Australian Economy 2019 - How this will impact on Property

I think this is an excellent read....(Harrisonyork)

We may even see AUD hit 60

The Australian economy in 2019 - house prices, growth and interest rates – another cycle extension - Harrison York

Extract

No recession, but constrained growth
Clearly a deeper slump in national property prices – say a 25% top to bottom fall rather than the 10% we are expecting – would cause severe economic damage but in the absence of much higher interest rates or unemployment causing mass defaults this is unlikely. Australia hasn’t seen the sort of deterioration in lending standards seen in the US prior to the GFC that saw people with “no income, no job, no assets (NINJA’s)” get loans and where the Fed raised rates 17 times over two years! And unlike in the US, Australian mortgages are full recourse loans so there is no “jingle mail”. So, a US GFC style surge in defaults adding to downwards pressure on prices is unlikely.
Barring a deeper property slump, a recession is unlikely:

• The drag on growth from slumping mining investment (which was averaging around 1.5 percentage points per annum) is fading as mining investment is getting close to the bottom.
  
  
• Surveys point to a recovery in non-mining investment. Business investment plans for this financial year are pointing to a 4% gain and 7% for non-mining investment.

 

I think the key to watch is defaults.

Prices alone don’t cause default’s - cash flow does.

Things to watch that might impact cash flow:

• Inability to refinance through stricter lending causing cash flow issues to borrowers.
• Availability if interest only and effect on cash flow if people must convert to P&I.

These two are already in play I think – you property guys would know much better than I do.​

• Interest rates (wholesale funding as well as RBA): Not fully in RBA hands as it has limited fire power due to Australia’s need to finance the current account deficit. RBA could be caught in position where dropping rates to strengthen mortgage holders cash flow is more than offset by increase in foreign funding costs which will need to be passed on by the banks to borrowers.

• Feedback loops from housing wealth effect into consumption, investment and household savings rates – this in turn slows the economy, resulting cash flow changes cause problems through lack of employment / rent income etc.

Marginal borrower who find their investments non-self-liquidating because of how they structured it initially or a fall in rental income or increase in vacancies or financing costs and lose their external income will become heavily cash flow negative – how much buffer do they have? Once they are out of buffer, they are the banks problem. How much can a bank recover in a repossession, how much blood can they get from a stone even if the loans are full recourse. How much assurance does the share price of GMA and QBE give you that there will be enough equity in the mortgage insurers to cover loses?

If the banks have a default problem, we will all have a problem via another negative feedback loop.

Banks have about 7-8% equity to interest earning assets. Early 90’s default event saw Impairment around 7%.

A repeat of defaults anywhere near that level would require massively dilutive recapitalisation of the banks and as the banks are a massive part of the Australian economy and superannuation assets. A hit to them will surely have another wealth effect feedback loop on asset prices.

If the feedback loops can be kept in check and you can bet the powers that be will be trying to manage it that way – we will be looking at what you would call a soft landing in housing and a largely unaffected equities market.

If housing price drops starts firing off the cash flow feedback loops and bank earnings are impacted by loan defaults, look out for a simultaneous decline in housing and equity which will not abate until we have been through all phases of a bear market in both assets. (Denial, creeping anxiety, outright concern, fear and then panic) If this does turn out to be a housing induced bear market, I suspect we are probably only at creeping anxiety so far – A long way to go)

2019, like every other year will interesting.

The greater the uncertainty the greater the oppertunity, just Journey safely.

 

Excellent feedback