ASX 200 faces resistance at 6000

The ASX 200 faces resistance at the key 6000 level. Money Flow is forming troughs above zero, indicating buying pressure. Recovery above 6000 would signal another advance. Failure of support at 5900 is less likely but would warn of a strong correction.

ASX 200

Iron ore prices are strengthening and likely to test the descending trendline at 70. Breakout above 80 would signal reversal to a primary up-trend but that still seems a long way off.

Iron Ore

Miners responded with another rally, the ASX 300 Metals & Mining Index respecting support at 3300.

ASX 300 Metals & Mining

So why the hesitancy? Banks are the largest sector in the ASX 200, with Financials representing 37.2% of the broad index. The ASX 300 Banks index is retreating and expected to test the band of support between 8000 and 8100. Trend Index peaks below zero warn of long-term selling pressure.

ASX 300 Banks

The outlook for banks is not that rosy. Household debt is growing faster than disposable incomes, placing finances in an increasingly precarious position. Interest payments are still manageable at 8% of disposable income but that could change if interest rates rise.

Australia: Household Debt/Disposable Income

The housing cycle appears to have peaked, with growth now falling. A function of tighter controls by APRA over investor lending and a Chinese crackdown on capital outflows.

Australia: House Prices

Building approvals for detached houses remain steady but approvals for higher-density housing are falling.

Australia: Building Approvals

A boom in construction of high-density housing has provided a strong tailwind to the economy over recent years, illustrated by the sharp spike in total residential construction compared to new houses in the chart below.

Australia: Value of Work Done

But the downturn in apartment prices and falling building approvals is likely to turn that tailwind into a headwind as apartment construction falls. This would affect not only the construction sector but the entire economy.

Political uncertainty over the continuation of favorable tax treatment for housing investors could also impact on new housing investment and strengthen the headwinds facing the economy.

Platinum founder warns on property “act of faith”

ScreenHunter_3505 Jul. 29 08.50

By Leith van Onselen

The founder of Platinum Asset Management, billionaire investor Kerr Neilson, has released an interesting report warning about Australia’s frothy house price valuations and the risks of a correction once “conditions change, [and] a lot of the assumptions are found wanting”.

The report highlights four “facts” about Australian housing:

1. Returns from housing investment are often exaggerated and flattered by inflation.
2. Holding costs of rates, local taxes and repairs are estimated to absorb about half of current rental yields.
3. Long-term values are determined by affordability (wages + interest rates).
4. To be optimistic about residential property prices rising in general much faster than inflation is a supreme act of faith.

It then goes on to examine each of these facts.

On returns, the report notes that “the rise in the price of an average home in Australia…[has] been about 7% a year since 1986. In dollar terms, the average existing house has risen in value by 6.3 times over the last 27 years. No wonder most people love the housing market!”

But rental returns have gotten progressively poor:

…we earn a starting yield of say 4% on a rented-out home or if you live in it, the equivalent to what you do not have to pay in rent. But again, looking at the Bureau of Statistics numbers, they calculate that your annual outgoings on a property are around 2%. This takes the shape of repairs and maintenance, rates and taxes, and other fees. This therefore reduces your rental return to 2%, and what if it is vacant from time to time?

And the prospect for future solid capital growth is low due to poor affordability:

…the last 20 or so years has been exceptional. Australian wages have grown pretty consistently at just under 3% a year since 1994 – that is an increase of about 1% a year in real terms.

Affordability is what sets house prices and this has two components: what you earn and the cost of the monthly mortgage payment (interest rates).

…even though interest rates have progressively dropped, interest payments today absorb 9% of the average income, having earlier been only 6% of disposable income.

ScreenHunter_3506 Jul. 29 09.21

Today, houses cost over four times the average household’s yearly disposable income. At the beginning of the 1990s, this ratio was only about three times household incomes. As the chart over shows, this looks like the peak.

ScreenHunter_3507 Jul. 29 09.22

Finally, the report argues that for Australian home prices to significantly outpace inflation over the next ten years, as they have in the past, “would require a remarkable set of circumstances”, namely a combination of:

1. Continuing low or lower interest rates.
2. Willingness to live with more debt.
3. Household income being bolstered by greater participation in the income earning workforce.
4. Average wages growing faster than the CPI.

The last point is improbable seeing that wages and the CPI have a very stable relationship, while the other points are not very likely.

Reproduced with kind permission from Macrobusiness.

World wakes to APRA paralysis | Macrobusiness

Posted by Houses & Holes:

Bloomberg has a penetrating piece today hammering RBA/APRA complacency on house prices, which will be read far and wide in global markets (as well as MB is!):

Central banks from Scandinavia to the U.K. to New Zealand are sounding the alarm about soaring mortgage debt and trying to curb risky lending. In Australia, where borrowing is surging, regulators are just watching.

Australia has the third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund. The average home price in the nation’s eight major cities rose 16 percent as of June 30 from a May 2012 trough, the RP Data-Rismark Home Value Index showed.

“There’s definitely room for caps on lending,” said Martin North, Sydney-based principal at researcherDigital Finance Analytics. “Global house price indices are all showing Australia is close to the top, and the RBA has been too myopic in adjusting to what’s been going on in the housing market.”

Australian regulators are hesitant to impose nation-wide rules as only some markets have seen strong price growth, said Kieran Davies, chief economist at Barclays Plc in Sydney.

…“The RBA’s probably got at the back of its mind that we’re only in the early stages of the adjustment in the mining sector,” Davies said. “Mining investment still has a long way to fall, and also the job losses to flow from that. So to some extent, the house price growth is a necessary evil.”

…The RBA, in response to an e-mailed request for comment, referred to speeches and papers by Head of Financial Stability Luci Ellis.

…The RBA and APRA have acknowledged potential benefits of loan limits “but at this stage they don’t believe that this type of policy action is necessary,” said David Ellis, a Sydney-based analyst at Morningstar Inc. “If the housing market was out of control and if loan growth, particularly investor credit, grew exponentially then it’d be introduced.”

What do you call this, David:

ScreenHunter_3294 Jul. 14 11.51

Reproduced with kind permission from Macrobusiness

Canadian housing bubble looks ripe for popping | Toronto Star

Adam Peterson writes the Canadian housing bubble is headed for a “slow-motion” crash:

My gravest concern is that Canada is fast approaching a 5:1 home-price-to-income ratio, a benchmark achieved by the U.S. at the peak in 2006. Since the correction, the U.S. ratio now hovers at approximately 3:1.

To compound the problem, household debt in Canada has breached 150 per cent of income and continues in the wrong direction; households are not cushioned against a blow.

Australian household debt is also hovering around 150% of disposable income.

Australian household debt to disposable income

While the price-to-income ratio varies between 4 and more than 6 depending on whether you use national averages or median data.
Australian house price-to-income ratio

Read more at Canadian housing bubble looks ripe for popping | Toronto Star.

Fannie Mae Profit Signals a Stabilizing Housing Market –

[Fannie Mae] reported quarterly net income of $2.7 billion, up from a $6.5 billion loss in the first quarter of 2011……..Across the country, there are signs that the housing market is stabilizing. Home prices have continued to fall, but at a much slower pace. More Americans are buying houses than they were a year ago. Housing starts have climbed more than 10 percent in the last year, as home builders pick up construction of new homes and apartment buildings.

via Fannie Mae Profit Signals a Stabilizing Housing Market –

Abundance of land, shortage of housing | Institute of Economic Affairs

Kristian Niemietz looks at how housing costs in the UK have exploded in recent decades. Real-terms house prices in 2011 were more than two-and-a-half-times higher than in 1975, with rent levels following suit. In the USA, Germany and Switzerland, real-terms house prices are still close to their 1975 levels.

· Housing affordability measures show housing to be unaffordable in every single one of the 33 regions in the UK.

· The main difference between the UK and its north-western European neighbours is not in demographics, but in completion rates of new dwellings.

· Empirical evidence from around the world shows that planning restrictions are the key determinant of housing costs.

via Abundance of land, shortage of housing | Institute of Economic Affairs.

Perils of ignoring Europe’s lessons – P.M.

DAVID MURRAY: The lending system for housing has resulted in a house price which is higher than it should be and part of the net foreign liabilities that are higher than they should be.

I believe that will be worked through by a stabilisation of house prices and steady increase in incomes and hopefully that’s the outcome but based on a price to income test, house prices in Australia are higher than they should be.

The regulations in the banking sector significantly promoted that outcome because the risk weight on housing is very low, so the gearing for housing is high. Historically the write-off rate’s been low. People believe that will last forever, which is always a worry. And this is purely with the benefit of hindsight, particularly on my part.

via PM – Perils of ignoring Europe’s lessons 24/11/2011.