The federal government’s First Home Owners Grant and state governments’ ‘free stamp’ duty helped bolster the housing market in Australia; news stories via the main stream media are warning of rent increases, but where do they get the information?

I suspect they just make it up or make some ‘economic forecaster’s newsletter’ a story of interest.

If you leave the various stimulus packages aside, Australia is still in recession.

The Federal Reserve Bank may be oblivious to unemployment and that the growth they seek to supress – by raising interest rates to help the banks – is a Claytons growth.

While the Canadians don’t have the FHOG and side step Stamp Duty, the Conservative political have played a similar game to Captain kRudd’s only they have told the CMHC (Canada Mortgage and Housing Corporation) to take on pretty much every home loan application.

What this has done is make the CMHC the largest sub-prime mortgage lender in the world. Apparently in an effort to prop up the real estate market in 2008 (when affordability nosedived), the Harper Conservative government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing.

The approval rate for these risky loans went from 33% in 2007 to 42% in 2008. By mid-2007, average equity as a share of home value was down to 6% — from 48% in 2003.

At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income; in Canada today that ratio is 7.4:1, almost 50% higher and in Australia, the prices are nearly 10 times the average Australian’s income.

The Americans have had their cash for clunkers (also pushed for here in OZ) and there is talk of ‘white goods’ and Australians have the opportunity to borrow $10,000 interest free for 4 years if they buy goods that reduce energy consumption on the grid.

Did Rudd create the situation … no, but he has extended it; Tony Abbot (now pretending to be pro-Aboriginal with respect to the Wild Rivers legislation in Qld) as opposition won’t expose the looming disaster becasue of the ripple effect (and shooting the messenger) as the banks will again put the hooks into the taxpayers for billions of dollars in defaulted mortgages.

The UCCC simply meant that lenders have to extend the term of the loan, reduce repayments, suspended repayments for a set period or a combination of all three.

When the UCCC came into being, home ownership via ‘coded loans’ in Australia started an inextricable downward slide as did the major banks hold on the mortgage market; to circumvent this loss of business and to address the ‘solicitor funds and alternate lenders’, lending under a ‘new un-coded’ loan, banks bought into alternate lending institutions while they figured a way of side-stepping the system.

A common practice by the banks before this was loading loans; they would tell borrowers that only so much of a home loan money was available but a secondary – and as no surprise to anyone these days – loan could be accesses (at a higher rate of course).  The challenge was how to work the same scam or something similar.

Now to obtain an uncoded loan, there has to at least a 50% weighting in a business venture for the funds to be made available; rental / investment properties meet that criteria; even worse was where banks allowed people to access their equity in their own home to buy shares, but that’s another story …

So here we are, property prices are starting a downward trend as unemployment starts to rise; although interest rates are lower, if you don’t have a job, they might as well be 0% for what its worth. With less disposable income, lowering wages, gearing on loans will start to bite; anticipated capital growth pretty much is and was the sole motivation for people becoming investors, as negative gearing reduces as rent increases and depreciation decreases yearly. Sooner or later, property entering the market will swamp available buyers; money injections in the banks only improves their position but they won’t be lending in a downward moving market. Corporate government is protecting the corporations from both their bad business decisions and greed from the people governments were elected to represent and protect.

This will hit cities more than country towns I believe; as the isolation of country towns will prove to be their saving; the following is a story from the USA that sends a clear message of what is to become here in Australia.

Flood of foreclosures: It’s worse than you think

Banks are moving slowly to list repossessed homes for sale, which could mean that housing inventory is even more bloated than current statistics indicate. Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale. The volume of this so-called ‘ghost inventory’ could be substantial enough to depress already steeply falling prices when it does go on the market.

’That’s not good news’ said Pat Newport (an analyst with HIS Global Insight) ‘excess inventory is the biggest problem in housing these days, and it leads to lower housing prices, which leads to more foreclosures’.  RealtyTrac, the online marketer of foreclosed properties, recently discovered that it has far more foreclosed properties listed in its database, which the company compiles using courthouse records, than there are listed in the multiple listing services (MLS) maintained by real estate agents.  Looking at listings in four states (California, Maryland, Florida and Wisconsin) found that they contained only a third of the foreclosures it has in its database.  The scope of the problem isn’t clear, but it could be huge considering that RealtyTrac has a total of 1.5 million bank-owned properties on its site.  ‘Many properties that should be listed on the MLS are not listed on the MLS’ said Lawrence Yun, chief economist for the National Association of Realtors (NAR).

The National Association of Realtors calculates official housing inventory statistics using data from the multiple listing services. By that measure, there were 4.2 million existing homes for sale in November, an 11.2-month supply at the current sales pace, up from a 10.3-month supply in October. But now it seems quite possible that these figures, which are already at record highs, are underestimating the situation. And if that’s the case, it could take much longer for the housing market recovery than analysts currently expect.  Once a bank repossesses a property, in some cases, it can take more than six months to hit the market.

’Either lenders are overwhelmed and can’t get these properties back on sale quickly, or they’re deliberately slowing down’ said RealtyTrac spokesman Rick Sharga.

http://money.cnn.com/2009/01/21/real_estate/ghost_inventory/index.htm

This is just the main players, but what about the ripple effect … the suppliers of fuel, parts and most important to shop-keepers, labour; labour by workers who spend their $’s in shops of all manner.

Property values have been ‘improved’ which coincidently helps local councils find money to maintain their districts and also pay interest on loans to ‘beautify’ their region, problem is that most of the acquisitions are on liability items .. council employee cars, councilor benefits, other machinery, fuel and a great list of suppliers that rely on income from the councils to keep afloat.

Investment properties are – by their very nature set up for tax advantages through negative gearing and depreciation – are a financial burden of growing magnitude when people’s employment is either stopped or hours cut back.

As disposable income shrinks, people are taking stock of their situation, more prudent ones are cutting back on purchases that are not essential and preparing for a rainy day that will most assuredly come. Kevin Rudd has come out of the closet, nothing more than a fellow wax lyrical with his halving the homeless by 2020 (with echo’s of ‘no child in poverty’ still clanging and echoing around with other equally hollow promises).

2009 will be the year of growing unemployment, growing numbers of homeless (more like double what they are today by 2020, but of course Rudd is putting it further out so it’s easier to forget and be responsible for and we’ll have far more pressing things on our minds); massive post Christmas sales will continue well after January and merge with Christmas 2009.

But don’t worry too much about building housing, as empty shopping centres will make idle places to house people.

Merry Christmas, this may well be the last good one we will all have  …

RealtyTrac expects more than a million bank-owned properties to have piled up on the market by the end of the year, representing around a third of all properties for sale in the U.S. which is bad news for anyone who lives nearby and wants to sell their home.

Forced sales drive down all prices and when this is added to tightening lending practices, it will – without eexaggeration- be the beginning of the end for property values.  We have passed so many ‘Peak’s’ and the secondary ripple effect of population shrinkage will likewise bite as the aafford-abilityof children bites, however, it won’t be orderly, it will eescalateand the ripple effect on the economy will reverberate as well, so fasten your seat belts, keep your powder dry and don’t shoot until you see the whites of their eyes ….

Newly introduced laws to slow the foreclosure rate in the USA has had a small effect, but eventually the pithy dam to hold back the tide, will easily be breached … the Uniform Consumer Credit Code implemented in Australia in the latter 90′s will likewise be only able to stem the flow so much as well, merely transferring the problem further down the track.

Moodys suggest that of the 52 million Americans with a mortgage, some 12 million (23%) now owe more money to the Lenders than their home is worth (and remember this will grow); although these put off strategies include a loan to be rewritten at a lower rate and the loss written off, so you can imagine that the returns (of say Superannuation Funds) on investment in the associated banking organisations will be having lean times for evermore …

So is there a right time to buy ? Well the theory is buy at the bottom of the market and sell just before the peak … the peak has been and gone and we are a long way from bottom. What will bottom look like ? Well take a look at Cuba and consider them the affluent ones, if access to doctors and free education etc are to be the new measuring stick.

The US$ 700 billion financial industry bailout will do what the system is designed to do, funnel money up to the ‘top’ with those below paying for it with their homes, assets, their families and even their lives.