Don’t Buy that House…Yet

Now I’m glad we decided to wait.

This is what a friend of mine told me over the weekend. She was referring to buying her first home.

A few months ago, her mindset was quite different. She and her partner were quite keen on buying a place. Especially after lenders offered a generous loan.

They quickly changed their minds once they realised how high their monthly mortgage payments would be.

So, they decided to wait and save more.

No rush to buy property

She is not the only one taking her time. In fact, as Domain reports, buyers aren’t in such a rush to get onto the market anymore.

From Domain:

Residential property buyers swooped on good-quality homes auctioned on Saturday but turned up their noses at the ambitious reserve prices set by some vendors.

‘Fickle buyer behaviour and a determination by many would-be purchasers not to overpay helped to once again push the city’s [Sydney] auction clearance rate below 60 per cent.

‘The metropolitan clearance rate was 56.8 per cent from 320 reported auctions, indicating that buyers regard the asking prices being pitched by nearly half of the current sellers as too steep.

Weekly clearance rates are in decline, as you can see in the graph below:

weekly-clearance-190618


Source: CoreLogic
[Click to enlarge]

And it is not just clearance rates.

As Digital Finance Analytics (DFA) recently pointed out, total sold values are also decreasing. As you can see in the table below, total property value sold last week amounted to $486.1 million. On the same week last year, that number was $1.4 billion.

auction-results-190618


Source: Digital Finance Analytics
[Click to enlarge]

Want even more evidence that the sector is slowing?

As job search engine Seek reports, while job ads have grown 10.7% in May year on year, real estate and property job advertisements have fallen by 9% over the same period.

job-ad-190618

Source: Seek
[Click to enlarge]

Property prices are falling

The truth is that the property market is slowing…and prices are falling.

Why are property prices falling?

Well, it is becoming difficult to get credit.

As Corelogic reported, this has happened before:

Similar to the current softening in housing market conditions, the previous downturn, which ran briefly from late 2015 to early 2016, was also driven by tighter credit conditions.

‘It lasted for only five months nationally, with national dwelling values falling by 97 basis points before surging higher again on the back of two 25 basis point cuts to the cash rate which led to a rebound in housing credit growth.

The big question is, will prices dip and recover like they have done in the past?

Or will we see a major correction?

A few months ago, I had this exact conversation with another friend. The fact is, property makes for interesting conversation during a barbie.

My friend believes that property prices will not plummet in the future.

Why?

As soon as prices start to fall, owners will simply hold off from selling until prices go up again. Just as it has happened before.

In fact, this could be happening right now. Take a look again at the DFA table above.

The number of listed properties last week was 1636, much less than last year’s number of 1969.

Investors may not be expecting price falls to last for long. They could be looking at holding on and riding out the market until prices start ticking up again.

I have a different theory.

While many investors may be looking at holding on, they may not be able to. Especially if prices plummet.

We may reach a point where prices fall so much that investors panic and decide to sell, to avoid losing even more on their investment.

Asset prices have been soaring on the premise that debt will remain cheap for a long time…and it may for a while. Yet with such high mortgage debt, this property market may only be sustainable as long as interest rates stay low.

High debt and rising interest rates

We are seeing a change in global sentiment. Interest rates are starting to rise around the world. Credit is tightening after the Royal Banking Commission revealed some questionable lending practices.

Australian households are highly indebted. Mortgage arrears are on the rise.

But it is not just high debt and rising rates that are the danger.

Banks are holding a large number of interest only loans in their books.

Interest-only mortgages pay no principal — just interest — for an initial period, usually five years. Once the initial period is over, mortgage payments spike up to include the principal.

Or investors may finance for another five years.

And many are expiring in the next few years, as you can see in the chart below.

est-inter-190618

Source: Reserve Bank of Australia
[Click to enlarge]

But refinancing could prove tough in a falling market.

According to the Reserve Bank of Australia, this could add about $7,000 a year in payments on average.

Add that to the fact that costs of living are rising, and wages are staying flat, and finding an extra $7,000 could be tough.

If the market continues falling, we may have a chance to test our theories soon.

In my view, the tide is changing.

Central banks around the world are already increasing interest rates. Higher interest rates could force more to sell as debt becomes more expensive. It’s only a matter of time.

We could see lending requirements tighten even further.

Things can only get worse as interest-only mortgages are forced to start repaying their principal…

And selling could be tough, especially if buyers turn ‘fickle’.

With high debt, stagnating wages, a credit crunch and the threat of higher interest rates, Australia is facing major risks in the housing markets.

Let’s hope my friend is right, otherwise we could be looking at a lot of financial pain.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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