Headwinds for the housing markets especially Sydney/Melbourne

The subprime crash in 2008 wasn't a natural function of a healthy market economy. It was the result of central banks artificially suppressing interest rates for protracted periods of time. A purer form of capitalism would have pushed rates up as the housing boom made credit more scarce. Central planning, not free markets caused the crash of 2008.

In the current situation, we have regulators correcting the impact of bad monetary policy.

 

Fair question. " Significant" would be > 10% in my opinion. In market corrections, the devil is in the detail. Some asset types correct more than others, and some suburbs do as well. The magic of averages plays a part here.

 

Quite right. But the regulators have boxed the RBA into a corner. Now rates will have to stay lower for longer, will all of the problems this brings.

 

To an extent this is true. But remember that buyers must be both willing and able to take on additional debt to keep prices rising. Once prices reach a certain point and buyers are no longer willing to take on additional debt, prices collapse. I have seen it happen.

True, but high prices do affect them. I have turned down many deals I could afford because they were overpriced. In Perth, many others are doing the same which leads to properties taken off the market or price drops. I have seen a lot of this in Perth. Sydney and Melbourne might not be there but it will happen.

 

Its RBA directing APRA to enforce credit tightening, not the other way round.
Rate hikes are blunt measure and effect every one not just highly leveraged.
What makes you think RBA wants to raise rates? I don't think they want to raise rates as our economy is not strong enough to be ready for rate hikes across the board.

But at the same time higher households debts and 1/2 trillion worth IO loans on banks books was posing systemic risks which needs to be countered.
APRA Tightening debt cap measures doesn't punish FHB or those with small debts as much but rather are targeted more towards investors with 'large total debts' and those with IO loans.

 

Are you saying that housing prices have nothing to do with incomes ? I suppose ARPA's focus on DTI then is misplaced since they think income is a denominator for home loans ...

And RBA is obviosuly idiots to think the same way ...

As far as I can see median house price fairly well correlates with median household income x median interest rate with movements within fairly tight range.

Sydney median house prices, compared to interest rates

Couldn't find Sydney median wages, but suppose it's not that different from this:
Australia Average Weekly Wages | 1969-2018 | Data | Chart | Calendar

Subprime crash has occurred with Fed rate of > 5%, just FYI. At Aug 2006 meeting Fed bumped the cash rate 0.25, from 5.0 to 5.25%. Subprime crisis started in late 2006 with mass defaults on loans and losses on RMBS and RBMS derivatives in early 2007 and by Jun of 2007 Bear Sterns was circling the drain, shortly followed by Lehman & Morgan Stanley. I know exactly the dates and timelines as I was in US at the time and actually followed the crisis as it unfolded and made pretty nice coin from put options (nothing major, just above 100k, I was just starting my career and didn't have a lot of money to play).

It is in response to the crisis Fed dropped the rate from 5.25 all the way to 1.00%.

BTW, I was a passive reader of forum.brokeroutpost.com (now defunct) just to see how crazy loose the lending standard became: low doc, self employed, high LVR, valuation shopping, multiple IP loans and so on. I have to say that LOs and MBs posts on this forum appear a lot more professional, I do expect that the wider LO/MB community is of similar quality and perhaps it is the result of tighter regulations of loan brokerages in AU.

So yeah, I don't agree with your narrative.

 

I think we agree on the recklessness, but perhaps not the cause.

 

Not really. This is the economics section of the forum, so I’m just pointing out how economics work.

You are free to do what’s good for you. I’m just pointing out that the current climate has created an unhealthy macroeconomic environment.

 

Values in Sydney and Melbourne to a large extent have risen more than 70% over the last 4-5 years. I guess people are enjoying their massive increase in incomes since 2013 too

I think not.

 

It's true that consumer spending is good for the economy.

It's true that consumers over spending or wastefully spending is bad for the consumer.

I think what is missing in this conversation is household savings. In this conversation, consumers either spend their money on interest/mortgage payments (bad for the economy) or spend it on consumer goods (good for the economy).

What if we took $1 trillion out of the economy? What impact would that have on the economy? People blame our current economic woes on interest/mortgage payments but perhaps too much household savings is also partly to blame.

Household savings = bad for the economy.

Household savings = good for the household.

 

You would be the only person who sees that. Here is the reality:

Maybe that's because you are unaware of the reality of house prices in Australia vs wages. Here is a good article to get you started.

Here's a look at the widening gap between wages and house prices

Let us know after that if you still think median house price fairly well correlates with median household income x median interest rate with movements within fairly tight range.

 

Defence rests.

 

Though asking Harry Trig if there's a bust coming is like asking a barber if you need a haircut.

 

Perhaps @BoatArrival was referring to this chart in the link they provided just after making this statement?

In this case, the graph shows an inverse correlation between Sydney house prices and interest rates (for that time period at least), so a bit different to what BoatArrival summarised.

 

the interest rate axis is bizarrely inverted?

 

I can see work sites yes. It would employ people in the relevant sectors. Question is whether these will translate into increased productivity "externally" (as in something exportable). Building a lot of houses probably doesn't count.

 

This graph is what drives talents out of this country.

And for those who are here, I don't know if they spend their life working for the bank + their employer.

 

>10% falls already happened in many many parts of Sydney

 

Just spoke to a mate. Purchased a house bayside way melbourne in the last couple months. 100k below what owner was asking. Couldn’t get any other offers. That’s about 10% below the seller “minimum price” let alone their goal price.

On the other hand - parents sold a joint ringwood way little unit for 50k more than expected. But first home buyer and it will still round that 600k mark

So basically - money is tighter. Anything over about 800k seems to be losing value. Still competition at the lower end of the market. Will be interesting to see how long the lower end hold up if the mid section keeps softening. Grants to first home buyers having impact here for sure - “artificially propping” up the market in conjunction with cheap money for those not carrying debt.

 

They were enjoying the use of "actuals" and limitless IO. Both now gone.