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Australian houses are not overvalued, according to a report into the current state of housing and mortgages by investment bank Credit Suisse.

The report questions the likelihood of a house price crash and says households can manage their debt obligations.

Australian houses appear to be fully priced according to the authors of the report, analysts Jarrod Martin and James Ellis along with Omkar Joshi.

They base this view “on a range of usual metrics for assessing house price levels”, including house prices to income, house prices to rents, house prices to GDP, per capita value of the housing stock to household income

The report notes that housing affordability has deteriorated.

However it questions the argument that an improvement in the ratio of income to house prices will be achieved through a “a sharp and disorderly retracement of house prices” (a house price crash) rather than a “slow re-balancing of this ratio through real house price erosion or flat nominal house prices combined with on-going growth in household income”.

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Source: Credit Suisse

According to Credit Suisse, Australian household leverage is relatively high in both an Australian historical and in an international context – above that of both the US and UK.

Click to enlarge

Source: Credit Suisse

However, it notes that as the RBA has previously stated household debt inAustralia is mainly held by higher income households, with households in the top two income quintiles holding almost three-quarters of household debt.

While the report says there is a risk that the relative resilience of Australian house prices will not be sustained in the future, it says there are “numerous arguments” cited as to why Australian house prices “are (and presumably should be) relatively high by international standards”.

Some of these include:

• Australia is a highly urban society by international standards with a cultural preference towards living close to central business districts / coastal cities (limiting desirable land area in an otherwise large land mass country) such that Australia’s capital city house prices to income ratio is comparable with coastal city metrics globally;

• Australian housing stock is relatively of high quality in nature and both relatively large and land-intensive by international standards;

• the supply of housing stock in Australia has been excessively constrained in long-term by land zoning and development restrictions (concurrently in some recent years by accelerating population growth); and

• the Australian taxation system is unusually generous with respect to residential dwelling investment, reinforced by a cultural personal investment bias towards the residential real estate.

Due to Australian banks being so heavily exposed to the residential lending market (59% of bank loans are residential mortgages), Credit Suisse says there is a strong connection between house prices and financial stability, noting “house prices have the scope to create financial system instability, and financial crises have scope to exacerbate house price declines”.

But it says factors in favour of a stable mortgage and housing market include the overall strength of the macro economy and an apparently “increased consideration of house price inflation in RBA monetary policy deliberations in the wake of the financial crisis” and the extent to which “mortgage interest rate changes are being undertaken outside of cash rate changes”.

It also notes the stable rates of home ownership in recent years in Australiacompared with rising home ownership rate in the US, “widely seen as a factor exacerbating the subsequent delinquencies crisis”.

If you jump off the top of a tall building, you’ll go splat at the bottom: that’s simple physics.

We are told economic laws are not as certain as those of physics, but this isn’t so.

It’s not coincidental that none of those heterodox people who forecast the world financial collapse treat land simply as another form of capital, as does today’s orthodox economist.

Many of them understood that land price is a pathology. Others, such as Robert Shiller and Joseph Stiglitz, knew that when land prices are permitted to develop into a bubble this is certainly a most unhealthy phenomenon.

Not so witless orthodox economists.

They still believe land price is simply a function of supply and demand, and don’t regard the private capture of more and more land rent as socially devastating.

They don’t see banks as privatisers of capitalised land rents.

Therefore orthodox-trained RBA, APRA and ASIC and Productivity Commission economists were not to be found amongst those who foresaw the financial bust.

You might say they failed their appointed task.

Why, then, are these people putting their hands out for a pay packet, let alone still being permitted to oversee finance and productivity?

They’ve failed us.




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I'm 44 and my husband is 43. He earns $180,000 a year and my wage is $40,000 a year. We have two children about to start high school at $10,000 a year each. We owe $70,000 on our home worth $850,000. We own a rental property worth $370,000 and owe $470,000 on it. Capital growth is not happening. It's rented out at $400 a week and the repayments are high. Should we sell the rental property? We would be left $100,000 in debt but funding that would be easier than a $470,000 mortgage. Would we still be able to claim the interest on our tax? My husband has another two years on his current wage, which will then drop to $100,000 a year. I'm worried we would struggle to meet the loan repayments. Should we cut our losses?

It appears you have a cash shortfall of about $15,000 a year but part of this will be refunded to you when you do your tax return. When you take these numbers into account, it's probably costing you $10,000 a year to hold the property. If you don't think it will appreciate by that much, it might be best to sell. The position regarding deductibility of interest when the asset has been sold is complex. You'll need to take advice from your accountant.

PROPERTY REPORT - June 2012

It's all about resources and infrastructure..
by Terry Ryder.
creator of hotspotting.com.au

Introduction:
It's all about resources and infrastructure, which means jobs, jobs, jobs

The places delivering strong capital growth are the ones creating jobs.

They’re not the places on the coast where people go to holiday or retire. They’re the places, often inland regional locations, where industry happens and jobs are created. And right now, it’s all about resources and infrastructure.

Here’s my simple formula for those chasing capital gains ...

Resources + infrastructure = JOBS
Growth happens where people go to access new jobs. It seldom happens where people go to take a break from their jobs (holiday) or where people go after quitting their jobs (retire). And, perhaps more obviously, prices don’t rise where jobs are being lost and unemployment is high.

To ram home this simple but powerful message, I’m devoting this edition of the Quarterly Market Report to a theme based on the two key jobs creators: resources and infrastructure.

<snip - see link for full text>

I have just returned from visiting relatives in Vancouver. I mostly stayed in West Vancouver with my retired aunt and uncle but also stayed in outer-suburban areas with my police-officer cousin.

I was looking for a bubble - after all Vancouver is a notorious property bubble - but - speaking as someone from Sydney I could not see one. Everything was so cheap. Houses especially. Cars too.

A Mountie and his drug-rep wife had a material standard of living that would match a partner in a second tier law firm in Sydney. House prices seemed impossibly low.

The only place where my material standard of living was markedly higher than the outer Vancouver middle class was that I have a decent surf beach locally and the local restaurants and coffee shops are much better in Sydney. Also alcohol is cheaper in Sydney - which is in part taxes and in part protection. (Alcohol is much cheaper in parts of the USA.)

To offset the beaches and restaurants, my cousins had a ski resort up the hill. And food (other than dairy) was cheaper. Quality was high. Dairy seemed to be another industry-protection issue.

And housing was much cheaper and much higher quality.

I remember thinking that Sydney was in a bubble when it got as expensive as Vancouver now is. But then housing prices doubled. After that they seemed to drift upwards.

I have given up predicting the end of the Sydney property bubble. It will happen. It feels like it might happen now. But it has felt like that before. And before that. And before that.

I would rather be short Sydney property than long it (though my wife might object). And that stance has cost me money in the past.

There is a scene in Crocodile Dundee where a New Yorker pulls a switch blade on Dundee. He pulls out an Australian bush knife which is far more impressive.

That is how I felt about Vancouver. You call this a bubble? I am an Australian. I can show you a bubble. Vancouver - that is just kids having fun.