House prices slump: Straw that breaks the economy’s back?

Wed, 24 May 2017  |  

This article first appeared on the Yahoo7 Finance web site at this link: https://au.finance.yahoo.com/news/housing-hit-wall-225035072.html 

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House prices slump: Straw that breaks the economy’s back?

Will a slump in house prices be the straw that breaks the economy’s back and be the trigger for an economic hard landing in Australia?

Probably no, but it is a question that will likely dominate the news over the remainder of 2017 and into 2018.

Australia has gone 25 glorious years without a recession, but the risks are building that late 2017 and 2018 will be glum ones for the economy. The extent to which the economy is stuck in the mud will depend on the extent of the housing slowdown, the impact this has on already fragile consumer demand and the policy response of the RBA and possibly the government.

A slump in house prices will damage consumer wealth and with that consumer spending, investment and employment. Wages growth, which is already at a record low, will stay low which will further compound the lack of traction in the economy and feed into the fragile growth outlook. Already retail sales are flat or falling and consumer sentiment shows more people are pessimistic than optimistic.

This is not good news.

In terms of house prices, there is a growing wall of worry that the boom in the Eastern States is ending, possibly in a bust. The admittedly erratic and somewhat volatile Corelogic house price data shows prices in both Sydney and Melbourne having fallen by 2 per cent from their peaks a little over a month ago. Perth house prices are down 11 per cent from their 2015 peak.

Adding to the risks, the regulators are instructing the banks to constrain their lending, especially for investors and interest only loans, and this is happening when the banks have been lifting mortgage lending rates independently of RBA moves in official interest rates. These factors will undoubtedly crimp demand for housing at a time when it is already of the cusp of a slowdown.

At the same time, it is strikingly clear that the financial strategy behind investing in property is turning sour – gross rents are actually falling in some cities and nation wide, rental growth is at its lowest in two decades. According to SQM Research, the gross rental yield is also falling which for highly indebted investors, cannot be sustained for very long. It is all very well for investors to have negatively geared properties, but there does need to be a reasonable cash flow from the rental property to help validate the investment decision.

What is also apparent is the oversupply of apartments in several cities where there has been a record building boom over the past few years is about to unleash an oversupply of property.

Economics 101 shows that when supply increases relative to demand, prices moderate – or fall. It is increasingly common to hear of anecdotes where apartment prices are being offered at marked discounts.

Lessons from the global financial crisis show that house price busts trigger widespread economic hardship and recession. Look at the housing busts and recessions in the US, Spain, Ireland and the UK, among others. What happens is that many home buyers capitulate and default on making payments on their properties if prices fall too much, and this leads to an economic slump as these losses impact on banks.

When banks have a rush of loan arrears on mortgages and actual defaults, they restrict lending which further compounds the slow down and the economy enters into a cycle of weakness.
This is still unlikely in Australia, but the risks are building. At best, house price growth is slowing. At worst, house prices are at the cusp of a decline. This will have significant consequences for home owners, investors, banks and of course, the overall performance of the economy.

The debate will revolve around the severity of the downturn and whether it spills over the broader economy.

Fasten your seatbelts and think about the possibility of Australian interest rates falling below 1.0 per cent and the Aussie dollar cascading.

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.