009		$ 577,500		$ 445,000
	October 2009		$ 505,000		$ 440,000
	September 2009		$ 595,000		$ 420,000
	August 2009		$ 612,500		$ 430,000
	July 2009		$ 547,500		$ 416,000

	Capital Growth in Median Prices
			Blairgowrie		Mornington Peninsula LGA
	period		% Change		% Change
	2010		35.6%		12.3%
	2009		8.5%		6.0%
	2008		-		1.1%
	2007		-		13.5%
	2006		15.4%		4.0%

	recent median sale prices
			Blairgowrie		Mornington Peninsula LGA
	period		median price		median price
	June 2010		$ 360,000		$ 383,500
	May 2010		$ 875,000		$ 326,000
	April 2010		$ 875,000		$ 370,000
	March 2010		$ 875,000		$ 369,000
	February 2010		$ 640,000		$ 347,500
	January 2010		$ 345,000		$ 352,500
	December 2009		$ 347,502		$ 360,000
	November 2009		$ 347,502		$ 339,500
	October 2009		$ 347,502		$ 347,500
	September 2009		$ 347,502		$ 295,000
	August 2009		$ 390,000		$ 320,000
	July 2009		$ 390,000		$ 320,000

By MARY COSTELLO

July 6, 2010

If you’ve decided to sell your property, it’s important to have an accurate idea of its worth.

One of the nation’s most comprehensive property price-tracking indexes shows Melbourne property prices following a national downturn in June.

The latest RP Data-Rismark property index has dwelling prices slipping in all Australian capitals with Perth, Melbourne, Canberra and Brisbane dropping the most.

Sydney prices performed better than Melbourne but were largely stagnant and Adelaide prices continued to grow at a healthy 1.1 per cent.

”Australian dwelling values remained flat with effectively no growth,” the RP Data-Rismark report said. In terms of the June quarter, ”this represents a striking deceleration in the quarterly rate of increase in home values”.

The slowdown in property prices will be welcome news for first home buyers increasingly priced out of the market, but is also likely to favour buyers at the top end where prices declined most.

”Most of the pain is really at the top end of the market,” RP Data research director Tim Lawless said. ”It’s a little more severe in Melbourne than around the rest of the country.”

The RP Data-Rismark index is typically ahead of other indexes in picking up property trends as it compares ”like sales” with ”like sales” so as not to distort the market by changes in the composition of the stock sold.

New figures from the Reserve Bank show growth in housing credit slowed sharply to just 0.4 per cent in June – its slowest growth for any month since July 1984.

In a further sign that the economy is losing pace, the bank reports that credit growth among owner-occupiers slumped to a mere 0.3 per cent – the lowest of any month on record.

June quarter growth was just 1.4 per cent, also the lowest on record.

The growth now is mostly in loans to housing investors, which rose by 0.6 per cent in June and by 2 per cent in the quarter.

The total growth in lending in June was just 0.2 per cent, the weakest recorded this year. Business credit was flat, and the stock of personal loans shrank by 0.3 per cent.

Recent data has shown the economy faltering under the impact of six rate rises, renewed fears on global markets, and the winding down of federal government stimulus spending.

The downward spiral in prices was likely to delay the onset of another interest rate rise and appease the Reserve Bank, which has raised rates six times since October, Mr Lawless said.

”We had always argued that the May rate hike was a step too far,” CommSec chief economist Craig James said. ”But it will be important now for the Reserve Bank to stay on the interest rate sidelines to give shell-shocked consumers and home buyers a chance to catch their breath.”

The news will worry vendors as buyers are less likely to bid at auction if they feel prices are not likely to rise.

Saturday July 31st 2010

Demand improved at this weekends residential auctions with a clearance rate of 71 per cent recorded, an increase from last weeks 66 per cent.

This result will provide encouragement and confidence to vendors with homes listed for auction between now and the federal election. An interest rate increase next week would reduce that confidence.

There was a total of 541 auctions reported this weekend, of which a total of 382 sold and 159 were passed in, 103 of those on a vendors bid.

This weekend last year saw 374 auctions, well under this weekend and a clearance rate of 87 per cent.

Next weekend the REIV expects 520 auctions.

House Sales in Detail

TOP 5 HOUSES

1. 58 Washington Street, Toorak $3,350,000
2. 42 Bayles Street, Parkville $1,701,000
3. 114 Maltravers Road, Eaglemont $1,700,000
4. 14 Green Street, Windsor $1,652,000
5. 27 Boorool Road, Kew East $1,582,000

TOP 5 BARGAIN HOUSES

1. 4 Burke Road, Sunbury $190,000
2. 21 Fugosia Street, Doveton $300,000
3. 21 Talgarno Street, Broadmeadows $320,000
4. 96 Ashenden Square, Rosebud $321,000
5. 12 Radiata Court, Mill Park $325,000

Flat/Apartment Sales in Detail

TOP 5 APARTMENTS

11. 1/29 Lewisham Road, Windsor $1,265,000
2. 609/108 Bay Street, Port Melbourne $1,200,000
3. 10 Butler Street, Camberwell $1,072,000
4. 43 Myrtle Street, South Yarra $982,500
5. 35/85 Rouse Street, Port Melbourne $970,000

TOP 5 BARGAIN APARTMENTS

1. 1/88-94 Franklin Street, Melbourne $260,000
2. 1/160 Bayswater Road, Croydon South $290,000
3. 2/139 Melrose Drive, Tullamarine $292,500
4. 3/42 Middle Road, Maribyrnong $295,000
5. 6/4-6 Burnewang Street, Albion $298,000

The Valuer-General Victoria, Robert Marsh, released his two-yearly general revaluation of 2.6 million Victorian properties, valuing the state’s residential, rural, commercial and industrial properties at a whopping $1.26 trillion, up 20 per cent in two years.

The Valuer-General uses land and market values to price properties and the results will be used by the state’s 79 councils to calculate rates from July 1 this year.

“It’s important to keep in mind, that an increase in values does not mean an increase in rates,” Mr Marsh said.

The total value of the 2.1 million residential properties assessed rose 20 per cent to $976 billion; the median house price jumped from $399,000 in June 2007 to $460,000 in June this year.

The Valuer-General’s spokesman, Greg Stevens, said properties in in the outer Melbourne suburbs neighbouring the Peninsula Freeway and EastLink had also jumped more than 20 per cent in value, and were singled out as the city’s prime moving real estate, particularly for first home buyers.

“They were the big movers in the revaluation this time around,” Mr Stevens said.

“There’s no doubt the property prices have clearly shown a direct relationship to the first home buyers’ scheme.

“It’s on the Peninsula Freeway arm, in areas such as Pakenham, Berwick, Narre Warren, Rye, Tookarook; they were low-value properties, and their values certainly increased at a faster rate than the average dwelling.”

Dandenong real estate agent Doriano Del Monaco, from Century 21, said it was no surprise that people were heading southeast, saying: “A lot of people are moving this way for a sea change. There’s quick access to the city, which they didn’t have before EastLink was completed in 2008.”

Real estate in the northern suburbs also saw impressive growth of more than 20 per cent. Inner-city Melbourne enjoyed a smaller surge of 5-10 per cent.

The median metropolitan house price has risen an impressive 121 per cent in the last decade; rural property prices had increased 131 per cent.

Bass Coast Shire had the largest growth in the state: 196 per cent since 2000.

The clearance rate from this weekend’s 560 auctions was 67 per cent, a result that is remarkably consistent with the past few weeks indicating that the market has settled at a new level this winter.

Buyers continue to have the upper hand; homes selling at auction are not exceeding vendors’ reserves in the same way that they were before Anzac Day.

There were a total of 560 auctions reported this weekend with 375 selling and 185 being passed in, 123 of those on a vendors bid.

This weekend last year saw a total of 382 auctions held and clearance rate of 86 per cent achieved, higher than this year but with fewer auctions.

The next 3 weekends have around 550 auctions each weekend with a drop the following weekend, to around 130 at this moment, due to the Federal election.