Property Prices Fall 1.5% in November, But RBA Holds Rates Steady

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Australia’s property market slump is showing few signs of improvement. According to new CoreLogic data, property prices across capital cities were down 1.5% in November. And it’s not just one or two markets skewing the numbers either. Five of the eight capitals saw prices decline during last month.

The problems started at the top end of the market. Melbourne had its worst month in memory, with property prices falling 3.5%. Despite this, Melbourne is still up 11.8% for the year. But it’s a sharp monthly drop whichever way you look at it.

Sydney, meanwhile, saw prices decline 1.4% during November. Like Melbourne, the market is still up for the year, at 12.8%. But most of that annual growth before the market turned midyear. As early as July, Sydney’s market was growing at 18.4% year on year. It just goes to show how far its price slump has sunk.

The rest of the market was a bit of a mixed bag. Darwin was down 1.3% and Canberra fell 0.5%. Hobart fell even harder, down 2.4%. On the upside, Brisbane’s market rose 0.6%. Adelaide was up 0.7%. And Perth bucked its own recent trends, posting growth of 0.3%.

What are we to make of all this?

For one, we can officially start calling it for what it is. House prices are officially in a ‘downward trend’. Despite three prices across three cities rising, these rates were marginal at best. The national market as a whole was down 1.5% in November.

These aren’t isolated incidents anymore. We’ve seen signs of this slowdown for three straight months now. At the least, we can say that price growth appears to have peaked. And it’s peaked in the two markets that drive most of the national growth — Sydney and Melbourne.

More than that though, we need to stop focusing on property prices in terms of annual growth. It’s become counterproductive. And it does nothing but gloss over the underlying weakness in the market.  Nor does it help us make reasonable projections for where the market goes next.

Look at the national market, which is up 8.7% year on year. What does it tell us? It describes what’s already taken place. It tells us very little about what’s coming next. Which is what makes the monthly figures so useful.

For the last three straight months, we’ve seen clear signs of market sluggishness. To the point where a trend is beginning to take form. And, with a degree of certainty, we can expect further house price declines in December. Why? Because the pressures on the market  remain the same.

Mortgage rates, for investors and owner occupiers alike, have risen this year. The rate of investment lending in particular has declined appreciably. Investors accounted for 54% of all new mortgages as recently as May. But by September this figure had dropped to 45%.

Lending is much tighter than it has been for a long time for home buyers. And that’s despite record low interest rates making borrowing cheaper than ever.

RBA holds rates steady at 2% despite falling property prices 

For much of this year, the RBA was concerned about price growth across the housing market. Overheating local markets in Sydney and Melbourne posed real challenges for the bank.

The RBA worried about what effects its rate policy was actually having. Was it benefitting the economy, as intended? Or just the housing market? Record low interest rates helped boost demand for home loans to new heights. But the RBA had no intentions to inject credit that’d flow into the property market alone.

It wanted low interest rates as a way of boosting export competitiveness. And as a way of weakening the Aussie dollar too, which helps non-mining industries like tourism.

Yet striking this balance has proved problematic. Especially when the property market saw most of the benefits from falling interest rates. This explains to some extent why we haven’t seen even more rate cuts.

Nonetheless, with house prices now slowing, the RBA has leeway to cut as it sees fit. But it now worries about something else altogether.

Remember, house prices are also an important pillar of the Aussie economy. Not only from the perspective of construction, but renovations as well. Housing related activity contributes roughly 7% to Australian GDP. Which makes any property downturn a potential hazard for the economy.

What the RBA don’t want is this price slump developing into a crash. That could jeopardise the health of the entire economy. But it might be too late for that. Tim Lawless, of CoreLogic, explains:

With the housing market moving through the peak of the cycle at a time when there is a large number of new dwellings commencing construction, there is likely to be a heightened level of settlement risk for off the plan purchases.

Those purchasers who have recently purchased off-the-plan may face challenges at the time of settlement if the valuation of the property is lower than the contracted price, or if mortgage finance is less freely available, or on more expensive terms. This would imply that some buyers may have a higher loan to valuation ratio than anticipated, which could require additional funds to bring the LVR down to a level the lender is comfortable with.

As a result of slowing housing market conditions, an additional risk for policymakers is where a large number of dwellings approved for construction are postponed or withdrawn as developers face fewer presales or lose confidence in their ability to deliver a profitable project to market.’

You can see the paradox facing the RBA. Cut rates, hope the banks pass it on, and watch property prices grow at the expense of the economy. Or leave rates alone and watch property prices crash, putting the entire economy at risk. Some decision…

You almost feel for the RBA — almost. But, were it not for its reckless rate policy, we wouldn’t be in this mess. Unfortunately everyday Australians will live with the consequences. Whether that comes from a property crash, a major downturn, or both, the outcome will be the same.

Mat Spasic,

Junior Analyst, The Daily Reckoning

The Daily Reckoning’s property expert, Phillip J. Anderson, is a bull when it comes to the housing market. He’s maintains that house prices are set to boom over the next decade.

We don’t always agree at The Daily Reckoning on the future direction of the market. But everyone is right half the time.

Phil’s 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where it’s going. He predicted a housing market crash in 2008. He also went against the mainstream in 2009, saying house prices would go on to boom this decade.

He was right on both accounts.

In a free report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade. He’ll show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.


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