Property risk highest in a long time

hobo-jo

hobo-jo

Australian property prices are not affordable on any spectrum that looks beyond the current cycle. Indeed, they remain at nose-bleed levels on any historical comparison.

Yet, prices have held at these high levels for over a decade and there is no saying that they won’t continue to do so. Throughout the GFC and afterwards I argued that the time of reckoning for the Australian housing bubble was not yet at hand. This was based largely upon the assumption that the nation had lots of firepower left in monetary and fiscal policy that would protect the downside. And so it turned out to be.

But each successive challenge has sapped these supports and insurance policies. Monetary policy is at 2.75% and probably has, at best, 1% of cuts left before it is exhausted. Fiscal policy too has limits now that the Budget guarantees bank borrowings. Not to mention the political paralysis preventing spending. We will never see another post-GFC stimulus program.

Most importantly, these limitations are apparent as the Australian economy enters a very serious challenge in the form of declining mining investment. In its editorial this morning the AFR wrote:

If Professor Garnaut is right, Chinese steel use per capita – the great driver of Australia’s resources boom – may not grow much further. He believes Australian resource investment will slide from 8 per cent of gross domestic product to just 2 per cent, effectively taking out about two years’ worth of national economic growth. This is already showing up in a string of profit warnings from mining services companies and an emerging slump in profitability in coal.
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Think about that a moment. 6% of Australian GDP disappearing over the next three years before we even start to grow. This is the same forecast currently projected by ANZ and Goldman Sachs. It must be taken very seriously.

If this comes to pass, then it will be very difficult for Australia to avoid a recession and property bust of some kind. There will be very big falls in the dollar and they will protect Australian property prices to an extent. The fall will trap Asian investors already in the market but it will also deter future investors as currency risk becomes the new reality.

But the fall in the dollar is also going to hit consumers, much more quickly than it is going to benefit tradable sectors. Consumers will see purchasing power eroded as high inflation in oil and all imported goods overwhelms income growth. This will keep confidence under the cosh.

More to the point, a 6% draw down in business investment will hit the labour market hard and potentially trigger forced selling in property markets. Perth and Darwin especially are going to be at risk of property busts as the many project labourers on our major mining projects flood back into town with nothing to do. Not to mention the trouble we’ll see in the many sundry industries that have benefited from the mining boom. Brisbane is at risk of this dynamic too but has already corrected sharply so has less downside.

These factors, along with a generalised stalling in income growth, have the potential to feed bad loans back into the banking system. The majors can absorb serious losses. But how serious? And how much credit rationing would it take to pop the grossly oversupplied Melbourne and Canberra property markets, the latter afflicted with big job losses from a new government as well? Sydney is strong but only so long as credit keeps flowing.

There are of course arguments about high immigration, underlying demand, under supply and rising rents to support the market. And they will play some part. But none of these will matter in the circumstances I’m describing. If there are not enough jobs then people will move in together. Shortage will turn to surplus.
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http://www.macrobusiness.com.au/2013/05/property-risk-is-at-it-highest-in-a-long-time

Thoughts from the Somersoft think tank?
 
Que the "it's different here" response.

They will prattle on about alleged supply constraints and high demand and even the face of a slow down property will jut keep going up. Rubbish.

Perth is a great example - it's chockers with pommies on 457s and FIFo bogans, once we see the mining investment phase recede you watch em all get back on a plane and go home and vacancy rates rise. The investment phase is the labour and capital intensive component - for many big projects that phase is coming to an end.
 
Apparently the bubble risk is subsiding, even though we are still very unaffordable, according to Larry's report:

http://www.propertyobserver.com.au/...il&utm_term=0_a523fbfccb-e3f70f235b-245278065

I also see unemployment increasing in the short-medium term and this may affect demand and servicibility. Although the latter has been in "happy days" territory for borrowers and looks to get better in the short term. We are told that Aussies are saving more so hopefully paying down debt has also been occurring.

Whilst it appears deflationary to me wrt asset prices, we have rising prices in everyday expenses especially utilities. I reckon there will be a further lull before the inflationary card is dealt. Inflation to asset prices will come. Now is a good time to buy prudently IMHO.
 
There will be very big falls in the dollar and they will protect Australian property prices to an extent
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Interesting...so does he mean low AUD is good for Australian property?

Was watching an interview on Inside business, the head of Australian Industry group advising AUD at 88cents will make lot of Australian industries extremely competitive on world stage.

Even Australian based miners (aka Atlas etc) will double or triple their profits if the AUD falls.

So there is a very good chance even if mining investments falls there will be other industries that will start doing well and compensate some of the losses to the GDP caused by reduced mining investments.

Since, the article already had a few IFs I thought I might add one more. If Indian government gets their act together by controlling the current inflation problem then the RBI (central bank) will start cutting interest rates which will trigger investments in infrastructure and will lead to demand for mining resources. Indian Government has identified it needs to make approx US$1 trillion investment in infrastructure over the next 5 years.

I think the China and India story has atleast another 20years to run easily.

IMHO, in 10-15 years time the chances of SS members arguing with property bears about Sydney median prices >$1m is quite possible.

Cheers,
Oracle.
 
hobo-jo said:
Thoughts from the Somersoft think tank?
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The author, David Llewellyn-Smith has been consistently wrong about the Australian housing market, so it's hard to take anything he says seriously. He is on the record in 2011 predicting a full decade of declining house prices. He has also been wrong about the unemployment rate, GDP, iron ore prices, gold, wrong on pretty much everything. This article is typical Macrobusiness dross... it can be summarised thus... 'bad stuff will happen in the future and then "The Bubble" will finally burst'. They've been churning this out for years to pander to their property bear audience. But nice plug for MB anyway, maybe David will get a few more donations out of it.
 
"Brisbane is at risk of this dynamic too but has already corrected sharply so has less downside."

obviously the author didn't get smashed holding Perth property, it's still way down
 
(I am just a beginner of econ so I maybe wrong).... but here is what I think... while if AUD drops it helps the local business to do export, it also mean that the petrol will be more expensive which increase the cost of the production and daily activities. While the business is back to the business they need to hire more people (which the business may have to increase the salary to attract more people to work if the area is lack of suitable people), (here what RBA did before) RBA may increase interest rate because of the inflation rate maybe increase and the inflation causing by the wages (that what happened once before and causing many people a bit surprise)

btw anyone feel the new positions salary is not as much as before nowadays when they business hiring people?
 
all this people that have been praying for a weaker AUD are about to see the pain of it, starting with fuel going up about 5c in the coming days... and so the pain begins. you don't get richer by reducing your purchasing power - it's just a nonsense
 
Ausprop said:
all this people that have been praying for a weaker AUD are about to see the pain of it, starting with fuel going up about 5c in the coming days... and so the pain begins. you don't get richer by reducing your purchasing power - it's just a nonsense
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You should bone up on economics 101 if you believe that. Why did Australia get through the Asian financial crisis relatively unscathed? Because our dollar plummeted in value.
 
TomW said:
You should bone up on economics 101 if you believe that. Why did Australia get through the Asian financial crisis relatively unscathed? Because our dollar plummeted in value.
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yeh thanks for that... think I managed to get thru that one ok.

It's strange that everyone wants pay rises on a personal level, but paycuts on a national level. anyway, lower living standards coming up. We will be slightly buffered as I think a lot of importers have been reaming consumers for many years, pocketing exchange rate bonuses. Big problems with foreign debt tho and who knows what it will do to inflation.... it may be benign for now but if the currency drops too far it will put pressure back on rates
 
hobo-jo said:
Continued high immigration is an if. Rising rents in the short term is an if (mixed bag at the moment: http://www.hotspotting.com.au/article/2462-darwin-and-perth-lead-rental-growth). Underlying demand might not be as strong if we see people cutting costs by and consolidating into less houses.

Both upside and downside have ifs.
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Totally agree with Perth rentals, I had a 23.26% rental increase. In addition new tenants wished to prepay 3 months in advance fixed term lease (I do not like periodic leases so that's why a new tenant moved in).
It was quite a surprise. :)
In addition there was some capital growth.... At least some good news at last!
 
Shadow said:
The author, David Llewellyn-Smith has been consistently wrong
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Can you point me to another daily commentator who isn't regularly wrong with short term predictions? You can cherry pick the wrong results from anyone with a history of predictions, doesn't mean they aren't worth listening to.

Aaron Sice said:
can some please define "long time" for the title of this thread please?
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Can you think of another time in history when Australia was at risk of a downturn in mining investment to degree we are today along with high prices relative to rents and income? Maybe the 1890 bubble?
 
hobo-jo said:
Can you think of another time in history when Australia was at risk of a downturn in mining investment to degree we are today along with high prices relative to rents and income? Maybe the 1890 bubble?
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There used to be talk of a three tier economy (mining/agriculture, services and manufacturing) then it went to a two-tier economy (mining/agriculture and services), now with expansion projects sidelined, mining slowing at present, the price of precious metals dropping, Port Hedland, Karratha etc coming off the boil, interest rates dropping, Budget cuts for all

At least the stock markets improving (did you see The Nikkei is up to 15,000 from below 10,000 in December).

What was that saying "may you live in interesting times"
 
Ausprop said:
all this people that have been praying for a weaker AUD are about to see the pain of it, starting with fuel going up about 5c in the coming days... and so the pain begins. you don't get richer by reducing your purchasing power - it's just a nonsense
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Uh !!! With a lower dollar you increase purchasing power , you receive more dollars for goods and services you exchange for them , you may even get to keep your job so you can afford to buy any fuel at all. Parity pricing means a lower dollar means australia earns more from its oil and other exports and can pay wages and increase tax revenue without increasing tax rates. So the consumer has more money in their pocket to buy fuel. A few extra cents for fuel is negligible compared to not even having a dollar to spend. It is very naive to just look at one side of the equation. Other countries are getting out of ecomic do do, by policies that lower their currency. to give the people more spending power.
 
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