The speculation is that tomorrow will see the RBA drop Australia’s official rates of 1.25% - and that’s what the the financial markets have priced in. Economists are more reserved though, a drop of that size would be the largest in history since the RBA started regulating official interest rates in 1990. With suggestions that the economy is already heading towards or in recession such a dramatic drop may not be necessary.

The interest drops have done nothing much for auction clearance rates:hey agents how can you still peddle auctions as the way to market a property in this market? The figures are nasty with Melbourne and Sydney still at close to the lowest rates for 12 months, although marginally up from last week. Adelaide clearance rates dropped sharply from the previous weekend’s, and Brisbane was slightly up. Sydney’s clearance rate was 42.6%, up 0.6% from last week’s .

So the RBA is trying to drop rates to kick start the economy and what are the states doing with sales tax? Well reported that NSW has just hiked sales tax and now that analysis is that in fact that stamp duty rises way ahead of income: you know the tax that should have disappeared with the introduction of GST in 2000.

According to a BankWest study:

Home buyers were forced to set aside at least 20% of their annual household income to pay stamp duty in Sydney, Melbourne, Adelaide and Perth. Sydney and Melbourne buyers needed almost three months of salaries to pay stamp duty, while Brisbane had the lowest combination of rate and house prices with buyers there only needing to set aside 1 month’s salary.

A $500,000 home in NSW would cost $18,174 in NSW, $23.411 in Victoria, $9810 in Queensland and $24,433 in South Australia.

The merged banks ANZ/National Bank have announced that first home buyers will need 20% deposits. From yesterday the previous minimum deposit requirement of 10% has been doubled.

Saving - the Old Fashioned Way

This means that buyers in Auckland, New Zealand’s most expensive city, where the median price is $433,000 will need a $86,600 deposit. In Wellington they will need $74,000 for a median-priced property.

Professor Bob Hargreaves, who heads Massey University’s real estate analysis unit, said rationing credit was a natural reaction to the global financial turmoil.

“People are re-pricing risk. Banks are finding it harder to obtain the overseas money that we rely on because it’s more expensive.

“I would say it’s one way of throttling demand. Banks are saying, ‘OK we’re still in the business of lending to people but you have to put more in yourself.’ In good times they’re your best friend; in not-so-good times they can be quite tough.”

So yes banks are fair weather friends but seriously would you really want to be borrowing 90% of a home’s price when there is as yet no evidence that the New Zealand property market has reached the bottom? Obviously the bank thinks its a bad idea to lend you 90% so I would tend to avoid being over-leveraged myself at the moment.

Housing affordability is still dire according to Massey University’s quarterly survey:

While his unit’s last home affordability survey in September had shown “slight” improvements over the past three quarters for home-buyers, things were still grim.

On an annual basis, national affordability improved 4.1 per cent because of average weekly wages increasing, as well as mortgage rates and house prices trending down.

The real problem we be of course is that New Zealanders are terrible at saving and most of those renting consider saving a deposit the biggest barrier to getting into the housing market. The reality though, is that at the moment deciding to buy a home is a little bit more difficult than worrying about the location or the decor: saving is suddenly going to be trendy again!

The good news for landlords appears to be that there will be no sudden shortage of tenants and that should support rental prices, so eventually the rental yields will improve if prices continue to drop, and then the cycle will start again.
Photo Credit

Although the rate of mortgage defaults: or mortgage stress as the Australian Press likes to call it is nothing like the overseas rates it is on the way up in Australia.

The western suburbs of Sydney have been Australia’s hotspot for mortgage stress for sometime but the latest report from Fitch Ratings has three new areas which have rapidly increased their level of mortgage defaults. These include the Gold Coast, Regional NSW particularly Gosford, Woollongong and Newcastle, and last and somewhat surprisingly, eastern metropolitan Perth.

Loan defaults have jumped 50% in the last six months to September. That is an impressive percentage increase but in fact the rate of mortgage default has jumped from 1.4% to 2.1% so the actual rate is still laughably low from a North American or European perspective.

Unfortunately this is possibly just the start for Australia. Although petrol prices are dropping by the day and the mortgage interest rates are coming down nearly as fast, the concern is that unemployment will start to rise, and the usual will rapidly hit the air conditioner as Australians are one of the world’s biggest consumers of personal debt. The effect in Western Australia and the mortgage belts of eastern and southern Perth could be particularly significant. Many of the people who have been earning six-figure salaries in the mining industry are some of the first to be affected if China stops buying. Exploration and contract services companies are already seeing contracts and funding disappear. Those that thought earning $100,000 / year gave them ability to spend $120,000 year are now about to find that a debt driven lifestyle really isn’t a smart move in an economy driven by the fickle mining industry.

The jobs will come back, the problem is that most people can’t afford to be without a paycheck for even one month never mind five or six.

Dunsborough, WA: Sale Sign

In the meantime there is one spot of good news in this gloomy picture. Signwriters are doing well out of the softening market. Trident Signs is reporting they erected a total of 1351 signs in October, a significant increase over the 975 of the pervious month. And the signs are getting bigger, and the real estate agents want two or three signs per a property. Sign writing anyone?

Photo Credit: Australia News

I’ve mentioned before the complete fixation that the entire building industry has on over-priced, over-sized MacMansions and now the statistics suggest that Australian home buyers agree with me!

Perth Mansion

These figures from Perth, which has an urban sprawl to rival LA’s, but I suspect there would be a similar story in most large Australian cities. Well according to figures from REIWA at no time over the last 10 years have bigger houses performed better than smaller in terms of capital gain News on the street from agents is that buyers use location and lifestyle to make their choice rather than size. The picture really is a mixture with the baby-boomers and migrants wanting smaller properties nearer the CBD and families moving to the outer suburbs.

The statistics are that since 1998 the average annual growth rate of three-bedroom house was 13% and a four-bedroom house grew at 11.7%. On the face of it a clear difference, but remember almost every new house built in Perth’s outer suburbs are 4×2, and new houses always have a lower rate of price appreciation than an established home.

Younger families want more bedrooms, but as the children become teenagers families are prepared to look at slightly fewer bedrooms so long as they are a good size and well separated from the parents. In other words a versatile house will always have a larger market than one which one has only one really practical configuration. As the population ages and particularly if the birth rate drops with as the economic outlook gets bleaker, I’m not sure I’d be investing in a 4-bedroom home unless I absolutely needed the extra space. The exception would a house which could easily be re-configured into having semi-indpendent living space for a boarder or a dependent relative.

Overall the statistics suggest that Australia, unless they open up their immigration policy significantly, will be looking at the same aging population as elsewhere in the Western world. Meanwhile of course the real estate market seems out of touch with REIWA expecting that sales of 4-bedroom homes will outstrip those of three bedroom homes as the huge number of project homes in Perth’s northern and southern suburbs come onto the market. But 4-bedroom house will always be worth more than a 3-bedroom house, wouldn’t it?

Photo Credit: TheLab