Watch for This as Australian Property Sours

Last time we saw this couple a few months back — let’s call them Mark and Susan — they had big plans.

They own a house in a prestigious neighbourhood in Melbourne, near the beach. It’s a good size plot of land, with a nice house on it.

They like the area, and their neighbours are good friends.

But, their son had just then graduated high school, and was looking to move away. The couple thought the house would feel too big with just the two of them living in it.

So, last time we saw them they were planning to sell the house and buy two properties: an apartment in the CBD, and a small house in the countryside.

And, as we heard from them back then, there was an added incentive to sell the house. As they told us:

I don’t really believe in this stuff, but we think the place may be haunted.

Their suspicions had begun a couple of years back, when they had started remodelling the house. Every time they tried to do some work on it, things would go really wrong.

So, they did some digging, and found out that the nice lady who had owned the house decades ago had suffered a violent death in it.

Don’t they have to disclose that to you before they sell you the house?’, we asked.

Well, the husband had remarried, and had stayed in the house for decades after it happened. So, as the death wasn’t the reason for selling, as it turns out, they didn’t.

Yet the haunted house had prevented them from making the changes they wanted to undergo because…they didn’t want to disturb the house.

Anyway, we saw them this week, and their plans had changed.

We think we are staying put.

As Susan told me, with property prices falling…things had changed for them. They are staying in the haunted house.

Confidence in Australia’s housing market has sunk to a new low

There is no doubt that as property prices fall, confidence on property is souring.

Here is The Australian Financial Review:

Confidence in Australia’s housing market has sunk to a new low as property prices in Sydney and Melbourne continue to drag on the rest of the country.

‘Property professionals took a bleak view of price growth and rents in the final quarter of 2018, with NAB’s residential property index falling 11 points to -20 in December, down from -9. Trust in the property market has been on a downward spiral since the beginning of 2018 and is well below the long-term average of 12.

‘Weak confidence levels coincided with property values ending the year 8.9 per cent lower in Sydney and down 7 per cent in Melbourne, according to CoreLogic data. Sydney is now 11.1 per cent below its peak in 2017 – a decline larger than the GFC, NAB Group’s chief economist Alan Oster said.

Domain, on the other hand, recently ran a more positive article, on how Chinese homebuyers may ‘snap up Australian property in 2019’. As they wrote:

 ‘The number of Chinese buyers of Australian homes is likely to remain steady this year in what’s being seen as a major boost for the weakening domestic property market.

‘Continued wealth growth in China – with dollar-worth per adult having risen four-fold over the past six years – an eye for an Australian bargain, a weak yuan and the trade war between the US and China are all predicted to be factors in keeping investment here bubbling along.

‘The upbeat forecast comes even as foreign buyers face extra state taxes on their purchase and struggle to obtain finance, according to the new report Australia 2019 Outlook for Chinese Residential Real Estate Buying  by Chinese international property portal Juwai.com…

‘In terms of buyer interest, inquiries jumped 58.1 per cent in the fourth quarter last year compared to the same period in 2017.

‘The forecast is backed up by Australian agents who routinely deal with Chinese residential buyers.

To be honest, I don’t buy it.

Chinese foreign investors are finding it tougher to get into the market as Australia tightened conditions for investors and China restricts capital flows. Plus, there is also the ‘small’ matter of the US–China trade war, which we don’t see going away anytime soon.

I think property prices could keep on sliding as investors stay on the sidelines. And, with credit conditions tightening, many in Australia looking to buy a home could find it tough too.

The fact is, even with the recent falls, properties in Melbourne and Sydney are still looking overpriced. While house prices have been increasing in recent years, salaries haven’t kept up.

One of the questions, is how the falls will affect consumer spending. As home prices fall, households feel less wealthy. Consumers could start spending less as they see their money vanish.

We are already seeing how this is impacting car sales. People aren’t buying as many cars as previous years.

But, in my experience, the thing to watch here is the unemployment rate. The big worry is if unemployment starts rising, as we saw in Spain once the property bubble burst.

The unemployment went on to soar in Spain to over 25%, causing massive payment defaults and people to lose their homes…which meant more homes on the market and more property falls.

So, you can see how keeping employment steady is key.

So far, the economy is still producing jobs, which is a good sign. Australian unemployment rate decreased in December, beating expectations.

The problem is that it’s all related.

The housing boom created jobs.

A housing slowdown could cause more people to get laid off.

As credit tightens and construction slows, we could see higher unemployment in related industries like construction and real estate. And, more people putting homes on the market if they lose their jobs and can’t afford the payments…

Bottom line, keep an eye out on the unemployment rate.

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 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, 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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