Why House Prices Could Be Doomed this Year

Summer is almost gone here in Southern Spain.

As we wrote yesterday, we have taken a break to travel to Andalucia in Southern Spain.

Last weekend, tourists were packing up their cars and suitcases to return home. Kids were getting ready for school.

Holidays are over.

It’s time to get back to reality…and things aren’t great.

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

Back to Reality

September can be an uphill economic battle. There are the summer holiday debts to pay off, and then there is also the back to school expenses. Books, school fees, uniforms…Not to mention that once September is over, Christmas is only around the corner…

Since 2008, the Spanish unemployment rate has remained high. There also hasn´t been much salary growth.

In fact, median household income has gone backwards. According to data from the Spanish Statistical Office, while median net yearly household income in 2009 was €30,045, today that number is €27,558. That is, median household income is about 8% lower than nine years ago.

As we wrote yesterday, rental prices have increased by about 28% in the last four years, according to Efe Agency. After the crisis, many lost their homes to the banks. Investment funds have since scooped properties in mass to place them in the short-term rental market. With long-term rentals in short supply, rental prices have soared.

But, a rental bubble is not the only problem. Costs of living have also increased in the last decade. Services, energy, food costs, you name it.

No salary growth and higher costs of living means that some generations may never own a home.

Much of this started with a property bubble in the 2000s, which then collapsed. Credit tightening, too much supply hitting the market and unemployment rising caused the property bubble to pop.

In Australia, after years of property price increases, we are starting to feel the effects of credit tightening. 

Recent figures by Domain show that clearance rates are slowing…and this is spring, the time of the year where the market supposedly heats up.

Property Prices Have Been Falling

Property prices have also been falling for the last 11 months.

Recent data from Corelogic shows that national property prices have fallen by 2% in the last 12 months. As you can see in the table below, Sydney leads the annual fall with a 5.6% drop, while Melbourne heads the latest quarter fall with a 2% decrease.

Table of national property prices

Source: Corelogic

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As Corelogic reports, Sydney and Melbourne have seen a 3.5% and 3.3% fall in values, respectively, since the beginning of the year. Both cities make up 60% of the housing market value.

As Tim Lawless from Corelogic said:

Weaker housing market conditions can be tied back to a variety of factors, foremost of which is the tighter credit environment which has slowed market activity, especially amongst investors. Fewer active buyers has led to higher inventory levels and reduced competition in the market. Collectively, these factors have been compounded by affordability challenges, reduced foreign investment and a rise in housing supply.

The thing is, two main factors are converging, and this may very well lead to even lower prices. One is a slow-down in credit. The other is a rise in property supply.

As another report from Corelogic shows, there is still a lot of supply to reach the market.  In the next year there will be 94,471 new units built in Australia, that is, a 3.5% increase in unit supply.

As you can see in the table below, over the next two years an extra 251,751 units — or a 9.3% increase in the current supply — may hit the market.

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

Much of this increase will be hitting the two cities that have been the main motors of the property market, Melbourne and Sydney. Yet notice that Brisbane and Adelaide are also looking at a large increase in properties percentage wise.

Table of national property prices

Source: Corelogic

[Click to open in a new window]

More properties on the market will most likely mean that property prices drop even more.

And now banks are also cutting credit. The recent property market rises have been fuelled by population growth, but also by access to cheap credit. Cut off access to credit and demand will fall. It´s that simple.

Add to the mix weak salary growth, rising expenses and higher mortgage rates and it all means that less people will have access to purchase a property.

At the very least the outlook doesn´t look good for the future.  We could be looking at a drawn-out downturn in the property market.

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 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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