Banks v investors in Oz housing battle

Australia's homes are the most unaffordable in the developed world, with a median price of $609,000. Photo / Thinkstock

Australian home prices in 2011 have fallen the most in three years, pitting local banks which say the drop will be short-lived against overseas investors betting it's the start of an overdue rout.

The nation's four biggest lenders, which account for about 87 per cent of outstanding mortgages, are forecasting prices will be underpinned by a housing shortage, population growth and an economy boasting near-full employment.

Overseas investors say high debt, unaffordable homes and rising interest rates could cause home prices to tumble as much as 40 per cent.

Government handouts to new home buyers helped Australia avoid the rout seen in the US, UK and Irish property markets in the worst global recession since World War II.

Prices surged in the past two years, leaving Australia with the developed world's costliest homes, highest interest rates and among its most indebted households.

"Australia stands out as the one developed housing market that didn't have a meaningful correction," said Ben Jarman, an economist at JPMorgan Chase in Sydney.

"The thinking among market bears is that surely that domino has to fall as well, particularly when you saw a very strong year for price growth in 2009 and 2010."

The median home price in the nation's eight capital cities, where two-thirds of the population lives on less than 0.5 per cent of the country's land mass, was A$470,000 ($609,115) in May, according to Brisbane-based property researcher RP Data.

That compares with US$169,588 ($205,345) in the US in April, according to real estate website Zillow.com.

Australian home prices slid 1.7 per cent in the first quarter from three months earlier, the biggest drop since the third quarter of 2008, government data in May showed. Prices fell 0.3 per cent in April and May.

Demand for mortgages, which account for about 63 per cent of banks' outstanding loans in Australia, slowed in April to the weakest annual growth rate since data began in 1977.

Home loans more than 30 days late hit a record 1.79 per cent in the first quarter, Fitch Ratings said on May 26, and "low-doc" loans that were more than 30 days overdue climbed to 6.74 per cent.

Fitch conducted a stress test of Australian banks last year in response to overseas investors' concerns about the sustainability of home prices. Moody's Investors Service cut the four largest banks' credit ratings by one level in May, saying their dependence on wholesale debt markets, rather than deposits, made them vulnerable to confidence swings.

Marc Faber, publisher of the Gloom, Boom & Doom report, last month urged investors to short-sell ANZ shares, citing excessive household leverage and an overvalued property market. Philip Chronican, Australia chief executive at ANZ Bank, said on June 2 that of their around 800,000 home loans held by the lender, only about 100 are facing repossession.

Melbourne-based ANZ, Australia's third-biggest lender by market value, has A$155 billion of outstanding home loans, according to the Australian Prudential Regulatory Authority.

About 1.7 million US homes were in the foreclosure process and expected to be put on the market as of April, real estate information company CoreLogic said on June 22.

John Taylor, founder of FX Concepts, the world's largest currency-hedge fund, says Australia's banks, which remained profitable throughout the financial crisis without government bailouts, are now overextended and will cut back on credit, helping spark a recession.

"Banks sailed through 2008 like the rest of us were all idiots," New York-based Taylor said. "They're not looking as pretty now."

The nation of 22.5 million has the most unaffordable housing in the English-speaking world, consulting company Demographia said in January, with the median Australian home costing 6.1 times gross annual household income, compared with 3 times in the US.

Debt in Australia is equal to 155 per cent of household disposable income, according to central bank data, compared with 133 per cent in the US before the crisis.

Australia has the highest interest rates in the developed world after seven increases from October 2009 to November 2010.

Reserve Bank of Australia Governor Glenn Stevens said last month that the bank would likely need to raise interest rates and was weighing Europe's sovereign debt crisis against a forecast pickup in domestic growth and inflation.

Jeremy Grantham, chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co, last year called the Australian housing market a "time bomb" set to blow when rates climb.

Gerard Minack, global developed markets strategist at Morgan Stanley, has said house prices are as much as 40 per cent overvalued.

Bank of America Merrill Lynch forecast last month that home prices will drop 10 per cent from their June 2010 peak.

Rob Brooker, head of Australian economics and commodities at Melbourne-based National Australia Bank, said the "soft patch" was temporary. Prices would climb 3 per cent to 5 per cent over the next two years, driven by an investment boom, he said.

The Australian Government forecasts mining investment of A$76 billion next year as companies including BHP Billiton, the world's No 1 miner, expand output to meet demand from China and India.

"There is a tendency for people overseas to extrapolate their experience of their own market to the Australian market, without really understanding the strength of our economy, the strength of demand, our connection to China and their growth story and the shortage of housing here," Brooker said.

FX Concepts' Taylor said Australia's dependence on China, its biggest trading partner accounting for about 25 per cent of exports, may soon be a drag, rather than boost, as Beijing attempts to cool the economy.

"This is the beginning of a recessionary period for Australia and housing will be one of the markets to get hit," Taylor said.

James McIntyre, an economist at Commonwealth Bank of Australia, the nation's biggest mortgage provider, said income growth, and low unemployment of 4.9 per cent, would support the housing market. McIntyre forecasts "subdued" growth for housing over the next year as the central bank raises interest rates to contain inflation.

- Bloomberg