Australia Facing `Once-in-100-Year' Housing Slump

By Jacob Greber

July 31 (Bloomberg) -- Australia may be headed for a housing recession similar to those roiling the U.S. and U.K.

The cause is a combination of rising default rates, the biggest drop in home prices in five years, the highest borrowing costs in a decade and slowing economic growth.

Prices in the property market -- described by the International Monetary Fund in April as one of the world's most ``overvalued'' -- will fall 30 percent by 2010, according to Gerard Minack, senior economist at Morgan Stanley in Sydney. Prices dropped in all of Australia's major cities last month for the first time since just before the Great Depression.

``I panicked'' when the figures came in, said John Edwards, chief executive officer of Residex Ltd., a Sydney company that tracks property prices. ``We've been doing this for 20 years and have data that goes as far back as 1865, and it's really abnormal.''

Prices fell in Sydney, Melbourne, Brisbane, Perth, Adelaide, Darwin, Hobart and Canberra by between 0.6 percent and 2.2 percent, according to Residex. The national median house price fell almost 3 percent to A$458,000 ($435,000).

``Australia is headed for a once-in-100-year real-estate slump,'' Edwards said. ``I have never seen the convergence of so many negatives.''

Rising property prices drove a decade-long consumer spending boom that saw Australia's $1 trillion economy weather fallout from the 1997 Asian financial crisis and the collapse of Internet stocks in 2000.

Soaring Prices

Household debt has almost doubled since 1999 to around 160 percent of incomes, a higher ratio than in the U.S. and U.K., according to AMP Capital Investors. The median national house price soared about 140 percent in the same period.

``By every metric I can think of, Australian houses are too expensive,'' Minack said, costing an average of six years' earnings, double what Americans paid before their property market started falling in 2006.

The Washington-based IMF says Australian house prices were overvalued by almost 25 percent in the decade through 2007 when compared with household income and ability to pay debt. Only Ireland, the Netherlands and the U.K. were higher.

A crash would ``result in a significant negative wealth shock'' for Australians, whose spending accounts for about 60 percent of the economy, Minack said.

While growth is expected to continue for a 17th straight year in 2008, the Reserve Bank of Australia forecasts it will slow to 2.25 percent from 3.9 percent in 2007. A government report today showed retail sales fell 1 percent in June, the biggest drop in six years.

Bank Stocks

A housing recession may also trigger losses at lenders including Commonwealth Bank of Australia and Westpac Banking Corp., whose stock has fallen more than 20 percent this year.

The nation's five largest lenders have added an average 105 basis points to mortgage rates so far in 2008 as the global credit squeeze drove up funding costs. They were also reacting to moves by central bank Governor Glenn Stevens, who raised the benchmark lending rate twice this year by a total of 50 basis points to a 12-year high of 7.25 percent to curb inflation. Prices gained 4.5 percent in the second quarter from a year earlier, the fastest pace since 2001.

The increases have added A$250 to monthly payments on an average A$250,000 home loan, according to the Real Estate Institute. Households spent 38 percent of their incomes on mortgage payments in the March quarter, the most in the 22 years the institute has measured affordability.

`Mortgage Stress'

Sydney research company Fujitsu Consulting says 923,000 households will face ``mortgage stress'' by September, up from 171,000 a year earlier who said they were having trouble repaying loans. Australia's population is 21 million, and 6.9 million households have mortgages.

As the pressure mounts, consumers are spending less on televisions, cars and vacations, hurting retailers including department store chain David Jones Ltd.

Ratings agency Standard & Poor's reported July 23 that payments more than 30 days late on so-called prime home loans increased for a sixth month to a record 1.49 percent in May. Some 14.5 percent of subprime loans were 30 days late, with 7.9 percent more than 90 days late.

John McGrath, chief executive officer of McGrath Estate Agents in Sydney, said the number of unsold homes in his market is rising, auction rates are falling and the time it takes to sell properties is up 50 percent from a year ago to 45 days.

``We're not even in the ballpark when it comes to affording a house in Sydney,'' said Anthony Duckworth, 30, a married father of one who works for a catering company.

Commuting Distance

With A$160,000 in savings, he would need a A$600,000 mortgage to buy a family home in Australia's biggest city -- double what he can afford. So he plans to buy north of Sydney and commute.

The central bank says lending grew in May at the slowest annual pace since 1991, when the property market collapsed amid mortgage rates as high as 18 percent. Home-loan approvals dropped by the most in eight years.

``It's like a debt tsunami out there,'' said Sandra Saker, who manages a Salvation Army service for families in Sydney overwhelmed by financial problems. ``Five years ago, the maximum debt people came in with was about A$200,000. Now we see people coming in with over A$1 million.''

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net