In yesterday’s email, we let you know that changes are coming to Harry Dent Daily. If you missed it and want to know what’s going on, please click here to get up to speed.
In short, we’re making it more relevant for you. It will be more Australian centric, focusing on the Aussie economy and stock market, as well as US and global events.
It will also be more outspoken and ‘controversial’. I put that in air quotes because to be controversial these days simply means not to follow the mainstream media narrative, or not to be politically correct.
Australia is becoming a rigid conformist society where views outside of the mainstream are not tolerated. As just one example, if you’re not a virtue signalling climate change warrior, then you’re a science denying simpleton.
There is no nuance. It’s no country for old men. Or middle aged men, for that matter. Sorry, we meant women too. We didn’t mean to be gender specific.
God (or Allah) forbid we start offending people on day two of our new project.
But hang on, that’s the point…
We don’t aim to deliberately offend people. We simply want to write what we think, without worrying about those who are out to nitpick, miss the point, and virtue signal to make themselves feel better, or look good in the eyes of others.
But enough of all that. Today, we want to talk about the Aussie housing market and its impact on the broader economy.
Aussie housing’s effect on the economy
Right now, we’re witnessing some pretty sharp price falls across Australia’s major real estate markets. Clearance rates in Sydney and Melbourne on the weekend were in the mid-to-low 40% range, the weakest in six years.
Such low clearance rates tell you prices are falling. According to Corelogic, over the past year Sydney house prices are down 7.4%, while Melbourne prices are down 4.7%.
Despite all the noise, these are very mild falls. The question is, how much more will prices decline?
SQM’s Louis Christopher believes that by the end of 2019, Sydney and Melbourne house prices may fall between 12% and 17% from the peak. That’s not too bad, given the gains experienced over the past five years or so.
If Labor wins the upcoming election and changes negative gearing rules on existing properties, Christopher thinks declines could be as much as 30% by 2020.
That sounds pretty grim. But let’s keep in mind that this is all crystal ball gazing stuff. It should be clear that if house price falls pick up pace into 2019, the RBA will cut interest rates…again. That will provide support to the housing market.
The most crucial input to house prices is interest rates. And because official interest rates have not moved in years, there is not a broad credit tightening going on across the economy.
The main thing impacting the market right now is the fallout from the royal commission. Basically, the banks have been shamed into doing the right thing; that is, lend responsibly.
Prior to this their aim was to win market share by lending as much as they could, with little regard for how borrowers would manage the repayments.
That the bank regulator, APRA stood around and watched this happen is a disgrace. That APRA boss Wayne Byers was just reappointed for five years is nothing short of scandalous!
Anyway, the royal commission effectively took the stupid out of the banks’ lending policies, which is now impacting demand for credit. This is why you’re seeing prices come back now.
Fundamentally, the price adjustment is probably almost done. But there is the psychological impact to consider, and that is a great big unknown. How much fear is now in buyers’ minds? It may account for another 10% downside risk for prices.
But without official interest rate rises from the RBA, we think the housing market downturn will be contained. That is, price falls will inflict some damage, but they won’t derail the economy completely.
If China’s growth doesn’t hold up we’re doomed
Given the risks in the housing sector though, the ongoing tensions between the US and China is particularly worrying. Australia’s economy is all about the housing bubble. What sustains this bubble is the income we earn from our commodity exports.
If commodity prices and volumes hold up (that is, if the Chinese economy remains strong), then the housing market won’t turn into a disaster. But if China’s economy slows markedly, it could spell big trouble for Australia.
That’s because the rest of the world sees Australia — economically — as a derivative of China. When China slows, our foreign creditors worry about our economy. They’re more reluctant to lend.
And that’s a worry for Australia’s economy. We have net foreign debt of more than $1 trillion. Foreign capital sustains our standard of living. Without it, we’d be in a deep hole.
Foreigners lend a good chunk of that capital to our banks, who in turn lend it to Australian’s to speculate on property. We need income to service that debt and keep our creditors happy. And China is a key source of that income.
Can you see how it all fits together?
That’s why, if China’s growth holds up, the damage to the housing market might be contained. If not, we’re heading into dangerous territory.
The stock market moves ahead of the news, so it’s important to keep an eye on prices to see what might be unfolding. In this instance, the banking sector is key.
Check out this chart of the ASX 200 Financial Index…
It’s currently heading back down to an important support area, around 6,000 points. If house prices are just experiencing a correction, rather than an all-out bust, we expect to see prices find support here.
But if the economy deteriorates from a China induced slowdown, falling commodity price income will translate into rising unemployment. This will in turn cause banks’ bad debts to rise (bad debt charges are currently very low), and you’ll see the index fall through support and head much lower.
Who knows how things will go from here? But keep an eye on the financials. This sector will give you important clues as to what is going on in the economy.
Editor, Harry Dent Daily