Property Dragging These Down with It Too

Wages in Australia aren’t really increasing…even with low unemployment.

In fact, Australian incomes haven’t really increased in almost 10 years.

Yet, while incomes haven’t grown, home prices have soared, especially in Sydney and in Melbourne. In the last five years, while wage growth has been falling, property prices grew by 32.5% according to Corelogic.

With low wage growth, Australian households have been tapping into debt to get into property. According to the Reserve Bank of Australia (RBA), mortgage household debt to income has increased from 120% to 140%.

The fact that properties kept on rising at a fast pace meant that many felt like they were sitting on a lot of money…so they spent more.

Now property prices are falling after some credit tightening and restrictions to investors. We are seeing some of the largest falls in Melbourne and Sydney.

With property prices easing, we may see other sectors also start to decline.

What Sectors Are Declining?

What sectors?

Well, slowing property prices are also affecting new car sales, for example.

As The Australian Financial Review (AFR) recently reported:

Aussie car sales fell 7.8 per cent in July versus the same month in 2017, data from the motor industry’s statistical service, VFACTS, showed. That was the worst monthly performance since June 2011.

The decline in sales has accelerated in recent months, tracking with the deteriorating property markets in Sydney and Melbourne. The monthly car sales figures, against the corresponding month in previous year, turned negative in April at 0.2 per cent, before recording falls of 2.1 per cent in May and 2.9 per cent in June. Then came July’s plunge.

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According to Car Advice, the average age of vehicles in Australia is 10.1 years. With the largest proportion, 30%, being five years old or less.

In fact, that was one of the things that surprised me when I first moved to Melbourne, the large number of new cars on the street.

In the three years I have lived here I can probably count the number of rickety cars with one hand…a stark difference from Spain.

Yet it is not the number of new cars, but the amount of luxury brands too.

Park in a public parking in Melbourne and you will notice the Audis…Range Rovers…BMWs…Porsches…Mercedes…Teslas….and the occasional Toyota or Hyundai.

Take a look next time.

Luxury car sales in particular are starting to feel the drops in house prices.

For about 10 years, CommSec has been tracking an index of luxury cars. They track sales of 17 luxury brands like Audi, BMW, Porsche and Mercedes Benz.

The Link Between Luxury Cars and Property Sales…

As they have noticed while tracking the index, sales of luxury cars have moved alongside home prices for quite some time now. That is, when home prices increase luxury car sales increase, and the opposite has also been true.

As they wrote:

When luxury car sales are in retreat you can bet that home prices aren’t far behind. That has been the case since the early 1990s. And indeed that’s the case now. Improved affordability allowed Aussies to upgrade their rides.

And, as they found in their recent Economic Insight, luxury car sales and home prices are slowing at the same time as property prices. After peaking in December 2016, luxury car sales have fallen by almost 11%.

Graph of Luxury car and home prices

Source: CommSec

[Click to open in a new window]

As they continued:

But the gap between wage and price growth has narrowed. And home prices are no longer soaring in key population centres like Sydney and Melbourne. So both the new vehicle market and housing market are slowing at the same time. And the “top-end” of both markets are leading the slowdown.

 

The slowdown in home prices is affecting vehicle sales, but be sure it will slowly start to trickle into other related industries.

Real estate agencies, construction, electronics, housewares, you name it. And it could snowball to affect the employment rate.

What could happen next?

Well, no one can say for sure, but it doesn’t look good.

Supply in the property market is increasing.

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According to data from SQM, listings in Sydney are 23.5% higher and in Melbourne they are 11% higher than a year ago.

Construction is also still going strong. As Corelogic noted in their recent report:

 ‘Unit construction remains well above average across most states, and is at record highs across Victoria and South Australia and only marginally below the record high in New South Wales.

Wage growth is staying put but costs of living are increasing. We are seeing oil prices go up. We may even see an increase in food prices because of the current drought.

With home prices declining, slow wage growth and costs of living rising we could start to feel the pinch.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent thinks the next economic upheaval is at our doorstep…and has a chilling warning for Australia in his new book Zero Hour. To find out more 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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