Down down prices are down in the property market in Australia.
Thousands of houses that should have sold last year are still unsold in early 2019.
Just looking at the local real estate market here in Queensland, I can see that there are
so many more houses on the market with lower prices than last year.
Makes sense, right?
Supply and demand.
The official figures for 2018 are as follows.
Sydney home prices dropped 8.9%.
Melbourne prices dropped 7%.
Perth dropped 4.7%.
Darwin dropped 1.5%.
Brisbane and Adelaide remained fairly steady and gained 0.2% and 1.3% respectively.
Canberra prices increased 3.3%, with Hobart being the only capital with significant gains
of 8.7%.
As a nation, including regional centres, Australian house prices fell 4.8% in 2018.
Hobart and Darwin actually have less homes on the market than they did last year, so
that might be a sign that their markets might rise.
However, all other capital cities are in a bit of a housing glut.
Perth has 6% more houses for sale than this time last year.
Brisbane has 8% more.
Sydney 22%.
Canberra 25%.
While Melbourne has a staggering 42% more homes for sale than it did in January 2018!
Surely this is a sign.
Investors are starting to want out.
A new term, FONGO, is being bandied about, which stands for Fear Of Not Getting Out.
It’s the phenomenon where homeowners wishing to sell start to get anxious when they can’t.
They worry that this time next year, prices will be even lower, so they tend to lower
their asking prices to try to get out sooner rather than later.
This is the normal consequence of a falling market.
The RBA, the Reserve Bank of Australia, are playing it cool, seemingly.
On Tuesday 5 February 2019, they kept the cash rate at a record low of 1.5%.
RBA Governor Philip Lowe said, “The housing markets in Sydney and Melbourne are going
through a period of adjustment, after an earlier large run-up in prices”.
He’s certainly not pushing the panic button yet, or at least, he doesn’t want to seem
like he’s reaching for it under the table.
The Commonwealth Bank, Australia’s largest home loan lender, thinks the downturn in property
prices will be larger than they first thought.
Like other forecasters, they believe that the heaviest falls will be seen in Sydney
and Melbourne.
They noted that their forecasts had been revised downwards due to the falling sentiment of
buyers from an asset price perspective.
In other words, buyers don’t want to buy property if they think that the market is
falling.
And that’s exactly what markets are based on — people’s perceptions.
Westpac Bank’s Consumer Sentiment Survey from January 2019, also paints a fairly gloomy
picture.
The results showed that views on the outlook for home prices were the most pessimistic
since they started asking the question back in 2009.
What happens when buyers think that the market is falling?
They hold off buying hoping for even cheaper prices in the future.
The Commonwealth Bank predict that Sydney property prices will fall by a further 4.7%
this year, and predict that Melbourne prices will fall by about 5.9%.
A change in government policy could result in a change to taxation rates around housing,
which would result in even further falls.
The Australian Labor party’s policies on negative gearing and capital gains are examples
of this.
Regarding negative gearing, property investors can currently claim losses on their investments
as tax deductions.
Labor wants this concession to be removed from future investments but only on existing
housing.
Newly built houses would still enjoy the concession to encourage housing construction.
And regarding capital gains, Australians who own property for at least 12 months then sell
it for a profit are currently entitled to a 50% discount on the tax this profit attracts.
Labor wants this reduced to 25% for future investments.
Migration intake is also a factor.
Higher immigration results in more people looking for houses in a smaller and smaller
pool, resulting in higher house prices and rent.
This is especially true when there are constraints on building enough new homes.
Less immigration results in the opposite — further price falls.
The recent increase in immigration coincides with Australia’s most recent housing price
boom.
Sydney and Melbourne are taking more migrants than ever.
Australian house prices have increased 50% in the past five years.
Sydney has increased at a whopping 70%!
Ultimately, government have the power to influence house prices through policy.
It’s just a matter of who do they wish to piss off?
The investors and landlords, or the struggling renters desperately trying to buy into an
over-inflated market.
If the government’s goal is to benefit the most people, then surely they must implement
policy that brings about a steady decline in property prices.
Expensive housing really only benefits the minority of Australians.
If you own your home and plan to continue living in it, its price doesn’t really affect
you all that much.
If you’re locked out of the property market, then the reasons for hoping for a market fall
are obvious.
However, the Australian government and the banks don’t want to see a decline in house
prices.
Governments benefit from a rising and stable real estate market.
Both federal and state governments can generate more fees and taxes from higher land prices,
allowing more money to flow through to governments.
In isolation, falling house prices do not necessarily mean people start having less
money to spend.
However, falling house prices may be a result of rising mortgage costs.
In that case, as house prices go down, people’s disposable income decreases resulting in a
slowdown in the economy.
As ABC’s Business Editor, Ian Verrender, wrote:
“When the value of your major asset is going backwards, you’re less inclined to spend
and less likely to be given credit.
That, in turn, weakens the domestic economy which eventually leads to higher unemployment,
mortgage defaults and, potentially, a banking crisis.”
Household debt has also become an issue.
Higher debt means less disposable income meaning lower consumption.
ABC’s Ian Verrender, stated:
“Having splurged so much on homes, our household debt, at just shy of 200 per cent of annual
income, ranks among the world’s highest.
Hocked to the eyeballs, it’s no wonder our household consumption is sluggish, retail
sales are struggling and inflation is anaemic.”
But the biggest single threat to the Australian economy, according to the RBA Governor Philip
Lowe, is the threat of a hard landing for China's economy.
He stated:
“If we are to have a significant downturn in the economy I think the catalyst would
be something going wrong in the global economy.
So that would be number one, and China would be at the top of that list.
If the Chinese economy stumbled and the authorities didn't manage the tightening up in credit
well and the Chinese economy slowed, then that would hurt us a lot.
Of the domestic sources of risk the housing market-consumption nexus is the most prominent
one, but not more prominent than the overseas risks.”
And lastly, the Danish investment bank, Saxo Bank, have outlined in their words, an “outrageous
forecast that could happen if certain factors were to fall into line”.
Saxo Bank market strategist Eleanor Creagh stated:
“The ‘Australian Dream’ was financed through an epic accumulation of debt as interest
rates collapsed, with household debt standing at 189 per cent of disposable income.
The Great Financial Crisis was responsible for deflating housing bubbles in other advanced
economies, but not in Australia.
In a bid to stave off the crisis’ effects, Canberra’s ‘economic security package’
further fuelled the spectacular run-up in leverage, kicking the proverbial can down
the road.
In 2019, the curtains close on Australia’s property binge in a catastrophic shutdown
driven most prominently by plummeting credit growth.
In the aftermath of the Royal Commission, all that is left of the banks is a frozen
lending business and an overleveraged, overvalued mortgage-backed property ledger and banks
are forced to further tighten the screws on lending.
The confluence of dramatic restrictions in credit growth, oversupply, government filibusters
and a slowdown in global growth cement the doom loop; property prices crashing by 50
per cent.
Australia falls into recession for the first time in 27 years as the plunge in property
prices destroys household wealth and consumer spending.”
So what are your thoughts?
Is Australia headed towards a property price crash, or are prices just going to steadily
decline throughout 2019 and pick up again in 2020?
Unfortunately, none of us know.
There are so many issues at play.
A Chinese debt bomb.
Dangerously high Australian household debt.
An economy so dependent on foreign nations that we simply don’t know what will spark
the next recession.
House prices?
Economy?
Recession?
It’s going to be a wild ride!