Have Property Price Increases Created Wealth?

The property market in Australia is slowing.

Sydney’s property market is down 0.3% for June and 4.5% over the year according to Corelogic’s numbers. The combined capital’s change in dwelling values dropped 0.3%.

Melbourne also saw a 0.4% drop for the month and a 1.4% decline for the quarter.

The fact that Sydney and Melbourne’s property values are dropping will have a big impact on the Australian property market. Both cities hold about 40% of Australia’s housing stock and 60% of the national total housing wealth.

Asset prices have soared in the last few years in Sydney and in Melbourne, as you can see in the graph below.

Median house prices by capital city 05-07-18

Source: Domain

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Australians feel it is hard to get into the property market

The fact that property prices have had eye watering gains has made it harder for young Australians to buy property. According to a recent survey by Mortgage Choice, 90% of Australians feel it is hard to get into the property market…and this is at low interest rates!

One in three would-be home buyers say they will be increasingly unlikely be able to buy a home when rates start increasing.

The property market in Australia is big. In fact, as Bloomberg recently reported, the housing market is now four times the size of the Australian economy.

Real Estate Boom: Everything you need to know to make a killing in 2018 with Aussie real estate. Download free report now.

With those massive increases in prices, households owning property may feel wealthier. But have they actually created wealth?

According to the Australian Bureau of Statistics, almost one in three (29%) households in Australia were over indebted in 2015-16 when looking at debt to income or debt to asset. That is up from 21% back in 2003-04.

Over three in four over-indebted households do not have enough liquid assets to cover 25% of their debts. Liquid assets are cash or assets that can be easily turned into cash.

The thing is, while debt has grown in recent years, wages have barely increased.

As you can see in the graph below, between 2003-04 and 2015-16, gross income increased by 38% while mean asset value by 49%. Yet in the same period, mean debt has increased by a whopping 83%.

Real mean increase (%) 05-07-18

Source: ABS

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That is, debt and asset growth has outpaced income….

Yet all the wealth created by soaring assets only exist if assets keep their value. If asset values were to crumble, then all you have done is create debt. A debt that will be harder to repay if income hasn’t grown.

26 years of uninterrupted growth has made households confident. They are confident that things will stay the same, that things won’t change.

Interest rates are low, which is making debt cheap…and keeping money in the bank worthless. Especially when you look at the gains properties have had in recent years.

Households are highly indebted, and they aren’t even saving. Slow growing wages and higher costs of living means that the Australian savings rate has dipped in recent years, as you can see in the graph below.

Australia Household Savings Ratio 05-07-18

Source: Trading Economics

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If property keeps going south, only those who cashed out at the right time will have created wealth. But, it is really hard to time the market. You could sell too early or hold onto property for too long. Then have to wait till the market turns again…or sell at a loss.

Being over-indebted and without savings leaves us exposed to any shock. What happens if unemployment starts increasing? Of if interest rates start rising?

The Reserve Bank of Australia will very likely keep rates on hold for the year, maybe even longer.

But some of the big banks are already looking at increasing rates.

And central banks around the world are already raising rates.

The US Federal Reserve has already hiked rates twice this year and may be looking at two more increases this year. The bank of England has also recently raised rates.

What could happen if the RBA starts raise rates?

The graph below shows how different interest rate scenarios. And how these could affect household debt servicing burdens in several countries. The red line shows the actual debt servicing burden if interest rates stayed the same.

Household debt servicing burdens under different interest rate scenarios 05-07-18

Source: Bank of International Settlements

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Any rate increases will make the already existing debt a much larger burden. And refinancing becomes much harder when property values are going lower.

Housing credit is already declining due to tougher lending restrictions. This is causing the slowdown in property.

With tightening credit, demand could go south very quickly.

And all those years of Australian uninterrupted growth could very well turn all that asset wealth into a huge debt burden.


Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent has a chilling warning for Australian property. Harry is the editor of Harry Dent Daily and has recently spent some time touring Australia. If you want to learn more about Harry’s worrying forecasts, click here.

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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