Something Terrible is Hiding Behind This ‘Wealth’…

As Sydney clearance rates head lower, we are starting to see some nerves around property.

This from the Australian Financial Review (AFR):

The situation of the Sydney market where prices are already falling and discounting is increasing prompted a warning from veteran analyst SQM Research’s Louis Christopher.

“This is getting almost unprecedented. It’s certainly unprecedented in the last 20 years,” he said

“I just cannot see any trigger which is going to create a bottom in the market in Sydney and Melbourne right now.

“All I can see are factors out there which could make this even worse.”

According to the latest Domain figures, Sydney’s preliminary clearance rates were 41% for the last weekend, with a bunch of properties not even making it to auction.

Melbourne’s figure was a bit higher, 48%, with the majority selling in private exchange instead of going to auction.

This is a stark contrast from last year, when clearance rates were in the mid 60%, and most properties were selling at auction.

According to Louis Christopher, revised auction figures for last weekend could go down to as low as 34%–37% once the full results are in.

Well, this is what happens when you close the credit tap.

Banks have been tightening investor lending and are increasing scrutiny for owner occupier mortgages.

The Australian Bureau of Statistics (ABS) also released the latest credit figures last Friday. According to ABS, housing credit has dipped by 3.8% in the month of September.

Are you prepared for an Aussie housing collapse? Find out here before it’s too late.

While most housing price falls started as investors were having a harder time accessing credit, the latest ABS figures show that credit for owner occupiers is falling too.

In the month of September, housing credit fell 2.8% for investors and 4.2% for owner occupiers.

That is, owners could also be having difficulties accessing credit. Or, it may be that they are sitting on the sidelines waiting to see how much property prices fall before they jump into the market.

The truth is that Sydney has seen some discounts in property recently.

As Domain reported in September, house prices in Sydney have declined by 6.5% year on year.

As Louis Christopher continued on the AFR, the market is deteriorating fast:

“We think the market has deteriorated over the course of the last 30 days. We’re getting to record lows in terms of auctions clearance rates now,” he said.

“Prices are probably now falling at a faster rate than where they were mid-year.”

“My concern is that we are just not seeing any language from the Reserve Bank to suggest that they are concerned by this.”

“If you assume they are not going to be in the market cutting rates over the next six months, then it’s going to be an extraordinarily weak market over that time.”

“It seems at this stage they are reluctant to tie in any connection between a falling Sydney and Melbourne housing market and the economy.”

“This will affect the economy. The 2017 first home buyers who bought on a 10 per cent deposit, they’re probably in negative equity right now.”

“How would you respond if you were sitting on negative equity? You would probably want to cut spending and try to save more to get yourself out of the situation.”

Now, with household debt at record highs, would cutting down on debt and saving more really be such a bad thing? 

The truth is that the recent housing boom in Australia hasn’t been the result of higher salaries…but has been fuelled by large amounts of debt.

Household savings are at lows while household debt has increased to record highs. Lowering debt and increasing savings would decrease risks in the economy.

Of course, this could take a toll on the economy.

When will the property bubble burst?

Australia avoided the global financial crisis in 2008 thanks to a commodity boom and Chinese investment. Yet lower interest rates fuelled the property boom.

Construction, the housing boom and consumer spending have been a real driver for the economy in recent years.

But high debt has meant consumers are already stretched, that’s why they have been cutting down on spending recently.

The thing is, even if the Reserve Bank of Australia decided to cut rates to promote consumer spending, it would only be punishing savers.

Banks have already started to increase mortgage rates out of sync as central banks around the world start to increase rates.

And, with rates stuck at a low 1.50% they are not exactly what you would call high.

I have often here in Markets & Money written about the Spanish property bubble and compared it to the Australian property market.

While there are many similarities, like the frenzy and the taking on of excessive debt, there are of course some differences.

The Spanish housing bubble plummeted as unemployment spiked.

This hasn’t happened in Australia. In Australia, the bubble is deflating as credit decreases. Meanwhile unemployment has stayed low, and even trending lower.

Of course, this could change if the housing market downturn takes a turn for the worse.

But the big difference from Spain is that Australia has been in a winning streak for over 27 years. This has allowed it to accumulate wealth…but also a lot of debt.

The big risk for Australia here is household debt.

Economist Warns: Overvalued Housing Market Set to Implode. Download the free report now.

How far will the housing downturn go? The truth is that nobody can answer that.

The main question for me is how much of the affluence you see in Australian streets is wealth, and what percentage is debt.

My feeling is that much of it is based on the latter.

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 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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