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Australian Housing: Crash Risks Building!

15 November 2018

Whilst the government is making noises about encouraging the banks to lend more freely, and surveys of Australians suggest they think it's the best time in three years to buy a house, the market itself is still deteriorating, with prices and transaction activity continuing to fall.

Sydney auction clearance rates for last week dropped to 42% – the lowest level in a decade. In truth, the number was likely even lower, with nearly 20% of all auctions that took place in Sydney unreported.

Nationwide, auction clearance rates are now barely holding the 40% level, with Brisbane and Perth seeing ever lower clearance rates than Sydney and Melbourne, even though it's the latter two markets that are gaining most of the market’s attention.

Apartment sales on the East Coast have cratered as well. According to property advisory group Urbis, less than 50 apartments were sold in Sydney in Q3 2018, just 13% of the stock available for sale, and a shocking 88% decline in sales compared to one year ago, when 381 apartments sold.

Whilst employment and growth figures for Australia are still relatively strong, we think it’s only a matter of time before the RBA is forced to cut rates, with the following chart from AMP Capital highlighting auction clearance rates for Melbourne and Sydney, and how they are now at or below levels seen in 2008/09 and 2011/2012, when the RBA began previous cutting cycles.
Auction clearance rates
Compounding our view that the next move for the RBA is down is research from Macquarie Bank, which shows a clear link between housing price growth and household consumption.
The chart below shows the correlation between house price movements and consumption growth, with the movements in house prices advanced by six months.

As Macquarie have made clear, where home prices go, consumption tends to follow.

Consumption and dwelling prices
Note that this is not a Sydney only phenomenon, with this article from Business Insider pointing out that a very similar picture is evident in Victoria.

Given 60% of Australia’s population lives in these two states, it’s hard to see how this doesn’t have a profound impact on the economy in the coming months (and indeed years), with the retail sector unlikely to have much of a Merry Xmas.

Warnings from high profile journalists are coming thick and fast now, with Robert Gottliebsen writing in The Australian that:
“The share markets’ danger signals are telling the Reserve Bank economists to leave their Martin Place bunker and go out into the real world. Go and talk to bank branch people (not CEOs) and learn how APRA rules are cutting bank lending by at least 20 over cent but usually by one third.
…Go out and talk to the vast numbers of ordinary Australians under mortgage stress who are suffering from the higher energy prices created in part by Victorian and NSW government bans or curbs on gas production.
…At this stage employment is strong and with labour shortages wages are rising. But the stock market is warning us that as the credit squeeze lowers house prices, the political turmoil is going to hit the real economy.”

In truth, things are likely to get worse in 2019, with further price falls on the way. SQM Research founder Louis Christopher released his housing Boom and Bust report for 2019 today, which included the following table.

As you can see, the base case is for Sydney and Melbourne prices to fall between 6% and 9%, with downside risk should Labor win the next election, and the banks pass on out of cycle interest rate hikes.
Prices chart

Note they do see a more benign scenario, but this implies a 0.50% cut in interest rates in the RBA, to a new record low of just 1%.

Commenting on these numbers, SQM stated that: “If SQM Research is correct on the Sydney and Melbourne forecasts, it will mean by the end of 2019, the peak to trough declines will be at least in the order of 12% to 17% for these two cities.
SQM Research believes that, presuming the RBA does not intervene in the market, 2020 could also record price declines due in part to the repeal of Negative Gearing which is a firmly stated Labor party objective. As such there is a risk that the total peak to trough declines could be in the order of 20% to 30% for our two largest capital cities.”

A drop of such magnitude would wipe the better part of AUD $1 trillion in wealth off the value of Australia’s gross household assets, a dollar value that exceeds the size of the entire SMSF industry.

Let’s hope it doesn’t get that bad, but risk conscious investors should be aware of these trends when building their portfolio for the years ahead.

Jordan Eliseo
Chief Economist
ABC Bullion

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