Australian property prices have been falling for almost a year now.
As we wrote on Friday, we are seeing most of the decreases in prices in Melbourne and Sydney, which make up about 60% of Australia’s housing wealth.
And the fall is gaining momentum.
According to Corelogic data, prices have dropped by 1.8% in the last quarter in Melbourne, and 0.9% only in the last month. Auctions results for both cities are low, below 60%.
Prices could keep falling as lending has been tightening, especially for investors.
There are also more listings in the market than last year. Construction is still going strong, which means that there is even more supply to hit the market yet.
And, it is not only property values that are falling, but also rents.
For now, low interest rates are still propping the market.
As Tim Lawless from Corelogic recently said:
‘While dampening factors are at play, consistently low mortgage rates will continue to provide a support buffer which should help to keep a floor under housing demand.
‘Owner-occupiers continue to enjoy mortgage rates at the lowest level since the 1960s, and although investors are paying around a 60 basis point premium on their home loans, interest rates remain low for this segment of the market as well.’
Will interest rates move up or down next?
The Reserve Bank of Australia (RBA) has been keeping interest rates at record lows.
All signs indicate that they will once again do the same in their next meeting. If they do, interest rates will have stayed frozen at 1.50% for two years now.
Yet the real question for me is, when the RBA decides to move, what will it be? Will the next move be up, or down?
We have had this discussion a few times in the office before with editors and analysts.
The RBA insists the next one will be up. They don’t want to keep fuelling the housing market.
And other banks around the world are already starting to increase rates.
The Bank of England just increased rates for the second time in 10 years. The European Central Bank has indicated it will start raising rates next year.
The US Federal Reserve has increased rates twice this year and is looking at two more hikes before the end of the year.
Yet, while the RBA may want to move rates up, it could be hard for them to do so.
Why the RBA would struggle to raise interest rates
For one, there is currently a lot of debt in the system.
Australian household debt to income is high, it is currently at 200%.
The thing is, house prices have been growing, and households have been getting into more debt to get a home. Living costs have also increased.
Yet while unemployment has stayed at lows, salary growth has plummeted. High debt and low salary growth are already starting to take a toll.
According to the recent ME Household Financial Comfort Report:
‘Despite improved job conditions and households reporting healthier financial buffers, the overall financial comfort of Australians is not advancing…
‘Households’ “comfort with paying their monthly living expenses” fell 3% to 6.40 out of 10 during the six months to December 2017, the lowest it’s been since mid-2014.
‘In fact, ME’s latest report shows many households’ financial situation is getting worse and again the culprit is living expenses, with 40% reporting this as a key reason their situation is worsening.
‘Around 46% of households surveyed also cited the “cost of necessities such as fuel, utilities and groceries” as their “biggest worry”…
‘Mortgage defaults may escalate if interest rates increase, particularly among vulnerable low-income households already dealing with the rising cost of necessities.’
An interest rate hike would bring more difficulties to already indebted households.
The other thing is that while unemployment has stayed low, inflation isn’t picking up.
Underlying inflation rate for June came at 1.9% below the 2% forecast. If inflation doesn’t pick up, it will be hard to increase rates.
Why is inflation so low?
Well, no one is really sure. It could be because of globalisation. Or that employment figures are not as good as they seem.
What will the RBA do next?
If salary growth and inflation don’t pick up, if house prices keep falling, if there is a deterioration of employment…the RBA’s next move could very well be down.
Editor, Markets & Money
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