(Updates with details of documentary in 31st paragraph)
Sept. 12 (Bloomberg) -- Australia, where home prices are falling at the fastest rate in more than two years, may have a glut of properties and be set for a U.S.-style crash.
The warning from tax-reform advocate David Collyer, commentator Kris Sayce and academic Steve Keen contrast with banks and developers that say a shortage of about 200,000 homes will underpin prices. The housing bears say builders and lenders are pushing flawed government data to keep prices afloat in the English-speaking world’s costliest place to buy a home.
“It’s important for the government and banks to keep the myth of a shortage alive,” said Sayce, editor of Melbourne- based online newsletter Money Morning Australia. “Without it, prices drop, and negative equity results in housing repossessions and insolvent banks.”
More than two-thirds of the government’s shortage estimate arises by including people who can’t afford housing, such as the homeless or those living in trailer parks, Sayce said. Collyer at tax-reform lobby group Prosper Australia says there’s actually a surplus of more than 250,000 dwellings after 15 years of overbuilding, while Keen argues the shortage estimate is swollen by inflated demand from handouts to property buyers of as much as A$21,000 ($21,700).
Banks in Australia have more than A$1 trillion of housing loans outstanding, with the four-biggest lenders accounting for about 87 percent of the total. The Australian Bankers’ Association said it doesn’t have a position on the so-called housing shortage myth and declined to comment.
Australia has the most unaffordable homes in the English- speaking world, Illinois-based consulting company Demographia said in January, with homes costing 6.1 times the average annual income.
The median price of apartments and houses in Australia’s eight state capitals has declined 3.4 percent in 2011 -- the most since 2009 -- to A$455,000 in July, according to a report from Brisbane-based researcher RP Data on Aug. 31. The average full-time workers’ annual earnings is about A$70,860.
The ratio of household debt to disposable income in Australia is 155 percent, higher than the 133 percent Americans accumulated at the height of the subprime mortgage boom. Demand for housing credit in Australia has plunged to the slowest annual growth pace since central bank records begin in 1977, data Aug. 31 showed.
The most commonly cited data pointing to a dwelling shortage in Australia is the annual State of Supply report released by the government’s National Housing Supply Council.
In its inaugural report in March 2009, the council broke down the estimated gap of 85,000 homes in the year to June 2008. It included 9,000 dwellings needed to house people who were homeless, 35,000 properties for those staying with friends or relatives, 13,000 dwellings needed to house people living in caravan parks, and 26,000 needed to increase the rental vacancy rate to 3 percent, and rounded that to the nearest 5,000.
That shortfall had swollen to 178,400 in the year to June 2009, according to the 2010 State of Supply report, which used a different methodology and didn’t specify which areas are short on dwellings. The 2011 report is yet to be published.
“We look at underlying demand, how many dwellings are needed to house our population, as opposed to market demand,” said Owen Donald, chairman of the Housing Supply Council. “There are submarkets that aren’t being supplied adequately and there may well be a surfeit in other submarkets. And in any market, there are going to be people who struggle to find a product they can afford.”
The Housing Industry Association, a Canberra-based builders’ group, said on Sept. 1 the nation will have a shortage of about 500,900 homes by 2020 if it continues to build at the pace it has over the past 20 years. The greatest shortages will be in Brisbane, Queensland; Stirling, Western Australia; and the Gold Coast in Queensland, the group said.
Recent statistics show that projection is doing little to buoy prices or lower delinquency rates in those areas.
Prices in Brisbane fell 6.6 percent in July from a year ago, the biggest decline among Australia’s capital cities, according to RP Data figures. House prices in the Gold Coast dropped 5.4 percent and apartment prices plunged 7.7 percent in the year to March 2011, RP Data said in a July report.
Stirling, a suburb 10 kilometers north of Perth’s city center, was among the 100 worst postcodes in Australia with mortgage repayments more than 30 days late as of March 31, according to Fitch Ratings. Across the nation, home loans more than 30 days overdue rose to a record 1.79 percent of residential mortgage-backed securities in the first quarter, while the number of riskier “low-doc” loans more than 30 days late climbed to a record 6.74 percent, Fitch said in May.
Westpac Banking Corp., Australia’s second-biggest lender, in an October report on the nation’s housing market estimated a shortage close to 200,000. Commonwealth Bank of Australia and Australia & New Zealand Banking Group Ltd. -- the largest and third-largest banks -- have also published reports in the past year that attribute the run-up in prices over the past decade in part to an undersupply of housing.
Reserve Bank of Australia Governor Glenn Stevens is among those flummoxed as to why homes are so pricey in a nation almost as big as the U.S., with just 22.7 million people.
“How is it that a country of our size -- we are not short of land -- how is it that we cannot add to the dwelling stock for the marginal new entrant more cheaply than we seem to be able to do,” Stevens told a parliamentary panel in Melbourne on Aug. 26.
The challenge to the shortage numbers echoes warnings before the U.S. housing crash from doomsayers including New York University Professor Nouriel Roubini, “The Black Swan” author Nassim Taleb, and Peter Schiff, chief executive officer of Euro Pacific Capital Inc.
U.S. home prices soared from 2000 to mid-2006, propelled by banks and other lenders that extended credit to homebuyers who later defaulted, leading to a collapse in the subprime mortgage market. The nation’s economic leaders during the boom times downplayed the notion that a housing price bubble left the country vulnerable.
“Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity,” then-Federal Reserve Chairman Alan Greenspan said in a speech in October 2004.
U.S. home prices have slumped 32 percent since their July 2006 peak, according to the Standard & Poor’s/Case-Shiller index, and the proportion of people who own their homes has fallen to 66 percent, from a peak of 69 percent in 2004. Australia maintained its homeownership rate of the last four decades of about 70 percent throughout the global financial crisis, government statistics show.
Recent Australian indicators have pointed to a slowdown in 2011, with the unemployment rate rising. Australia faces as many as 100,000 job losses and rising unemployment that will force the central bank to cut interest rates by November, Bank of America Merrill Lynch strategists said last month.
‘The Block’ -- one of Australia’s top-rated television shows -- highlighted the housing market’s recent malaise.
The series followed four couples as they renovated homes to attract the highest price at auction over set targets. More than 3 million watched the finale on Aug. 21 as just one of the four homes sold, for A$855,000, versus its A$840,000 asking price.
Australia had a total of 377,315 homes listed for sale online in July, a 22 percent jump from a year earlier, according to SQM Research. The percentage of successful sales at auction - - a common sales method in Australia -- in the week ended Aug. 21 was 50 percent, down from 60 percent a year earlier and 78 percent at the same time in 2009, according to RP Data.
Developers including Australand Property Group, Stockland and Meriton Pty, and developer-backed Urban Taskforce Australia, are among groups arguing an undersupply of homes will underpin prices. Urban Taskforce Chief Executive Officer Aaron Gadiel said most Australians live in a small number of coastal cities, exacerbating the shortage and driving prices higher.
Prosper Australia’s Collyer says there’s actually an excess of 256,324 homes, equivalent to double the housing stock in the nation’s capital, Canberra. That’s because Australia has built one new dwelling for each 2.32 new people for the past 15 years, Collyer said, more than is needed for a nation with an average 2.66 people per home.
Real Estate 4 Ransom
“When residential property prices blow into a bubble, the tragic error often made is in attributing price rises to housing shortages,” Melbourne-based Collyer said. “The U.S. experience shows this conviction is shattered as soon as price declines begin.”
Prosper Australia’s documentary ‘Real Estate 4 Ransom’ is scheduled to play in cinemas in Sydney, Canberra, Melbourne and Hobart this month and next.
While an increase in the number of people per dwelling would reduce the Housing Supply Council’s assumed shortfall, the increase itself could in part be attributed to a lack of adequate supply, the Housing Supply Council’s Donald said.
“Our methodology is logically sound,” Melbourne-based Donald said. “But none of us would bet our own house on the precision of our estimate of the extent of undersupply.”
More than 100,000 properties lie vacant across Australia, 46,220 in metropolitan Melbourne alone, according to Karl Fitzgerald, director of Earthsharing Australia, a subsidiary of Prosper. The group’s estimate is based on the number of homes that used less than 50 liters (13.2 gallons) of water a day between July 1 and Dec. 31.
“When a credit bubble has been created, the only things that keep it growing are more credit and the belief that the commodity is in short supply,” Sayce, who has been warning of a collapse since late 2008, said. “Credit supply has grown exponentially and is starting to taper off, so all that’s left is the shortage argument.”
Sayce expects home prices will fall by as much as 40 percent from their peak in the second quarter of 2010. Money Morning Australia offers commentary on financial news -- paid by advertisers -- to 87,000 subscribers.
The government’s first-homeowner grant and a resulting spike in mortgage debt have created a false perception of under- supply, according to the University of Western Sydney’s Keen, who expects a drop of as much as 10 percent in prices over the next year.
The government introduced in July 2000 a payment of A$7,000 to first-home buyers to offset the impact of a sales tax. Dwelling prices responded, surging 15.5 percent in 2001.
As the global credit freeze dented Australian home prices, the government doubled the grant in October 2008 for those purchasing existing homes, and tripled it for buyers of newly constructed housing. Home prices jumped 13.6 percent in 2009.
“Households simply can’t and won’t take on more debt relative to income than they already have,” said Keen, an associate professor in economics who is publishing the second edition of his book Debunking Economics in October. “So this avenue for profits for the banks has come to an end.”
Keen, who said his Debtwatch blog draws an average of 200,000 hits a day, sold his Sydney apartment in the inner-ring Surrey Hills suburb in 2008, missing out on further gains over 2009 and into 2010. He walked 224 kilometers (139 miles) from Canberra to the top of Mount Kosciuszko in April 2010 after losing a bet made in November 2008 that home prices would drop 40 percent to then Macquarie Group Ltd. economist Rory Robertson.
“Dr. Keen continues to bang his one-dimensional drum on the Australian housing market, still oblivious to the stark differences between the situation in Australia and what occurred in Japan and the U.S.,” Robertson, who no longer provides housing forecasts in his current role as an economic analyst at Westpac, wrote in an e-mailed response to questions.
“Most economists are not so silly as to literally ‘bet the house’ on an economic forecast,” said Robertson, who has owned his own home since 1999.
--With assistance from Brendan Murray in Sydney. Editors: Malcolm Scott, Andreea Papuc.
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