It’s a Good Time to Be an Avocado Lover

Two avocados for $4 dollars. Bargain!

That was the deal at my local grocer yesterday…and, after having a look around, other local supermarkets had similar deals.

The truth is, after getting a bad rep for being pricey, avos are cheap now.

And prices could stay low for a little while.

Australian avocado growers are having a great season.

As Avocados Australia CEO said recently in a meeting, as reported by Fresh Plaza:

Now is a great time to be an avocado consumer. Not only will there be plenty of quality fruit in the market, some of our regions are going to be delivering larger fruit, with sizing up due to more rain in the growing season and an earlier maturity. Consumers can look forward to not just a good supply of fruit, but a good supply of larger fruit.

According to Fresh Plaza, we are looking at the lowest avocado prices in the last five years. If avocado production keeps increasing at the same rate, producers may have to start looking for markets abroad to flog supply.

And, this comes at a time when Australia is looking at opening the doors to Chilean avocado imports…

Want to hear about another Australian staple that is also looking at lower prices?

Property.

According to data from Corelogic, property posted its first annual drop, since 2012, in May. The annual drop for national dwelling values was -0.4%, as you can see below.


Source: Corelogic
[Click to enlarge]

The drop is mainly because of price dips in Melbourne and Sydney. Both cities are the major drivers of the property market, making up around 60% of Australia’s housing market value.

On average, capital city prices fell by 0.2% in May, with Melbourne the worst performing at 0.5%.

Weekly auction clearance rates in capital cities are also plummeting, as you can see in the graph below.


Source: Corelogic
[Click to enlarge]

Why are property prices falling?

Well, investor credit has tightened, as you can see in the graph below.


Source: Corelogic
[Click to enlarge]

As data from the Australian Bureau of Statistics (ABS) has shown, investor loans fell another 0.9% in April, after falling 9% in March.

What is putting the brakes on investor lending? Corelogic explains:

Firstly, the Australian Prudential Regulation Authority (APRA) introduced a 10% speed limit on investor credit in December 2014 which has resulted in a slowing of investor credit growth. Although APRA have announced that this cap will be removed shortly it is unlikely that investor credit growth will accelerate in a meaningful way. Secondly, loan serviceability is now being calculated across the board based on an interest rate of at least 7% which has made accessing credit for some more difficult. APRA has also implemented a cap on interest-only lending of 30% of all new mortgages, this has led to a substantial drop in demand for this product which was largely used for investors. Finally, lenders are now typically charging premiums of 60 basis points on interest rates for investors compared to owner occupiers with premiums typically in excess of 100 basis points for investors with interest-only loans.

And I don’t think this is just a temporary slowdown. As Corelogic continues:

Although the 10% speed limit is set to be lifted from July 1st, the likelihood of a rebound in housing credit remain low. The 30% cap on interest-only lending has a much more broad based dampening effect on investor activity. Add to this the fact that APRA is now focusing more on minimising debt to income ratios higher than 6 and maintaining a focus on keeping low deposit lending to a minimum and banks are stepping up their scrutiny on borrower expenses and incomes. The net effect is likely to be further tightness in housing credit which will continue to constrict housing market activity and reduce prospects for price appreciation.

The thing is, if prices continue to fall, and interest rates continue to rise, we could see more investment properties hit the market…which could mean even lower prices.

High household debt — which is at almost 200% of disposable income — is adding to the pressure to rush to sell, if prices keep falling.

Does this mean that first home buyers may have their avoc…ahem…cake, and eat it too?

Well, maybe.

If prices keep falling and credit keeps tightening, first home buyers could find it hard to access credit as well.

Best,

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 been recently touring around Australia. If you want to learn more about Harry’s worrying forecasts for Australia, 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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