Australia | Apr 14 2008
By Greg Peel
The latest Australian economic data have fallen into line with the increasingly disturbing trend recently established. Today it was the turn of housing finance to show a fall of some magnitude, with a 5.9% fall in loans in February being the lowest reading in four years. This news follows a drop in credit finance, the first decent fall in the ANZ job ads number for a while, a big drop in business confidence, and another big slump in consumer confidence.
It was the actual number of loans which fell 5.9%. The value of loans fell an even more alarming 9.4%. As this was the February figure, it pre-dates another two interest rate hikes. So if increasing interest rates are the primary cause of the fall in loan demand, along with general inflation problems in food and energy in particular, then just wait for the March figures.
Quite simply, as we all know, housing in Australia’s cities is generally unaffordable. Put up rates even more, and pay more for petrol and groceries, and housing becomes more unaffordable again. The number of loans on existing properties, as opposed to loans for people to build, fell even more sharply to a seven year low. First home buyers accounted for only 17.2% of loans compared to the twenty-year average of 21%.
With housing finance being the next economic indicator to fall off a cliff, one can understand why recent forecasts from a number of economists see the average housing price falling 10% in Australia on a slowdown, 30% on a recession, and up to 50% in some specific areas such as popular holiday house regions. Hardly anyone can afford to buy a house anymore in the area they’d most prefer to live with reference to their place of work. And the cost of taking out a mortgage is climbing ever higher, not only due to RBA cash rate increases but also due to additional independent increases from banks.
Incidentally the big banks, which cop all the criticism in the media, unsurprisingly saw their share of the mortgage market at its most dominant in 15 years. For while the big banks may have been increasing their rates under the spotlight, increases have been a lot more significant out of the spotlight from smaller regional banks and non-bank lenders. The cost of funds may have increased for the big banks, but since the shutter came down on the securitisation market smaller lenders without deposit bases can no longer compete. They are fighting to even survive.
The slump in housing finance will come as no surprise to those economists and academics who have been warning of an eventual Australian house price collapse for some time. The level of Australian household debt has been soaring at an exponential rate – far faster than that of the US and to levels never before seen. With so many families and individuals laden down with such a debt burden, the expectation is that it would only take a slight slowdown in the economy (which the RBA is trying to orchestrate anyway to fight inflation) before a housing tipping point is reached and the bottom falls out of the market. This is not good news, particularly for those who have also seen the value of their share portfolios fall 20% or so.
But there is a counterforce. Another school of economists argue that house prices, and particularly rents, will continue to rise in Australia for the simple reason demand is outstripping supply. The population is currently growing at its fastest rate in 18 years, spurred on by skilled immigration which the government is desperately pushing in order to maintain Australia’s economic growth (which the RBA is otherwise trying to slow), and the rate of building of new dwellings has fallen substantially, due to the high cost of materials and the high cost of labour. The labourers have all run off to the mines.
At the same time Australia is enjoying better than “full” employment (given full means 5% unemployment) and household incomes are growing, providing the ammunition to keep that extraordinary debt burden balanced. Thus, for example, all of ANZ, Commonwealth Research and CommSec have argued to day that while the average house price might slip from here as a slight corrective reaction to 100 basis points of recent interest rate hike (plus another 30-odd from the banks), it should stabilise and turn around again later in 2008 due to the simple concept of plenty of demand and lack of supply.
That’s the average price across the country. There will be different reactions in different regions, with Brisbane, for example, still buoyant, Perth beginning to plateau, and Sydney and Melbourne seeing definite falls. In the McMansionville suburbs of Sydney and Melbourne there is a noticeable slump. But Tasmania is the new black and who knows? There might even be people who will choose to live in Adelaide.
Of course if rents keep rising in the capitals as they have done, higher yields should draw in more property investors to the market, particularly as the stock market is currently depressed. BIS Shrapnel, for example is predicting a 50% rise in rents over five years. This only further fuels demand and thus house prices if investors seek existing homes and not off-the-plan.
(What I want to know is who? Who is going to pay 50% more? Everyone outside those of “high net worth” are already struggling as it is. Are they going to eat dog food? If oil goes to US$150/bbl will we still use our cars as much? If rents go up 50% will we not consider moving back out of cities, moving to smaller house – perhaps the kids have to share – of sharing more amongst singles? Average incomes are not going to go up by 50%.)
So at the moment the housing market is in some state of balance, waiting to see which force will prevail. With US and global economic growth forecasts turning weaker by the day, it will be interesting to see how well the demand side holds up its end of the bargain.
(Oh – and just kidding Adelaide).