Meanwhile... in Australia

Yesterday we talked about articles being published in New Zealand about their belief for trouble ahead for the Canadian Housing Bubble.

Meanwhile, over in OZ, comes another sign the Australian housing bubble is in serious trouble.

Insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring.

The IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013 after “elevated” losses this year.

Said Bloomberg:

"the company cited deteriorating market conditions in the Aussie mortgage market. Specifically, the company noted elevated loss experience in Australia as lenders accelerated the processing of later-stage delinquencies from prior years through to foreclosure and claim at a higher rate and severity than expected, particularly in coastal areas of Queensland that experienced natural catastrophes and regional economic slowdowns and among certain groups of small business owners and self-employed borrowers.”

Like Vancouver, Australia has been leaning hard on Asian buyers from China to support it's bubble.  And just like Vancouver, the country is suffering as investment from China evaporates as excess funds for investments disappear as China executes it's own soft/hard landing in real estate.

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Tues Post #1: In Australia they've started blaming the buyers for "unrealistic expectations"

When we hear or see auctioneering we always think of insolvency.

But in Australia it is commonplace to put your home up for auction before giving a mandate to estate agents. The auction of houses and land is not considered as a last resort.

In the Land of Oz, over 85% of real estate is sold by auction.

And no day is more important on the Auction calandar than the last Saturday at the end of November - the last weekend of spring in the Southern Hemisphere and traditionally the most popular day to buy and sell real estate via auction.

Known as 'Super Saturday', this particular day is considered the high point of the real estate sales year and is significantly hyped.

Anticipation was keen for this year's 'Super Saturday' as property owners and real estate agents had hoped the lead-up hype would jolt what has been a lifeless market so far this year into action.

But it wasn't just property owners and real estate agents who were looking forward to 'Super Saturday'. Those hunting for real estate 'deals' were out in force.

But 'deals' of desperation were not forthcoming as the slumping Australian market is not quite at that point yet.

With clearance rates for residential properties in Sydney and Melbourne way below expectations, buyers kept a tight grip on their wallets and only about half of all homes being put to auction sold under the hammer.

It lead the Australian news to proclaim Super slow sales on real estate market's 'Super Saturday'

It shouldn't come as a surprise. With articles proclaiming that many current homeowners are facing a problem of negative equity as a result of declining Aussie real estate values, potential buyers have become vultures. Who wants to catch a falling knife?

And an interesting dynamic is developing.

The failure of last weekends 'Super Saturday' is prompting auctioneer's to blame the potential buyers.

"Buyers were being unrealistic about property prices, auctioneer Damien Cooley of Cooley Auctions said. "We're seeing a lot of cases where an agent may quote a price such as mid to high $400,000s and buyers are turning up expecting to pay in the low $400,000s. A year ago buyers would have automatically felt they had to pay five to 10% more than what was being quoted."

Oh the horror!!

But buyer aprehension is justified.

According to SQM Research, an independent property advisory and forecasting research house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors, the Aussie real estate contraction is far from over.

"The tide hasn't turned," SQM Research director Louis Christopher said. "The worst is still in front of us. There is a huge overhang of stock for the market to work through and it is going to get worse before it gets better."

I wonder how long it will take the Real Estate industry here to blame 'unrealistic buyers' when our market turns and the bidding wars become a distant memory?

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Is Panic Setting in the Australian Housing Market?

Around the Western World a housing bubble was created by artificially low interest rates designed to stimulate the economy after the dot com crash of 1999.

In each country as individual housing bubbles began to burst, newspaper articles began appearing telling people to remain calm.

And it is no different in Australia.

Aussie 'real estate expert' Andrew Winter is the latest crash-denier.

Consoling those concerned about Real Estate in the Land of Oz, Winter tells readers that the current slowdown in property sales is not a sign that the Australian housing market is about to crash.

• "Property pundits often make the statement that the housing market is about to crash. This occurs a few times every decade but it seems to suffering overuse since the global financial crisis in 2008."

For Winters it's all part of the regular housing cycle and a minor downturn is to be expected.

• "So it was not surprising - although it was a little disappointing - to see recent television reports predicting doom again and claiming price falls of 15% and more off the average Aussie home."

In the article Winters displays classic rationalization. When prices are rising, the increasing average housing price is constantly touted as a great indicator about the strenth of the market. 

But when prices are falling, experts like Winters ask you to question the 'average' price and how it is calculated. If you do this, the gloom and doom predictions are then dismissed:

• "These predictions are based on statistics - statistics that have been collected over the past year. So in effect, it's a rear vision image that we're being told about. Prices have steadied, and dropped in some markets, it is true, but there is always an upside to a decreasing market and that is of course that it is great for buyers."

Winters tries to calm Aussies that Australia will be different from the rest of the Western World's credit induced housing bubble:

• "The heavy losses being faced in the UK and US were caused by bad lending practices and housing policies that just don't exist in Australia. They stretched residents in those countries well beyond their means and created a property bubble. But even in these depressed markets, there are signs of recovery."

Just like in Canada, Aussie's are being told 'it's different here'. Perhaps the best quote from that article is this ridiculous rationization denying what is coming:

• "Owning a home remains an Australian dream. That dream creates a demand which together with a solid economy protects us against crashes."

Alrighty then.

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Speaking of 'Tulip Mania'

It's 2011 and there is definitely an emerging 'theme' to real estate for the early part of this year.

As you know, for the past six months there has been a dramatic decline in the number of real estate sales. Yet the average price of houses seems to be rising - huh?

Realtor Larry Yatkowsky commented on this right off the bat as the New Year started.

• "Vancouver real estate’s New Year is starting off with a bang. For the first time in many months, the aggregate number of properties for sale in the lower mainland has tumbled below the 17,000 mark. Vancouver Realtors® began whispering in the early part of December that it was becoming more difficult to find quality homes for their buyers."

Declining inventory leads to bidding wars as buyers fight over a shrinking pool of available inventory.

Interestingly a similar situation has been developing in Australia.

Australia has also gone through a stretch where listings have been declining. Predictions by realtors Down Under have called for R/E prices to remain stable or grow by 5-6% in 2011 due to an underlying shortage of properties.

But new figures suggest that the Aussie shortage has been overblown and that the figures "dispel the myth of property undersupply in most cities, and says certain capitals such as Brisbane are actually recording a dangerously high level of properties on the market."

And just who do you think propagated that 'myth'?

During the 2008/2009 slowdown, the local real estate industry urged sellers to pull listings off the market. This was a strategy, done on purpose in order to create 'demand' and stave off further declines.

The same strategy was urged by the Industry during the Fall months as the media was besieged with month after month of negative press regarding declining sales.

In Australia, the Reserve Bank is contemplating another rate increase and it is suggested that such a move could accelerate a downturn just as the pent up supply from a contrived 'shortage' hits the Spring market.

Is the lack of supply a R/E fueled lie? Is the truth more a case of the fact that there is no lack of supply, just speculators sitting on a lot of inventory that can/will be put on the market in short order?

American blogger Mike "Mish" Shedlock thinks so and examines the Australian developments in this eerily familiar sounding post title: Australia's "Tulip Mania" About To Crash, As Housing Shortage Proves A Massive Myth.

I say 'eerily familiar' because it was just yesterday I was comparing the situation in the Vancouver suburb of Richmond in the same 'Tulip Mania' fashion.

Mish concludes that:

• "The day of reckoning has finally arrived for Australia. A day of reckoning awaits Canada, China, and the UK as well. It's too late now to do much of anything except:
  
  * Exit the Australian stock market
  * Get out of the Australian dollar
  * Pick up some popcorn
  * Stay on the sidelines and watch the collapse unfold"

I'd personally recommend getting the Costco size case of 'Jiffy Pop' myself.

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Gathering Stormclouds

It comes as no surprise to readers of this blog to know that I firmly believe that higher interest rates loom in the not too distant future.

And when that circumstance comes to pass, Canadians are gonna get crushed financially.

Just look at how much debt Canadian households are carrying relative to their personal disposable income.

We like to say we are different from Americans, but it's hard to buy into that malarkey when you study the Bank of Canada (BOC) data. According to the BOC, the debt-to-income ratio of households in this country stood at 142% in the second quarter of 2009. That means for every dollar Canadians earned, Canadians owed $1.42 in debt.

In 2005 that figure stood at 116%.

Not only is that debt level exploding, but the BOC estimates that the ratio will rise to 160% in two years!

That's basically where it is for American households. And when it comes to household debt relative to GDP, Canadians and Americans are already neck and neck.

Shockingly, Canada is virtually the only country where households have taken on more debt during this recession. While total household debt in foreclosure-ravaged America shrank 1.7% over the last year, debt levels here jumped 7%. According to Statistics Canada, in November personal lines of credit surged 20% from the year before, loans for home renovations were up 31%, and balances of credit cards jumped another 6.9%.

But by far the most interesting statistic is that, in dollar terms, most of the increase in household debt has come as the result of the huge mortgages people are taking out to buy homes at today’s soaring prices. Over the past two difficult years of the economy, the total residential mortgage debt load in Canada ballooned 18.

“We’re the anomaly in global markets,” says Derek Holt, an economist at Scotia Capital. “We continue to climb to new highs with house prices and we haven’t seen any deleveraging among households. What’s so special about Canada that we should be experiencing this while every other industrialized economy went down and stayed down?”

Now we've talked at length here about how the BOC has been pounding warning drums to warn Canadians not to get used to the abnormally low interest rates of the last year.

And the 800lb gorilla in the room is those skyrocketing debt levels.

When interest rates begin to rise from their record lows (have I mentioned how this is, IMHO, a certainty?), borrowing costs will rise and hundreds of thousands of Canadian families will face a brutal cash crunch.

How bad is it going to be?

Recall that the BOC conducted a series of theoretical stress tests to see how Canadian households will fare should interest rates rise.

I wasn't aware of the values applied, but I am now advised that the stress tests analyzed what would happen if rates rose between 3.2% and 4.5% by mid-2012.

With the BOC benchmark rate currently at just 0.25 per cent, that is a sizable jump. And when a household’s debt-to-service ratio, a measure of monthly payments relative to income, breaks past the 40% mark, it’s considered to be “financially vulnerable” to financial shock.

What the bank found in its review was that if rates rose to the higher level, 9.6% of households would find themselves in that danger zone.

Amazingly, the BOC's test scenario of a jump in rates to even as high as 4.5% would still leave mortgage rates low by historical standards. Especially if, as many fear, the trillions of dollars in emergency liquidity that’s been pumped into the economy sparks inflation. But according to Ian Lee, a former mortgage banker turned Carleton University professor, given today’s insanely low levels, rates don’t need to jump that much to wreak havoc on Canada’s debtor class. “I was in the industry when mortgage rates went through the roof and I was throwing middle class owners out of their homes,” he says. “We’ve seen this movie before."

Yes we have... and it wasn't pretty.

In fact we only have to look across the Pacific Ocean for a preview of how our future will be playing out.

In this Bloomberg story we get a glimpse of what is happening in Australia. The Aussies, like Canada, took emergency measures to stave off a collapse in their real estate industry.

And just like in Canada, the result was rampant price speculation in real estate.

But when the incentives to buy ended and now that interest rates have risen (the Australian central bank rate is now 3.25%), the Australian real estate market is starting to get hit.

As the Bloomberg story notes, rising rates are starting to trigger default conditions on Australian mortgages.

Last week a survey found 45% of all buyers who purchased in the last 18 months are under severe mortgage stress, with many forced to use credit cards to keep up their home loans.

And - what a surprise - when we take a closer look we find that Australians have a debt-to-disposable income ratio of 156% - almost identical to Canada's (145%).

The scary thing is that the 3.25% Australian central bank rate is nowhere near to topping out.

Australia is just starting to feel the pain.

Meanwhile ours looms ominously on the horizon.

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