Sydney’s housing market is 18 per cent closer to a crash than at the beginning of 2016. This is the inescapable conclusion from the latest figures that show an 18.4 per cent surge in house prices for the year 2016, the fastest annual increase since 2002. Million-dollar-plus median house prices are spreading across Sydney’s suburbs like a deadly infection, while Melbourne is not far behind.
The comparison between 2016 and 2002 should be terrifying to all Sydney homeowners. 2002 was the year after John Howard and Peter Costello doubled their First Home Owner Grant for new housing purchases. Combined with Costello’s 50 per cent capital gains tax discount that incentivised investors to also buy properties, the grant pumped enormous amounts of money into the property market. At the time, house prices were much lower than today, and prices in relation to household incomes were also much lower—the average Sydney house was around 7-8 times average household income. That was still too expensive, but there was room for the market to move.
The difference in 2016 is that there was no room for Sydney’s housing market to move, but it did anyway. The average price was 10-12 times household income, which is way beyond what is affordable. Today, 21.78 per cent of Australian households are in some degree of mortgage stress, meaning they are cutting their budgets and/or increasing their credit-card debt in order to make mortgage payments—and this at a time of record low interest rates! In January 2017 the Annual Demographia International Housing Affordability Survey, which surveys more than 400 cities in nine countries including the USA, UK and Canada, ranked Sydney as the second most unaffordable city in the world after Hong Kong. The report’s author Hugh Pavletich said: “What housing should be in normal markets is at or below three times household earnings, so Sydney is four times what it should be.”
The 18.4 per cent average price rise in 2016 has just increased the pressure in the already-stretched bubble.
The rise wasn’t fuelled by a rush of first homebuyers, or even other owner-occupiers, as the latest APRA figures show a collapse in bank loans to owner-occupiers in 2016. The growth in bank lending went to property investors, who are engaging in a short-term feeding frenzy. Investors are taking advantage of record low interest rates to load up on debt, gambling that the low rates will be permanent. However, the types of loans that banks are making are a dead giveaway that investors are over-extending: 40 per cent of all mortgage loans are interest-only, and 49 per cent of all loans are being made through mortgage brokers. The latter is especially suspicious, as prior to the 2008 financial crash, the banks used mortgage brokers to make loans to borrowers who couldn’t afford them, many of which involved outright fraud, as documented by Denise Brailey’s Banking and Finance Consumers Support Association. A 1 March promotional article on real estate website Domain casually referenced a Sydney mortgage broker with a portfolio of 19 investment properties.
What will an Australian property crash look like?
To know what Australia is in for when the property market crashes, look at what happened in the USA, Ireland, Spain and many other countries when their property markets crashed in 2007-08. Then, understand this: Australia’s bubble is bigger than theirs were when they crashed!
Of most concern is the Australian banks, especially the Big Four, which have increasingly directed their business into the property market. Joe Hildebrand reported on news.com.au on 18 February, the warning of former government economic adviser John Adams that the Australian housing bubble is one of the “seven signs Australians are facing economic Armageddon”. Bank lending into housing has risen from 21 per cent of GDP in 1991, to more than 95 per cent of a much bigger GDP in June 2016. The banks won’t survive the crash, and, like Ireland and Spain, will take the rest of the economy down with them.
Solution
At the time of the 2008 GFC, the CEC proposed a Homeowners and Bank Protection Bill, modelled on a proposal by American physical economist Lyndon LaRouche, to manage the fallout of a housing crash and banking collapse. The law would have ensured Australians kept their homes, but not their investment properties, and that the banks stayed in business, but under strict government control while they were reorganised. This type of approach wasn’t followed in the USA and Europe, and consequently hundreds of banks collapsed and millions of families were forced from their homes.
A more pre-emptive solution is to implement a full Glass-Steagall separation of the banking system. This means breaking up the Big Four banks and Macquarie, and any other “vertically-integrated” banks that mix commercial banking, which is taking deposits and making loans, with investment banking, which involves speculating in securities, including dangerous derivatives. Australia’s banks justify the risks they are taking from lending into the housing bubble, by speculating in derivatives, which they claim “hedge” the risks. Coinciding with the doubling of the housing bubble since 2008, Australian banks’ derivatives exposure has risen by 163 per cent, from $14 trillion to $36 trillion! The two biggest banks, CBA and NAB, have stopped disclosing their true derivatives exposure. Glass-Steagall will split the banks into separate commercial and investment banking entities, and as the commercial banks which make housing loans will not be allowed to gamble on derivatives, they will be forced to assess their lending risks directly, which will stop the flood of reckless lending to investors that is driving prices through the roof. Glass-Steagall will also protect the real economy when the property bubble bursts.
https://www.change.org/p/break-up-the-big-banks-now-pass-glass-steagall
Toms Blog on Life and Livingness