Australia Facing `Once-in-100-Year' Housing Slump (Update1)
- From: Siansiansian <williamtan74@xxxxxxxxx>
- Date: Thu, 31 Jul 2008 07:52:42 -0700 (PDT)
http://www.bloomberg.com/apps/news?pid=20601068&sid=aBCuyixr8nJE&refer=economy
July 31 (Bloomberg) -- Australia may be headed for a housing recession
similar to those roiling the U.S. and U.K.
The cause is a combination of rising default rates, the biggest drop
in home prices in five years, the highest borrowing costs in a decade
and slowing economic growth.
Prices in the property market -- described by the International
Monetary Fund in April as one of the world's most ``overvalued'' --
will fall 30 percent by 2010, according to Gerard Minack, senior
economist at Morgan Stanley in Sydney. Prices dropped in all of
Australia's major cities last month for the first time since just
before the Great Depression.
``I panicked'' when the figures came in, said John Edwards, chief
executive officer of Residex Ltd., a Sydney company that tracks
property prices. ``We've been doing this for 20 years and have data
that goes as far back as 1865, and it's really abnormal.''
Prices fell in Sydney, Melbourne, Brisbane, Perth, Adelaide, Darwin,
Hobart and Canberra by between 0.6 percent and 2.2 percent, according
to Residex. The national median house price fell almost 3 percent to A
$458,000 ($435,000).
``Australia is headed for a once-in-100-year real-estate slump,''
Edwards said. ``I have never seen the convergence of so many
negatives.''
Rising property prices drove a decade-long consumer spending boom that
saw Australia's $1 trillion economy weather fallout from the 1997
Asian financial crisis and the collapse of Internet stocks in 2000.
Soaring Prices
Household debt has almost doubled since 1999 to around 160 percent of
incomes, a higher ratio than in the U.S. and U.K., according to AMP
Capital Investors. The median national house price soared about 140
percent in the same period.
``By every metric I can think of, Australian houses are too
expensive,'' Minack said, costing an average of six years' earnings,
double what Americans paid before their property market started
falling in 2006.
The Washington-based IMF says Australian house prices were overvalued
by almost 25 percent in the decade through 2007 when compared with
household income and ability to pay debt. Only Ireland, the
Netherlands and the U.K. were higher.
A crash would ``result in a significant negative wealth shock'' for
Australians, whose spending accounts for about 60 percent of the
economy, Minack said.
While growth is expected to continue for a 17th straight year in 2008,
the Reserve Bank of Australia forecasts it will slow to 2.25 percent
from 3.9 percent in 2007. A government report today showed retail
sales fell 1 percent in June, the biggest drop in six years.
Bank Stocks
A housing recession may also trigger losses at lenders including
Commonwealth Bank of Australia and Westpac Banking Corp., whose stock
has fallen more than 20 percent this year.
The nation's five largest lenders have added an average 105 basis
points to mortgage rates so far in 2008 as the global credit squeeze
drove up funding costs. They were also reacting to moves by central
bank Governor Glenn Stevens, who raised the benchmark lending rate
twice this year by a total of 50 basis points to a 12-year high of
7.25 percent to curb inflation. Prices gained 4.5 percent in the
second quarter from a year earlier, the fastest pace since 2001.
The increases have added A$250 to monthly payments on an average A
$250,000 home loan, according to the Real Estate Institute. Households
spent 38 percent of their incomes on mortgage payments in the March
quarter, the most in the 22 years the institute has measured
affordability.
`Mortgage Stress'
Sydney research company Fujitsu Consulting says 923,000 households
will face ``mortgage stress'' by September, up from 171,000 a year
earlier who said they were having trouble repaying loans. Australia's
population is 21 million, and 6.9 million households have mortgages.
As the pressure mounts, consumers are spending less on televisions,
cars and vacations, hurting retailers including department store chain
David Jones Ltd.
Ratings agency Standard & Poor's reported July 23 that payments more
than 30 days late on so-called prime home loans increased for a sixth
month to a record 1.49 percent in May. Some 14.5 percent of subprime
loans were 30 days late, with 7.9 percent more than 90 days late.
John McGrath, chief executive officer of McGrath Estate Agents in
Sydney, said the number of unsold homes in his market is rising,
auction rates are falling and the time it takes to sell properties is
up 50 percent from a year ago to 45 days.
``We're not even in the ballpark when it comes to affording a house in
Sydney,'' said Anthony Duckworth, 30, a married father of one who
works for a catering company.
Commuting Distance
With A$160,000 in savings, he would need a A$600,000 mortgage to buy a
family home in Australia's biggest city -- double what he can afford.
So he plans to buy north of Sydney and commute.
The central bank says lending grew in May at the slowest annual pace
since 1991, when the property market collapsed amid mortgage rates as
high as 18 percent. Home-loan approvals dropped by the most in eight
years.
``It's like a debt tsunami out there,'' said Sandra Saker, who manages
a Salvation Army service for families in Sydney overwhelmed by
financial problems. ``Five years ago, the maximum debt people came in
with was about A$200,000. Now we see people coming in with over A$1
million.''
To contact the reporter for this story: Jacob Greber in Sydney at
jgreber@xxxxxxxxxxxxx
Last Updated: July 30, 2008 23:56 EDT
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