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Blog

The Australian Housing Market

Ben Rodney

Median house prices in Australia have fallen by 5.3%. The dominant narrative on our televisions and in our newspapers is that the property market will fall further. I'm always suspicious when it comes to television and newspapers.

What's more interesting about the fall in property prices is that these falls are concentrated in the boom towns of Sydney and Melbourne, which have fallen 9.5% and 5.8% respectively from their peaks in July 2017 (bringing them back to where they were in 2016).

Here is the logic of the argument that property prices in Australia will fall further, and drag the entire economy down with it:

A fall in house prices > A fall in the wealth effect > A fall in consumer spending > Job losses in retail and housing construction > Unemployment spikes > Mortgagees defaulting on home loans and dragging down banks > Forced home loan/distressed home sales > A fall in house prices

Rinse and repeat the process until the country falls into a recession. It's a logical argument, but there is little evidence it is actually happening.

Let's look at each causal step and examine the supporting data (or lack thereof):

A fall in house prices

Only Sydney has had a significant pullback. Sydney is a volatile market where house prices have fallen four times in the last 15 years. It should be noted however that the speed of the fall in Sydney is the fastest on record.

Excluding Sydney and Melbourne, the average prices for the other state capitals is actually up. 

A fall in the wealth effect

This is a theory to explain homeowners spending patterns. It makes sense logically but it's very hard to quantify. The theory states that when people feel wealthy (thanks to the equity in their house) they spend more, and that the reverse happens when house prices are down. 

I believe it may cause people to defer big ticket items such as cars, and car sales are down heavily, particularly in NSW. I'm not sure it is of much consequence on smaller items or more generalised spending.

A fall in consumer spending

The data doesn't support this yet. Consumers are spending more this year than last, and here is the chart to prove it:

Chart showing Consumer Spending in Australia

Rising unemployment

Again the data doesn't support this. Unemployment is trending down. Employment is the key factor when it comes to mortgagees paying their mortgages. Australia is adding more jobs, which means more spending and more demand for houses.

Mortgagees defaulting on home loans, bad debts spiking and dragging down the banks

We recently had Westpac Banking Corporation presenting to our network. Guess how many many of their 1.6 million mortgages defaulted last financial year? A: 400. Asset quality of the banks is not deteriorating.

Forced home loan/distressed home sales

I suspect the low auction clearance rates in Sydney and Melbourne are because there is a difference in expectations between buyers and sellers. Buyers read the doomsday headlines about property prices and think the market will get cheaper. Sellers, in no rush to sell, are prepared to wait. I would be much more worried if the auction rate was very high and the price was declining – that would be indicative of forced/distressed selling.

Property market prediction: House prices will bottom in June 2019

I'll probably be wrong about the date, but I think buyers with good jobs will step back into the property market. In the absence of a spike in unemployment, and with the population and GDP growth Australia is currently experiencing I cannot see the country falling into recession.

Like any other cyclical market, property prices go up and go down. The long term trend however, much like the stock market, is up. 

As Churchill once said "Never let a good crisis go to waste". With that in mind I see this pullback as an excellent opportunity to buy downtrodden stocks in the housing and consumer discretionary sectors. Contact me or your Morgans Adviser for more details.

Disclaimer: The views and opinions expressed here are my own and may not always be consistent with those of Morgans Financial Limited or our Research Analysts. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.