Why Are House Prices Falling?

We’re sure you’ve seen the headlines.

‘Confidence in Property Market Sours’, ‘Property Prices are on the Way Down’.

For the shrewd investor, it appears now is not the best time to invest in property in Australia.

In short, it is not as ‘safe as houses’.

Any analysis of why house prices are falling must touch on a variety of factors. Here are the five primary explanations.

  1. Regulatory Uncertainty
  2. Household Debt Ratios
  3. Luxury Car Purchases
  4. Building Approvals
  5. Stagnant Wage Growth

As the RBA notes, ‘Property assets are likely to behave differently to other asset classes because, in comparison with most financial assets, they involve relatively large transaction costs, are traded in relatively thin markets and consist of heterogeneous products.’

But this isn’t an exercise in reading the tea leaves.

Negative Gearing and the Housing Bubble

First and foremost, at time of writing, a Labor government seems likely to win the next election, if polls are anything to go by. If it does, scrapping negative gearing — or at least restricting it heavily — is on the cards.

Negative gearing is the Australian government’s set of tax rules that lets property investors buy property whose rental income doesn’t fully cover the mortgage payments.

Without negative gearing, or with a heavily restricted version of it, the demand for housing will weaken as it becomes more costly to own an investment property.

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

Key Indicator for House Prices

Secondly, as reported in January, the ABS revised total household liabilities upwards to $2.466 trillion, or 199.7% of disposable income.

As a result of this stress, luxury car purchases have fallen off a cliff.

As Markets & Money’s Selva Freigedo astutely notes, this tracks extremely well with house prices.

Luxury car purchases and home prices

Source: CommSec

 

Housing Market Running out of Steam

This is in effect a function of Australia’s indebtedness. Which is why it is such a good indicator.

Next, building approvals for dwellings have recently taken a hit in Melbourne as the city begins to feel the same cooling effect that has hit Sydney.

This is crucial as it indicates property developer sentiment as to whether they will get an appropriate Return on Investment (ROI).

Across Australia, you can see the relatively steep drop off in building approvals for dwellings:

Australian Building approvals for dwellings 2017-2018

Source: Australian Bureau of Statistics

In this data set, we see that private sector dwellings excluding houses (i.e. units) have taken a major hit.

Clearly, the sentiment isn’t there at the moment.

Finally, it is worth noting that Harry Dent has recently warned that the global property outlook is very grim indeed and may be the first of many bubbles to burst.

Simply put, rent to income and mortgage to income ratios are unsustainable and a major correction is imminent.

Here we see a chart of Australian wage growth over the past 10 years.

Australia annual change in hourly rates of pay

Source: tradingeconomics.com

With wage growth now below inflation, Australians are simply running out of money to plow into a property.

Investors that are wise to these critical indicators will look to other vehicles to drive their wealth.

Regards,

Ryan Clarkson-Ledward,

For Markets & Money

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


Ryan Clarkson-Ledward is a junior analyst for Markets & Money. Ryan has degrees in both communication and international business. His priority is bringing you the latest price updates on stocks through ASX updates, as well as supporting Sam Volkering with background research. As part of the team at Markets & Money his aim is to provide unbiased and relevant news for readers. Ryan’s work with Sam is designed to provide research that complements Sam’s analysis for small-cap and technology stocks. Together, their objective is to break through all the jargon and give you the hard facts to inform your investment decision-making. Ryan writes for:


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