Possibly driving an already weak economy into recession.
By Mark Hansen, Australia, MarketCap:
Every day, we have investment banks and others telling us that the Australian housing party is over. Estimates for price declines over the next year or so vary from 7.5% to a plunge of 25%.
Even the Reserve Bank of Australia is in on the act. But it is trying to put a positive spin on any downturn after having for years encouraged new house and apartment construction as being “good for the economy.”
The full impact of new housing supply will not be felt for a year or so. It is almost certain that there will be a major surplus when everything now under construction is complete. This is a bad omen for the Australian economy, where building and selling of houses and apartments has been playing an outsized role.
Macquarie Bank has estimated that new supply will be greater than 200,000 dwellings, whereas demand will be 170,000 to 180,000.
The effect: downward pressure on both house prices and rents; and possibly, an already weak economy driven into recession. There are many signs of a coming downturn:
- For Sale signs are springing up everywhere.
- Auction clearance rates continue to decline. In parts of Sydney it is down to 40%.
- More properties are now being bought by investors, mostly domestic, than by owner-occupiers.
- Household debt has soared, it is now around 140% of income.
- The house-price-to-income ratio is a stratospheric 6.4 times.
- Rental yield is now around 1% after costs.
- Some banks have raised mortgage rates in an attempt to calm the market and are charging investors more than owner-occupiers.
- The big four banks have recently raised $18 billion to help cover potential losses from the housing market.
- Some sell-side analysts now have the big four banks as a sell because of housing exposure.
The situation could quickly become very grim. As prices decline, people start to move into a negative equity position. If the bank takes possession of the house and sells it, any outstanding debt still has to be repaid. The alternative is bankruptcy. A downturn is accelerated by those who are forced sellers. Job losses too put further stress on mortgagees’ ability to pay.
This is not a good time to buy a house in Australia, particularly in Sydney and Melbourne; the cities that have seen the biggest gains. In fact, I know people who have sold and are now renting. They expect to buy back in at lower levels.
The financial sector makes up around 50% of the Australia stock market. In turn, the big four banks make up around half of the financial sector. Most of their income comes from mortgages on residential and commercial real estate. They have had a great year in earnings, but share prices are well off the March 2015 highs. They currently look like a risky investment, especially with potentially lower future dividends. By Mark Hansen, Australia, MarketCap
Ominous signs for one of the few bright spots in the weakening economy. Read… What a Million Dollars Buys in Australia’s Housing Market