Ever since the 2008 Financial Crisis, two countries have seemed to lead a charmed existence and evaded the world wide credit/housing implosion.
They were Australia and Canada.
Bullish proponents who claim things were different in Canada always pointed to Australia as another example of how a sound banking system and Asian investment were proof that our nation would escape the implosion of a 'supposed' housing bubble.
But as we have covered on this blog numerous times, Australia is starting to see it's bubble implode.
Many people who bought houses on Melbourne's fringes in recent years could be facing financial ruin after a slump in prices has left them owing more to the bank than their homes are worth, experts have warned... (this has) led some financial experts to warn of a 'depreciation time bomb' of negative equity for home owners in fringe suburbs, who owe more to the bank than the value of their homes... there is a risk that some purchase decisions that were made on the expectation of higher long-run average growth rates may have to be reassessed.
In Australia, as in Canada, many young buyers have been enticed into the market with emergency level interest rates since 2008.
Kevin Bailey, principal at Shadforth Financial Group, said his warnings three years ago of a ''homegrown subprime crisis'', created in part by inflationary first home buyer incentives, are now playing out. He said the schemes enticed mostly young people, without savings, to borrow heavily and pay a premium for low quality housing in poorly serviced locations.
Sound familiar?
Bailey also goes on to say:
"Lots of baby boomer parents who have made money out of property gave sage advice to children to pour their money into bricks and mortar because prices double every seven to 10 years Young people who were sold that lie will find it very difficult to escape and it's a tragedy."
The reality is that both Canada and Australia merely delayed the inevitable with their interest rate policies.
What we read is happening in Melbourne is merely prologue for the Lower Mainland.
Will we see articles like this in the Sun or the Province by the New Year?
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.
McKinsey & Company is a global management consulting firm which bills itself as "the trusted advisor to the world's leading businesses, governments,and institutions".
In a report released today, McKinsey notes that total debt to GDP has declined in only three countries since the 2008-09 crisis: the United States, South Korea, and Australia.
As we all know Canada has not only NOT seen their total debt to GDP decrease, it has hit historical highs.
In fact, total debt has actually grown in the world's ten largest mature economies due mainly to rising government debt - Keynesian style.
McKinsey notes that the US is following the two phase deleveraging process that 1990s Finland and Sweden followed but point to the household segment as leading the way with 15% reduction in debt to disposable income (driven unsurprisingly in major part by mortgage defaults).
The bottom line in the report is that US (households) are at best one-third of the way through their deleveraging and the UK (financials) and Spain (non-financials) face much more significant pressures (which will inevitably impact aggregate demand given governmental borrowing pressures) as their deleveraging has only just begun.
It's interesting that McKinsey mentions Australia.
Faithful readers know that for the longest time Canada and Australia stood above other countries in the Western world for having seemingly escaped the imploding real estate bubble.
Both were viewed as commodity rich countries which were being fuelled by Hot Asian Money.
Both real estate markets were - supposedly - immune because of rich Asian buying up land there.
But as we have noted numerous times on this blog, 2011 was a turning point for R/E in the Land of Oz.
And perhaps nothing hilights this fact more than real estate auctions in Australia.
Unlike North America (where auctions are used to sell distressed and foreclosed properties), the use of auctions in Australia is one of the main means of housing sales and their results are often a barometer of the market’s strength. Aussie newspapers even devote entire sections to auction sale results.
But 2011 saw the reality catch up the housing market in Australia and after home prices fell the most in at least 12 years in 2011, home auction results foreshadow another year of declining Aussie home prices.
According to Bloomberg the Aussie auction sales are tanking. Peter Green, a principal at Australian property broker Laing+Simmons, “in the last three months, the number of people visiting open houses has been cut by half. And buyers may show up to auctions, but they don’t bid.”
Half of the homes that went to auction in December failed to sell.
Bloomberg notes Australia escaped the housing rout seen in the U.S. and Europe, in part due to government measures to boost demand in the wake of the collapse of Lehman Brothers.
As we all know, this is exactly what Canada did too.
In 2011 Aussie housing prices recorded the biggest drop since Brisbane-based RP Data began compiling figures in 1999.
For years Australia has used the rationalization of money from China as the reason their housing bubble will not implode. But now Australia has begun their develeraging process.
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 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?
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.
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."
Over on Business Insider, we are offered another look at how the Australia Housing Bubble has begun it's decline in earnest.
The much-hyped “Flip that House” program The Block held a nationally televised auction to sell four houses. In the program couples purchase a house, renovate it, and then try to 'flip' it for a profit.
And as a 400 person live audience watched (and over 3 million tuned in on TV), only 3 of the 4 properties available in the auction actually sold. As the Sydney Morning Hearld newspaper observed:
"Whatever the lure of a celebrity house, the would-be buyers in Fitzroy Town Hall were just as jittery as the would-be buyers at any other auction in recent weeks. "
The remaining three properties sold in the week after the failed auction, but at a substantial loss compared to the initial purchase prices plus the sums expended on them by the 4 couples in their 2 months of televised renovations (not to mention the advertising budget).
Naturally there are those who don't see the fate of these flippers as a sign that the in the Australian housing market bubble is bursting.
In Australia's online Business Spectator, readers are told that the median forecast of the “21 leading market economists” polled was for 5% growth in nominal Australian house prices per annum for the next ten years.
The column's author notes this would suggest “that [housing prices] will likely be 55% higher in 10 years’ time”.
Good luck with that. As the Business Insider observes they expect a fall in house prices of about 40% over the same time period.
And the reason for the difference? The role of debt in driving house prices.
B.I argues that debt drove prices up over the last 15 years, and now debt will drive them down again.
"The mechanism is simple - but it’s not part of conventional “Neoclassical” economics, which is why [the] surveyed market economists don’t consider it. Aggregate demand is the sum of income plus the change in debt, and this is spent this is spent on both goods and services and assets. There is thus a link between the change in debt and the level of asset prices."
We continue to watch the events in the Land of Oz as a harbinger of what is to come here.
Excellent story on the Australian verison of 60 Minutes which is covering the Australian housing collapse. You can watch the whole segment here.
From the intro to the story:
We dodged a bullet this week. The Reserve Bank decided to keep interest rates on hold yet again. And with good reason. Record numbers of Australians are struggling to keep up with their mortgage repayments. Home ownership has never been tougher or more thankless. A generation ago, buying a house was the done thing - the one investment that was considered as good as money in the bank. If you didn't own the roof over your head, you'd failed in some way. Not anymore. Now, renting might just put you ahead of the game.
As American blogger Mish Shedlock has noted, this story is so sad because Australians had every warning in the world. All they had to do was watch the US housing bubble burst.
It is a lesson that Canadians, particulary those here in the Village on the Edge of the Rainforest, have ignored. You simply cannot explain anything to anyone with a firm conviction "It's Different Here". As Mish says, "Australian homeowners are now finding out they do not own their home. Instead, their home owns them."
Before too long we here in Vancouver will learn that harsh lesson too.
After the financial crisis of 2008, as the greatest recession since the Great Depression of the 1930s set in, Canada's economy fared remarkably well.
So well, in fact, that many Canadians are oblivious to all this talk of a 'Great Recession' around the world.
Everyone is aware of the 2008 Financial Crisis... but few appreciate how severe the underlying credit crunch was.
And that's because Canadians never really felt that crunch. The banking sector in Canada insulated our citizens from the worst of that crunch. Because of the emergency level interest rates brought in by the Federal Government... because the Canadian Mortgage and Housing Corporation (CMHC) dramatically lowered the requirements to qualify for a fully backstopped mortgage... and because CMHC insurance fully guaranteed mortgages given out by Canadian banks, those Canadian banks kept on lending money to Canadians.
As a result Canadians kept on buying.
But the availability of cheap credit has driven Canadian household debt levels to record highs. Household debt as measured against disposable income currently sits at a record high of 147%.
As Canadians have piled into massive consumer spending, and buying as much house as they could afford under emergency level historic low interest rates, there is this perception that the Bank of Canada will never raise interest rates because they wouldn't dare upset the economy.
This, of course, if pure nonsense.
Echoing this sentiment is the chief economist for RBC Global Asset Management, Eric Lascelles.
“There is a popular misconception that the Bank of Canada cannot afford to raise interest rates because this would prove too damaging for mortgage holders. The opposite is in fact true. The reality is that the Bank of Canada cannot afford to delay raising interest rates, for precisely the same reason. The longer the bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later.”
You can clearly see how the domino's will inevitably fall here.
Once the Bank of Canada raises its key lending rate from the current “astonishingly cheap” one per cent, costs of servicing mortgage and other debts will rise.
These increased costs will sap consumer spending, housing prices will fall as lower-tier buyers are forced out of the market by diminished affordability, and the endless annual increases in real estate values will cease.
Just as so many Australian's (as we saw in yesterday's Aussie TV clip) were dependant on rising real estate, so are many Canadians. And as lower-tier buyers are forced out of the market by diminished affordability, the vicious catch-22 cycle will begin. The lack of buyers will increase inventory. Increased inventory will create competition for what buyers remain. And a 'high supply, limited buyers' condition will start collapsing the market.
The Reserve Bank of Australia first started raising their interest rates back in October 2009.
By January 2010 it was evident the Australian collapse has started. As Mish Shedlock observed:
"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 and stay on the sidelines and watch the collapse unfold."
Since January 2010 the Australian collapse has picked up speed. Yesterday's Australian TV clip quoted a stunned Aussie who said "I don't think anyone saw it coming."
That will be our future. So many do not see what is coming. And right now we're still telling ourselves, "they wouldn't dare raise interest rates."
But as the chief economist for RBC Global Asset Management noted... they most certainly will.
The risk is clearly greatest of all for those who have just purchased a home since the 2008 financial crisis.
All the people who were lured by emergency level interest rates over the last 3 years are, on average, earlier in their career, and their income has not yet fully blossomed. They often begin with little equity in their dwelling, having neither contributed much equity up front, nor made many mortgage payments, nor have they enjoyed the fruit of rising home prices.
Their debt load is likely at its lifetime peak.
As Lascelles’ notes, the outcome of rising rates will be quite painful these buyers.
The only remaining question is... do these buyers represent a systemic risk similar to the devastation on the U.S. economy of its housing collapse?
Interestingly Lascelles discounts this outcome. Despite that fact that many will face higher rates when they renew, Lascelles argues that by the time many do renew the impact will be mitigated by three years of rising household incomes.
A downturn saved by a rebounding economy? Didn't American economists predict that same outcome in the United States?
In 2007 many well known economists in America (like the infamous Ben Stein in the clip below) were adamant that the few who would be affected by resetting mortgages at higher interest rates would not adversely affect the overall real estate market.
And in the summer of 2011, a similar sentiment seems to exist in Canada.
Not only will interest rates will rise, but the mantra of "they wouldn't dare" will give way to "I don't think anyone saw it coming"... just like it now has in Australia.
And just like we see in Australia today, the impact here will be more severe than expected.
The financial collapse in 2008 was the tipping point of a worldwide housing collapse that started in 2006.
Two housing bubbles escaped the worldwide carnage: Australia and Canada.
But the tide has started to turn in Australia, which is home to the most unaffordable city in the world - Sydney.
Above is a newstory which aired on last Friday on Channel 7 in Australia. It gives you a glimpse of what is coming for Canada, home to the 2nd most unaffordable city in the world: Vancouver.
“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."
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