Its the Economy, Stupid: Why Australia won't have a Housing Crash

Discussion in 'Property Market Economics' started by Redom, 24th Oct, 2018.

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  1. Redom

    Redom Mortgage Broker Business Plus Member

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    Confidence in housing is low & prices are falling in Australia’s two major capitals. Some are beginning to question whether we are at the beginning of a housing crash? Will major cities prices decline by up to 30%? My opinion is that this outcome is very unlikely. Why?

    Australia’s two major economies are in the BOOM phase of the business cycle. The Sydney and Melbourne economies are singing and dancing at the moment, and as a result, Australia’s economy is too. When looking at the facts about current economic conditions, there’s plenty to be positive about:
    • GDP growth jumped to 3.4% in the June 2018 QTR – the fastest pace in nearly 5 years and one of the fastest growth rates in the developed world. We have a diverse economy, so if housing prices are falling it doesn’t mean the economy is too.
    • Unemployment has now fallen to 5% on the back of multiple years of record employment growth. In Syd & Melb, its around 4.5%. Almost everyone who wants a job can get one. Prospects look good too, with vacancies on the rise.
    • Wages will begin to rise as pressure builds from a tight labour market. Simply, businesses will need to pay more to attract and retain staff. The US is currently experiencing something similar with their sub 4% un-employment rate.
    • The dollar remains low – helping our exporters and supporting local production. Inflation remains contained despite higher import costs & higher oil prices.
    • Interest rates are likely to remain low for a good while yet. The RBA are letting the economic momentum build, in part to help manage household debt risks. Changes in household interest rates from funding cost increases remain relatively modest. Interest rates remain at very low levels and are substantially lower today than 2-3 years ago.
    • Population continues to grow at relatively rapid rates. Migration rates have reduced this year, but Australia’s population growth rate remains high. We’re a blessed country & we have strong institutions. People all around the world will continue to want to live here & governments can ‘select’ highly productive skilled young workers through the migration system.
    • Infrastructure investment remains high. One of the country’s largest ever road & rail projects are being built simultaneously, along with a new airport …the list just goes on. Sydney is being transformed. That’s a big boost in public sector investment over the coming years. Melbourne is increasing their infrastructure investment too.
    • Consumption remains strong, despite the wealth effect of falling house prices & the interest only rollover. People are just saving a bit less. Similarly, RBA analysis shows that a potential change in repayment terms for interest only borrowers would have a negligible impact on broader consumption levels.
    • On the back of all of this good economic news, the federal government are soon to deliver Australia’s first surplus in 10 years! The NSW & VIC governments are already in relatively large surplus positions too.
    • Globally, US interest rate rises will dry up liquidity and funding around the world. You'll see asset prices fall in a lot of asset classes over the next few years as assets are repriced to a higher interest rate setting. Aussie housing is part of a worldwide trend here. Fed's raising rates relatively quickly always make emerging markets all jittery, causes a little bit of chaos in parts of the world. Generally speaking, Australia's proven to be very resilient to these changes in the past.
    In short, more people, more jobs, more infrastructure & more investment are transforming Sydney & Melbourne into BOOMING economies.

    But what about HOUSEHOLD debt?

    The household sector is where a lot of the current risks lie at the moment. Household debt to GDP is enormous, debt to income levels are high & we are exposed to changes in servicing costs. In addition, there’s a rollover of IO loans happening & there were some issues with debt origination in the past. Earlier this year, I wrote an article explaining the origins of a debt problem and issues with lending standards creating our own debt problem.

    Overall, our household debt problems have been very well managed and has had a relatively minor impact on macroeconomic conditions. The stock of IO debt has fallen significantly & new interest only loans account for well under 25% of new loans.

    Furthermore, lending standards were NOT that poor in the past. Systemically, lending has been allocated relatively well. In general, those that could afford loans and prove their affordability got them. Most households aren't over-leveraged, capital has been appropriately allocated so those that can afford it, have it - a function of our financial system working well. Arrears rates remain low & overall loan to value ratios are low enough to sustain natural corrections in housing prices. Some borrowers are more susceptible to changes in rates than others, particularly large scale investors.

    Anecdotally, we’ve had over 750 users of our MoneyBRAINS software to date which provides data about Australian consumer debt & risk levels. It’s a relatively small sample size, but produces some interesting insights:

    Screenshot 2018-10-24 18.32.23.png
    The general story from this data is, borrowers who may be ‘overleveraged’ are typically smart investors who appropriately manage risk. Specific changes to lending (read here) were mainly targeted at investors. Homebuyers accounted for a much smaller proportion of I/O loans & have always had their existing debts ‘stress tested’ when they were originated.

    Furthermore, it is unlikely that there’ll be a dramatic feedback loop from a housing market correction to the greater economy. More specifically:
    • IF house price falls causes our banking system to collapse, than Australia indeed may be heading for a world of pain. This is highly unlikely based on APRA stress testing of banks, our low LVR position & the well functioning nature of our financial system.
    • IF borrowers cannot afford an increase in repayments & cannot refinance, this may trigger a SUPPLY shock by forced sellers. This again, is highly unlikely. You will see this in pockets of the country (OTP, investor markets). In general, the macroeconomic impact will be minimal.
    How does this all translate to the housing market?

    Despite this economic backdrop, house prices have been falling in recent years.

    Today, housing confidence is low, lending is tighter, supply is coming online relatively fast, liquidity is being taken out via IO rollovers & there’s potential regulatory changes via the Royal Commission, and potentially a new government.

    The supply demand balance has shifted, so prices are falling relatively slowly. This will probably continue for a while yet. Nonetheless, on balance, calls for 'housing market crashes'with sharp falls in median values in a short time space is unlikely. The strong economy will support resilience in the housing market.

    In short, the fundamentals of housing demand remain relatively strong.

    The strong economic fundamentals will mean that its more likely that we’ll have a few ‘bad’ years with small negative growth to let some of the steam come out of the market. This is in line with previous housing market corrections.

    What’s the saying again; "its the economy, stupid."
     
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  2. MTR

    MTR Well-Known Member

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    Good thread

    But is it 2 markets that are falling?

    Are there any markets in Oz that are strong/rising..... ? I dont know of one
    Tassie has now peaked

    No one can predict how long this bear market will last or how low it will go???

    IMHO its all about the credit squeeze has nothing to do with the economy. If you cant service debt you can not buy

    The nail in the coffin is IO reverting to principal/interest, this is massive, far worse than IR rises

    Wages are not rising

    We just dont know the full impact of investor stress, by this I mean how many will have to offload, hence more supply. I expect the consequence will be property prices falling.

    It will fragment markets further, and how hard it impacts ie how far it falls will be dependent on product and suburb

    We do know that APRA worked and one reason why we see more supply

    I am not confident in a property recovery until credit squeeze eases and I would not be buying now as the timing is all wrong.... for a buy and hold investor
     
    Last edited: 24th Oct, 2018
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  3. berten

    berten Well-Known Member

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    You’re saying we are in for a few more years of price falls but not a crash?

    At the current and accelerating rate of decline, I’m not sure the there’s a difference.
     
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  4. HomePage

    HomePage Well-Known Member

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    In the interest of balance, why don't these point deserve bulleted analysis like the positives you list earlier? Saying them quickly doesn't diminish them or make them go away, especially the 'lending is tighter' elephant in the room.
     
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  5. Rowan

    Rowan Well-Known Member

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    Redom, I like all the facts you put together. You ever look at the property economics abroad in other global cities?

    Every city is different I understand and comparing is challenging but looking at the circumstances e.g. in London where prices dropped 15% amongst Brexit and strong Housing Affordability policies or Vancouver/Toronto where it dropped 10% amongst credit restriction and 4 rate hikes but now experiencing growth again, I can't see any extraordinary factors that can make Sydney and Melbourne experience anything more severe then they have.

    Interest Only Loans is one unique factor often brought up but I haven't read any good analysis just lots of speculation. Id imagine that the majority of book would still be in the money given the outstanding price growth with a small percentage in negative equity from those originated in the last 2 years. But given lenders have given discounts to switch to P&I, APRA restricting book growth in the last 2 years, Aussies noted to be so far ahead in repayments, lenders assessing IOs serviceability the same way as P&I. Would this really be as severe of a trigger as the NINJA Loans in USA to cause a crash? Hard for me to see that.
     
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  6. Sackie

    Sackie Well-Known Member

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    One person's crash is another person's opportunity of a lifetime.

    The whole 'crash' debate is a waste of time because there is not only one reality of consequences, but a multitude. All depends who is looking at it.

    Party on.
     
  7. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    naah...its all about credit ...stupid or not
     
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  8. sash

    sash Well-Known Member

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    Agreed...the economy is travelling okay...its all about credit.

    The other thing is the point in the cycle both Sydney and Melbourne are at....more falls to come...100%.
     
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  9. DrunkSailor

    DrunkSailor Well-Known Member

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    Exactly, mate. Diversity is key. Too many people here only want to operate in one market: a boom. So they keep trying to sweep the possibility of a severe downturn under the rug.

    The market doesn’t care about wishful thinking. It’s better to adapt to the changes and focus on how to capitalise on the new conditions than shutting your eyes and praying.

    This forum should move on from arguing about whether the market will crash or not and focus more on discussing ways to capitalise on the downturn.

    Nathan Birch has even given out advice on how to prepare and benefit from the “GFD”.
     
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  10. scienceman

    scienceman Well-Known Member

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    Why would you call our economy 'diversified' when we have hardly any manufacturing left? Our economy is increasingly dominated by the parasitic FIRE industries. And in a related point 2/3 of our so called strong GDP growth is due to dumb population growth. Relying on infrastructure/ construction is also a hollow promise and has been described as a Ponzi scheme. And to what end - Sydney looking like Hong Kong? Do we really want to live like that? In any case all this building/ population growth will have to end some time (like all Ponzi schemes), so why not now when we still have some amenity and natural environment. PS we have very little in the way of genuine skills shortages and there is no justification for our massive skilled migrant intake.
     
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  11. Noobieboy

    Noobieboy Well-Known Member

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    Regardless of crash predictions, Australian economy is a diversified economy. Manufacturing is dead and will die even more as technology progresses. Those who are refusing to see that are living in the past, just like those who thought that agriculture will remain the main employer after the industrial revolution.

    Society is moving towards a hybrid economy of virtual products and services.
     
  12. scienceman

    scienceman Well-Known Member

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    Manufacturing is not dead - it's just dead (or in steep decline) here as we have allowed it to go offshore. That was my point. There are plenty of reasons to think it still matters and is a better way to grow the economy than through dumb and nasty population growth.

    From The Conversation:

    Why the Australian economy still needs manufacturing

    "Writing in The Conversation earlier this year, Professor Tim Mazzarol highlighted a clear link between economic growth and the presence of a viable manufacturing sector. This reflects a number of factors, including a direct relationship between the expansion of manufacturing and flows of new direct foreign investment, a critical connection between manufacturing and the development of new technologies and other innovations; and manufacturing as a driver of national productivity growth.

    This does not appear to be true for most service-based industries. While these sectors are generating an increasing proportion of jobs, they do not appear to be associated with the same aggregate effect on productivity growth or innovation. Based on this evidence, Mazzarol concluded that:

    “…the Australian economy cannot maintain long term growth and high living standards on the back of agriculture, mining and services alone. Manufacturing still matters.” "
     
    Last edited: 25th Oct, 2018
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  13. scienceman

    scienceman Well-Known Member

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    Sydney and Melbourne are not economic powerhouses when as I have been saying they hardly make anything and are reliant on the Ponzi scheme of debt, endless population growth, a real estate bubble, and the FIRE industries that benefit from it:

    Giant Melbourne, Sydney economic suckholes engulf nation - MacroBusiness
     
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  14. Rowan

    Rowan Well-Known Member

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    Decline of the manufacturing industry is not a good thing, I agree with that.

    But population growth is mainly funneled into Sydney and Melbourne. They are global cities, if we as country are fortunate enough to have the opportunity to have one city (fantastic that we have 2) where people around the world envy and want to live, then we should embrace that opportunity. Growing those cities, increasing the tax base and re-investing back into improving quality of life and again attracting more visitors makes a lot of sense. I don't need to justify this, only need to point to all the best cities in the world including our own.

    You were concerned over Sydney/Melbourne turning into Hong Kong. Forget Hong Kong, we are not even Toronto level density..

    Some people don't like the direction Sydney and Melbourne going and that it's not what it was. I understand that. But those people need to move, we have ~15 other cities that are like Sydney and Melbourne in the past. It would be selfish to not let Sydney/Melbourne realise its potential.
     
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  15. scienceman

    scienceman Well-Known Member

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    'Global city' ? Isn't that just a slogan? You also have the economics wrong. Growing the tax base through population growth will never keep up with all the infrastructure need just to stand still with that population growth. It is not called an infrastructure deficit for nothing. I know by the way we are not Hong Kong - I am looking ahead. What do you think the result of endless population growth will be? And it is a bit arrogant to suggest if we don't like it just move out.
     
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  16. truong

    truong Well-Known Member

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    @Redom, to me the most helpful part of your post is your analysis of MoneyBRAINS users. Smallish sample I agree but very insightful.

    Lots of people are talking about the debt crisis is general macro terms and this tends to send people into panic mode. Rarely do we see real statistical data about the behaviour of single individuals in their own circumstances and yet it is at this micro level that decisions are made. Thank you!
     
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  17. Sackie

    Sackie Well-Known Member

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    The_Truth_Is_Out_There_tagline.jpg
     
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  18. kierank

    kierank Well-Known Member

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    The end is nigh!!!!
     
  19. Perthguy

    Perthguy Well-Known Member

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    I have just finished a major renovation project and finishing up a build project now. It surprised me how many materials I bought that are manufactured in my local area. Good quality at good prices too. There is a lot more manufacturing going on than people imagine.
     
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  20. Perthguy

    Perthguy Well-Known Member

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    I have tried that because I made money in the Perth downturn. Oh boy did I get shouted at. Apparently, I am completely wrong about the Perth market. Or so I was told by people who didn't actually invest in the Perth market during that time :rolleyes:
     
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