Several investment banks have warned a slowdown in Australia’s housing market could trigger a recession in 2016.
Macquarie Bank forecasts house prices declining gradually by up to 7.5%, starting March next year.
Credit Suisse says that housing is ‘no longer the safe haven asset’. It sees real estate as riskier than even the stock market…
All the banks agree on one thing. As prices decline, they expect it to drag on the economy, raising the risk for a recession. JCP Investment Partners just ‘elevated’ their forecast for a likely recession in 2016 too.
This isn’t scaremongering.
For years, the growth in the housing market drove the economy. It helped offset the downturn in mining. But now the housing market is close to peaking.
Supply, in key cities like Melbourne, is exceeding demand. Building approvals are on the up too. But they’re overshooting demand by 20–30,000 properties according to some estimates.
House price growth is slowing as well. If you’ve been following trends in recent months, you’ll know all about this.
Median prices in Sydney grew by just 1.1% in August. That was in contrast to growth of over 5% between June and July. Then, in September, Sydney saw no price growth at all. And that’s from a city which grew by almost 17% in the past year!
The same is true across the rest of Australia. In cities like Perth, house prices are down by almost 1% over the past year. In Adelaide, prices have fallen half a percent during the same period. So you have prices slowing and supply rising, both of which suggest the market has peaked.
If you’re reading this, wondering why falling prices might spell trouble, I’ll explain.
How falling house prices hurt the economy
Right now there are two camps of people in Australia, with relatively little middle ground.
There’s one corner which wants house prices growth to continue rising. These are the homeowners among you out there. Those with homes you either live in, or properties you lease out.
Then there’s the other side. People weighed down by unaffordable housing costs. These are your households which can’t afford to plump down a deposit on a home loan. House prices remain out of reach for this group, even with record low interest rates.
If you fall into the latter camp, you have every right to feel happy about falling prices. House prices in Sydney and Melbourne remain unaffordable for many. Home ownership remains a distant dream.
But consider also the side effects of falling house prices on the economy.
The first casualties would be indebted buyers falling into arrears. From that, you could see a mass of defaults. Either way, the effect on household budgets would be steep. If household incomes drop, that in turn affects employment too. And as unemployment rises, economic activity stalls as spending levels fall.
You end up with a cycle that creates unemployment, and lowers household spending. In a nation whose export sector doesn’t drive activity like it once did, that’s a recipe for recession.
How bad is household debt becoming? According to Bank of America (BoA), it’s risen to never before seen levels. Household debt to GDP is over 133%! Now imagine rising repayments rates, and what that will do to budgets.
And all of this is happening with decade low oil prices! What will happen when oil prices recover? If all these things take hold at once, household budgets will be at breaking point.
When you have that kind of debt piled up, a cooling property market is a dangerous thing. You could find yourself with negative equity, owning more on your mortgage than what it’s worth.
Worse still, BoA believes interest rates will play a major role too. It expects the Reserve Bank to lift rates next year in response to rising inflation. If interest rates rise, households will find it even harder to meet mortgage repayments. JCP’s Wes Campbell notes:
‘The combination of weak disposable income and high household debt is concerning, particularly given Australia may have to raise interest rates in the future to follow the United States’.
Too much supply and not enough demand equal falling house prices
An oversupply of housing is another factor weighing on the property prices. Population growth is slowing. Despite the fact the market remains so unaffordable for so many.
Even the recent clampdown on investor lending is only adding to this issue. As investors get driven out of the market, the market gets left with excess supply and less demand. Macquarie reckons the imbalance between supply and demand is growing:
‘Building approvals and housing commencements, at 200,000 plus, are running well ahead of estimated underlying demand, which we peg at 170,000 to 180,000 once current and prospective population growth rates are incorporated’.
You know very well how supply and demand works. With too much demand, and too little supply, house prices go up. Too much supply, not enough demand, and prices go down. Which makes the problem of oversupply a real concern for the stability of house prices in the year ahead.
Macquarie believes this slowdown will hit high density apartments first. Especially now that there’s a bevy of apartments slated for construction.
Whether you believe the banks or not depends on whether you own property I imagine. Some of us want to believe that prices will remain at least stable. Or that they might even start growing at knots of yesteryear again.
Already house prices are slowing. Slowing population growth, alongside investor lending clampdowns is having an effect.
And with household debts rising, and housing supply up, it’s a bleak outlook. Especially once you factor in potential rate hikes next year.
Yet investment banks are merely wising up to what we’ve been saying all year. The Daily Reckoning’s Greg Canavan warned of the coming recession earlier in the year. As one of Australia’s leading investment analysts, Greg says we’re heading towards our first recession in 23 years.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position.
But there is a silver lining. There are actions you can take now to lessen the blows of the coming recession.
Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.
Contributor, The Daily Reckoning