Why a Deflating Housing Bubble is Just as Bad

It was a sudden pop…and then everything spiralled down.

Until then, the economy had been booming. Credit had been flowing and there was money everywhere.

Property prices had taken off, spurred by high immigration and investors.

Construction had skyrocketed. All you saw when you looked at the horizon were cranes.

House prices kept appreciating in gigantic steps. Who cared if salaries were not following at the same pace?

Until one day, it all came crashing down.

Let’s be clear, I’m talking about Spain, it’s property boom and the crash that followed in 2008.

Australia has also seen a boom in property in the last years. According to Corelogic, the country has seen a 31% increase in property in the last five years.

And while properties have been soaring, salary growth has plummeted in the same period.

Now, things are slowing.

But, differently from Spain, the property bubble isn’t popping, but slowly deflating.

Yet this could be just as bad.

The fall is starting to gain momentum.

As you can see in the graph below, national prices have declined 0.6% in the last month, 0.9% in the last quarter and 1.6% in the last year. According to Corelogic, this is the fastest annual decrease rate since 2012, with now Melbourne leading the fall in the last quarter.

Index results as at July 31, 2018 03-08-18

Source: Corelogic

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That both markets are falling is a big deal. Both capital cities make up 40% of Australia’s total housing stock, and 60% of housing wealth.

My suspicion is that this is only the beginning.

Why? Well for one, supply is increasing.

Data from Corelogic shows that in the last 28 days to 22 July 2018, the total number of listings in the nation was 108,436. This is 7.2% higher than last year and a higher number of listings since 2012, as you can see below.

TOtal listings 03-08-18

Source: Corelogic

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In Sydney, we are seeing something similar. Over the past 28 days to 22 July, there were 26,103 properties for sale, 21.7% higher than last year and the most since 2012.

TOtal listings 03-08-18

Source: Corelogic

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And in Melbourne, there are a total of 30,029 properties for sale. This is 10.5% more listings since last year and the highest number since 2014.

TOtal listings 03-08-18

Source: Corelogic

[Click to open in a new window]

And, with construction still going strong, we will see even more supply come into the market.

As Corelogic reported: ‘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.

The question is, how much further down will it go.

Tim Lawless from Corelogic doesn’t think the trend is close to stopping.

We can’t see any factors that may halt or reverse the housing markets trajectory of subtle declines over the second half of 2018. The availability of housing credit has been a significant factor in contributing to this slowdown, however there are a variety of hurdles contributing to slower conditions.

I don’t either.

Credit restrictions and higher interest rates on investment loans have slowed investors from getting into the market.

Yet another factor that will influence investors is falling rents. As we told you on Wednesday, rents are also seeing drops in price. Rental yields are now the lowest in Melbourne (3.04%) and Sydney (3.21%).

With fewer investors getting into the market, the demand is now mainly driven by home buyers. According to Corelogic, owner-occupier credit growth is 8% over the last year while investor growth has dipped to 1.6%.

But with the market on a slow downturn, we could also see some of that demand fall too.

You see, with prices falling, there is no pressure to rush in and buy. A slow down-turn could mean that people wait to see how much further prices fall before entering the market.

Especially if sellers are the ones feeling the pressure.

We are already starting to see that in Sydney.

As The Australian Financial Review reported:

LJ Hooker’s Peter Tannous has his work cut out for him in Sydney’s west, where he is now either coaxing desperate homeowners to close the sale of their properties quickly before the market dips again or consoling those who have sold at a loss.

‘As Corelogic’s Hedonic Home Value Index confirmed that property prices are continuing to drift down, this week Mr Tannous sold a two-bedroom unit for a 30-year-old homeowner who “couldn’t afford his mortgage” any more with a newborn arriving.[…]

‘Unfortunately, Mr Tannous and his colleague, LJ Hooker Merrylands principal John Contos have plenty more similar properties to sell especially for their investor clients facing pressure from rising rental vacancy rates and falling rents in Sydney.

It’s only starting.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent thinks the next big crisis is at our door step. We could be about to enter an ‘Economic Winter’…one that could freeze the Australian economy for years. If you want to learn more about Harry’s worrying forecasts, 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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