Aggregated Awareness

From Christopher Pavese of Broyhill Asset Management via Zerohedge comes this well put together report on the Australian Housing Market, and where it might be heading.

Excerpt: "...The recurring theme in every case is that housing bubbles are almost always justified by “new era” thinking, land shortages, and are considered unique right up until the moment they pop. Most bubbles around the world have at least partially deflated in the wake of the Great Contraction, yet the property market Down Under continues to chug along ignoring the gravitational forces of mean reversion as Aussie consumers continue their American-inspired credit binge.

US housing prices nearly doubled in the decade leading to their ultimate peak as shown in the above chart. Australian real estate kept pace with these gains until US home prices lost nearly a third of their value as US home owners deleveraged their balance sheets. Since then, Australian households have watched their home prices appreciate by at least that much, while they continue to feast at the trough of easy credit..."

"...Demand for new home loans fell to a nine-year low in April as rising interest rates dampen enthusiasm for housing. The number of new home loans has fallen 26 percent since its recent peak in June 2009, a leading indicator for housing. With a lag, you would expect these numbers to flow through to building approvals, housing starts and ultimately prices. Higher interest rates are starting to bite with new home sales dropping by more than 6 percent in May 2010 and average loan prices declining, according to Australia’s Housing Industry Association (HIA). Sydney’s most recent auction clearance rate fell below 50 percent and remained flat in Melbourne, with both posting their lowest rates since December 2008...

...Australia has gone two decades without a serious downturn, leading most to believe that house prices move only in one direction, despite historical data which clearly indicates that the ratio of home prices to income has always fluctuated around a stagnant long term average. The reason is that income acts as an anchor limiting the price homeowners are able to pay, and has always pulled prices back to earth in every instance. It is only a matter of time.

In a recent speech, GMO’s Jeremy Grantham explained that the average family can afford a home about 3.5 times their income. In 2005-2006, new homes in the U.S. were selling for well over 5 times median income while other real estate bubbles have grown to 6 or 7.5 times. Australian real estate is at 7.5 times family income today - twice the price it should be according to GMO data, and needs to decline by over 40 percent to return to trend.

A more dire analysis by The Economist estimates Australian property is more than 60% overvalued based on the ratio of house prices to rents, more than any of the 20 countries the publication tracks. Six of the 10 most unaffordable cities are in Australia according to the annual Demographia International Housing Affordability Survey.

It’s no wonder that many first-time buyers are already struggling to meet payments, with 40 percent of those who took advantage of government subsidies reporting some degree of financial stress. Initial mortgage payments for a home in Sydney or Melbourne absorb more than half of the average family’s disposable income.

Yet, the potential for even a pause in ascending real estate prices is seldom considered as the local media often maintains that Australia completely dodged the Great Contraction.

It appears that the great majority of home owners in major cities discount the possibility of a bubble in their own backyard, despite warnings from Jeremy Grantham, speaking in Sydney and Melbourne last month, that the housing market is a “ticking time bomb.”..."

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