Is the Worst Really Over?

Sydney or Melbourne? Which city do you prefer?

Last weekend, we took a break from Melbourne’s cold weather to spend some time in Sydney.

Sydney is large, multicultural and home to iconic Australian landmarks.

Melbourne is all about sports, culture and food.

Both cities are completely different.

But, they do have something in common…construction.

In fact, we barely got any sleep during our time there. Everywhere you looked there was roadworks, construction sites…and apartments popping up everywhere.

Yet the housing market is slowing.

Property prices are trending lower in Australia, as the latest Corelogic results below show.

Index results as at 30 June 2018 03-07-18

Source: Corelogic

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As Corelogic reported:

‘Declines across the most expensive sector of the capital city market is largely attributable to the declines in Sydney and Melbourne, where the upper quartile of property values fell by 7.3% and 2.5% respectively over the past twelve months.  Mr Lawless said, “A surge in first home buyer activity has helped support demand across the more affordable price points in these cities.”

Property prices have been sliding in the last year after banks tightened credit, especially for investors. The slowdown comes after five years of steep property increases.

Will property prices continue to fall?

If prices continue to fall, those who bought near the top will be the most damaged financially, as they see their equity decrease or even turn negative as we saw 10 years ago in the US and European housing markets.

The decline has been slow so far…some are even saying the worst is over.

But, is it? Will prices keep on declining slowly only to edge higher later?

As Corelogic continued:

According to CoreLogic research director Tim Lawless, despite recent and consistent monthly falls, national dwelling values remain 32.4% higher than five years ago. He said, “This highlights the wealth creation that many home owners have experienced over the recent growth phase, but also the fact that recent home buyers could be facing negative equity.”’

First home buyers may be propping up the market, but just their demand will not bring the eye popping increases we have seen in recent years.

According to a recent BIS Oxford Economics report, the upcoming demand will not meet supply. In fact, they expect demand to keep falling. As they wrote, courtesy of the Australian Financial Review (AFR):

Sydney house prices are about to do a flip on the residential boom that occurred between 2013 and 2017, managing a total growth of only 3 per cent in the three years to 2021. During the boom, prices grew a whopping 85 per cent, BIS report Residential Property Prospects 2018 to 2021 says.

‘Supply is running at record levels, having risen above 200,000 dwelling completions per annum in 2015-16, and expected to stay above this level through to 2018-19,” BIS Oxford Economics senior manager Angie Zigomanis said.

‘”Demand has also risen, with population growth expected to exceed 400,000 in 2017-18, its highest level since the peak in net overseas migration in 2008-09, although this will still not be sufficient to meet supply.”

‘”However, owner-occupier demand appears to have topped out and, with tight lending conditions expected to continue to discourage investors, overall demand will fall.”

‘While predicting an 8 per cent fall from the peak a year ago, BIS says that by 2021 the median house price will be be 4 per cent below that high, representing a decline in real terms of 13 per cent.

Banks are increasingly tightening credit, and it doesn’t look like this trend will be reversing soon. Overseas immigration is also slowing and there is a growing apartment supply that is about to hit the market.

Couple that with high household debt and the fact that there are more buyers switching from interest only mortgages to higher payments (including principal) in the next five years, and we could very well see prices sliding further.

Low interest rates may put a brake on the slowdown and give highly leveraged households some breathing air.

Yet we could see prices slide even more.

Housing construction has been a large driver of Australian growth in recent years, as you can see in the graph below.

Where is Australian growth coming from? 03-07-18

Source: AMP Capital

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Yet slower housing growth could have a knock down effect in the economy.

It will not only increase unemployment in the industry, but as households see their wealth decline, they could cut spending, also a major driver of growth.

Is the worst over? We don’t think so. In fact, we think it’s only starting.

The question is, how steep will the fall be.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Winter is coming. According to author and economist Harry Dent the next big crisis is at our door step. He thinks we could be about to enter an ‘Economic Winter’…one that could put freeze the Australian economy for years. 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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