Housing prices in Australia fall as the property bubble shrinks.

In a week that was fairly light on data releases, let’s return to Australia’s perennial favourite topic – house prices.

While it is difficult for current property owner to sell their properties, we now see how a bubble gradually collapses back into reality.

Data released Tuesday showed that across Australia’s eight capital cities prices fell 0.7 percent in the first quarter of 2017.

Prices fell by 1.2 percentage in Sydney, which was the hardest-hit. Prices fell 0.6 percent and Brisbane respectively, while Perth dropped 0.9 percent.

While the price declines over the past 12 month were less dramatic than that of the year’s, they were still more than the previous year. Although Sydney prices declined 0.5 percent year-over-year, Melbourne prices rose strongly (6.2%), while Brisbane’s annual increase was 1.6%.

The past year saw a 1.5 percent drop in prices in Perth, which has been under pressure for a while.

This downward price pressure has led to a reduction in auction clearance rates documented by CoreLogic. Clearance rates averaged 56.9 % last week in the country. Only 55.7 % in Sydney and 58.7 % in Melbourne had higher clearance rates.

Comparing this to last years, when the average capital city rate was 66.7%, Sydney was at 68.0% and Melbourne was 71.0%. And this doesn’t even factor in that auction volumes have dropped this year.

So here’s the deal. There are fewer people who want to sell their homes. People who fail to succeed are usually less successful. People who succeed receive lower prices.

It pays to see the long-term. It pays to look at the bigger picture. minutes of the last RBA board meeting said: “Housing prices were still 40 percent higher in Sydney and Melbourne than at the beginning of 2014, while housing prices in Perth had fallen by around 10 percent over the same period.”

The big question is whether the housing market will continue to deflate slowly, or whether there is going to be an abrupt “pop”.

Major triggers would be needed to cause a significant correction of property prices. This trigger would be most likely to be from interest-only loans.

More and more attention is finally being paid to dangers caused by Australia’s profligate use of such loans. As written last year, at the peak a staggering 40 percent of residential mortgages in Australia were interest only.

The Australian Prudential Regulation Authority stepped in last year, capping new interest-only loans at 30 percent of new loans. Due to tightening bank oversight standards, these loans have seen a dramatic decline.

According to the latest data, 15.2 percentage of interest-only loan are reported. of new issuances.

The RBA has been pushing an upbeat storyIt will all work out. As they tell it, the AUD$120 billion a year of interest-only loans coming due will be smoothly transitioned to principal-and-interest loans for most people.

For many, this will mean a rise of 30-40% in monthly payments. At a time when wages growth has been persistently sluggish, many people don’t have much wiggle room.

Interest-only loans typically have a five-year term and then need to be refinanced or become principal-and-interest loans. For a whole lot of folks, an interest-only rollover ain’t going to happen. Worse, interest-only loans were at their highest volume in 2013-2016.

So we are about to see a three-year wave of shifts to principal-and-interest loans.

Worse, these loans were heavily mediated by mortgage brokers and arranged to move volume, rather than quality.

Widely cited research from investment bank UBS about the prevalence of so-called “liar loans” gives one every reason to be really worried about the ability of these borrowers to make a mortgage payment that has increased by a third or more per month. 

The RBA promotes a rosy scenario, which involves looking at the average buffer and embedded equity households have. This ignores the economics 101 fact equilibrium prices are determined not by the average borrower but the marginal borrower.

If a person is selling hot dog, they don’t care what the average person is willing to pay for a hot dog, they care what the last person they might sell to is willing to pay, for she determines the price.

And, in a moment of gaping honesty eight weeks ago, the RBA’s Chris Kent highlighted the differenceThe average and marginal borrower.

“About half of owner-occupier loan borrowers have prepayment amounts greater than six months. Half of these borrowers still have small amounts, but some borrowers have more recent loans. He said.

It doesn’t matter than some of them are new borrowers – other than that they bought at the height of the bubble, making them more susceptible to financial stress than other borrowers.

Many people are wired. It will be difficult to pay the bills if they get more money. And if a lot need to sell at once then, as they say at NASA, “Houston, we have a problem.”

The Australian balloon could burst, or the air could vaporize.

Regardless of the outcome Australians should be asking difficult questions about why APRA waited so long to act on interest only loans and liar loan.

Very difficult, very public queries.