Is This What a Property Bubble Hangover Looks Like?

First home buyers and people looking to upgrade their homes are coming back into the property market.

At least, that´s what we heard from the Reserve Bank of Australia (RBA) this week.

Those with ‘boots on the ground’, the property agents, beg to differ.

From The Australian Financial Review:

A lot of people have had about six to 12 months to digest the market and the clever buyers are buying now while everyone else is talking about how bad the market is,” Mark Foy, principal at Belle Property Surry Hills, said.

‘”It’s a sentiment-driven pull-back in the market even though the fundamentals are still strong. It’s harder to get buyers to commit so we have to be more flexible as agents”.

‘”But if you can borrow money you will create tremendous value for yourself”.

‘If’ is the key word here for us.

Loans to buy homes fell by 0.2% in January, dropping to levels seen back in 1984. Investors may have been the ones to experience the credit squeeze first, but owner occupiers are feeling it too now.

High immigration and cheap debt driving property prices

High immigration and cheap debt have driven property prices up in recent years.

Now supply may be catching up with demand, but our suspicion is that credit tightening is also playing a huge role in the slowdown.

And credit tightening could continue.

From Bloomberg:

It could get even harder for borrowers after the securities regulator said it will review its guidance on lending standards. Under proposed changes, the Australian Securities and Investments Commission said lenders should take more steps to verify expenses such as school fees, utility bills and entertainment services, rather than rely on spending benchmarks that tend to underestimate expenditure.

‘Banks are also demanding borrowers have bigger down payments, pulling back on lending to would-be homebuyers who haven’t been able to save a deposit of at least 20 percent. That’s forcing some to lower their sights to a cheaper property, or give up house-hunting altogether.

Property may have seen some big falls in Sydney and Melbourne, but it still remains unaffordable. Mainly because we haven´t seen much wage growth in recent years.

According to the most recent Demographia’s International Affordability Survey for 2019, housing is still ‘severely unaffordable’ here in Australia.

The survey rates housing affordability by dividing the average house price by average household income. Anything rated 3.0 or under is considered affordable. Anything over 5.1 means property is severely unaffordable.

It rates the Australian median market at 6.9. Sydney´s median multiple has dropped with recent property falls, but it´s still at 11.7, and Melbourne has a high 9.7. Both well over the ‘severely unaffordable’ marker.

To become affordable something has to give. Either wages need to start growing or house prices need to come down further.

Retail sales figures also disappointed in December and January. As we wrote before, we didn´t see much foot traffic in Melbourne´s big shopping areas during Christmas.

While retail figures showed some increases in cafes and food retail, much of the decline was in clothes and footwear sales.

We are also seeing some big drops on car sales. Cars, like houses, are big ticket items, and as households feel the pinch, they will wait put off buying a car.

In fact, Kris Sayce shot a Markets & Money video update this week on how house drops are affecting the car industry. If you haven´t already, you can watch it here.

GDP figures

And, GDP figures have been a let-down too.

According to the Australian Bureau of Statistics, the economy slowed in December, it only grew 0.2% seasonally adjusted terms when they were expecting a rise of 0.3%. Growth over the year was 2.3%, below the 2.8% the RBA expected.

Mainly because households are spending less as they continue to struggle. Instead, much of the growth came from government spending.

Yet even as we have seen GDP growing in recent years, GDP per capita has barely increased, and is now declining. What I mean is that while the country has been growing, individuals haven´t seen much growth.

But Australian property price increases have made property owners feel wealthier, something called wealth effect. Now we could start to see the opposite effect.

The opposite means that consumers could cut spending even more as house prices fall and wages remain stagnant.

With household spending making a large part of the economy, Aussie households feeling less rich could affect many areas of the economy.

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 effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is an editor for Markets & Money and every week goes through each report and research note produced by our global network of trusted advisors to find, in her opinion, the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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