Australia’s property market has had a topsy-turvy year in 2015. During the first two quarters, national house prices maintained the strong growth we’ve become accustomed to. Yet the rate of growth is slowing with each passing month. The national market grew at 10.1% in the year to October. Taken in isolation, you’d be forgiven for thinking the market’s never been in better shape. But this was down from the 11% year on year growth from a month earlier. It’s a clear indication that things are heading south.
The tide started turning in earnest sometime around June. It’s hard to pinpoint the exact moment. First came signs that the wave of regulatory clampdowns on banks were working. This campaign kicked off late last year. But it took until the middle of this year for signs of success to show up.
As lenders tightened investor credit growth, they hurt demand in the process. Auction clearance rates, averaging in the 60s in recent weeks, are down on 80% rates from last year. And that’s just one by-product of slowing demand.
At the same time, it became clear in June that China’s economy was slowing. Third quarter figures showed the Chinese economy growing at 6.9% in the year to September. Good by global standards, but below par for Chinese authorities.
And now, in the midst of all this, last month saw banks lift mortgage rates for owner occupied loans.
It all amounts to a rapid change in the space of just 10 months. We’ve gone from a high demand, fast growth market, to something entirely different. And it’s not just that lending to domestic buyers is slowing. Now we’re seeing that foreign investors, led by the Chinese, are losing interest too.
Here’s Credit Suisse reporting on this:
‘Chinese demand for global property could fall by 30% [in 2015]. Chinese bidders have reportedly been less active in foreign property markets [since China’s yuan devaluation]. The underlying issue is weakness in the Chinese economy. Capital flight is tightening credit conditions, which, in turn, is dampening income growth, wealth and the purchasing power of Chinese residents.
‘All things considered, the likelihood is that Chinese flows into the Australian property market have flattened out in 2015.’
There are two angles here. On one side, slowing demand is a potential boon to everyday Aussies entering the market. If demand slows, so will house prices. If nothing else, that increases affordability across the market. This is true especially in cities like Sydney, Melbourne and Brisbane. These markets tend to attract most international interest.
Of course, existing home owners don’t share this enthusiasm. Not when it ensures subdued price growth. However there’s an even bigger issue at hand. Albeit one that ties in closely to a lack of affordability in the market.
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Low demand in a time of oversupply: the nail in the coffin
At present, the housing market is carrying excess supply. That’s only set to worsen as a raft of new homes come online in the next two years. Some estimates predict supply overshooting demand by some 40,000 homes nationally.
All told, demand would need to rise just to keep prices from falling…
Chinese buyers holding back, only adds to pressure on the housing market. Granted, there’s a lot of debate about the extent of foreign investment in Aussie real estate. Some observers have downplayed the importance of foreigners play in the market.
But they do impact the market, however marginally. A recent NAB survey showed foreigners purchased one in every six new homes in the quarter to September. Including existing homes, that rises to one in 10 homes.
These aren’t immaterial numbers. By no means are the Chinese as important to demand as domestic buyers. But in a time of slowing demand and oversupply, you need all you can get. Without this, the future of the housing market bodes poorly for the economy. And that’s what really matters here. How the housing market impacts the broader economy is a major concern.
How the property market impacts the economy
Ultimately, China’s declining interest in Aussie real estate will only add pressure on the economy. As you no doubt already know, housing related activity is a major driver of economic growth. The construction industry is the fourth largest contributor to national GDP, employing one in 10 workers. So we can’t simply discount the effects of slowing demand, either at home and abroad. Why? Because falling house prices inevitably result in tightening household budgets.
Credit Suisse notes (emphasis mine):
‘The risk is that house prices flatten out or fall, making it harder for the economy to absorb the mining shock via housing and the consumer. An increase in Chinese demand is required to keep the housing market [steady] in lieu of rising supply and falling local demand. In the absence of a pick-up in foreign demand for housing, it is likely that policymakers will need to stimulate the economy further. Deep and timely RBA rate cuts might help to stabilise housing demand by counteracting the overly negative impact of macro-prudential regulation.’
It seems that increase in demand isn’t coming anytime soon. And we can’t expect it to. Not until China’s economy stabilises.
However, as China’s middle class expands, demand may pick up in turn. Yet there’s no telling when investors will regain confidence. After the recent market trauma, it may take years. Chinese consumers know they face a future of increasingly slowing growth.
Any rebound in foreign investment also assumes Australia’s property market remains attractive. Those in it for capital gains may have less need to invest in the future. Especially if prices continue stagnating or, worse still, declining.
Credit Suisse realises the only response to a housing downturn is more stimulus. Which, as you’ll know, typically comes in the form of lower interest rates. In theory, that should free up households to continue spending even as the housing market shrinks. But any effects will likely be temporary.
If there’s anything that will tip the economy over at the edge, it’s the property market. We may not have to wait long either. Last month Macquarie forecasted house prices could decline by 7% in 2016. And Morgan Stanley warned the market risked sending the economy into recession.
Chinese investors were once blamed for pushing up prices. And of lowering affordability for domestic buyers. Yet the impact was always exaggerated. But their role in lowering demand now can’t be understated. Today, we need them more than ever if we’re to avoid a housing led recession.
Housing affordability may improve, but it will come at a cost.
Contributor, Markets and Money
PS: The RBA kept rates on hold at 2% during its November meeting. And now UBS is forecasting interest rates staying at record lows for years.
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