Get ready: Aussie property falls to get worse

Get ready: Aussie property falls to get worse

Welcome back.

Just like that, a new year begins.

Although I am going to begin the new year with a look back at what happened last year.

The so-called ‘Santa rally’ never came to the markets in 2018.

That is, a small spurt for stocks to finish the year higher.

The broader Aussie market sold off as December came to an end.

Over in the UK, the FTSE 100 finished December where it started.

Major indices in the US, on the other hand, were savagely sold off as the year wrapped up.

And it turns out Aussie house prices took a bigger beating than most expected.

New year, same news

The last week of a year, and the first week of the new year, is my favourite time.

In Australia, there’s generally very little do, other than complain about the heat. Most places are closed. There’s no rushing from place to place. You have time to finally finish that project you started a year ago, or enjoy guilt-free Netflix binges. You lose track of the days. The markets are quiet.

The time of year when you actually have the time to read the paper but there’s nothing really new to read.

Take The Age this morning.

It kicked off the year talking about falling Aussie house prices. Again.

According to The Age, there’s more doom and gloom ahead for the property sector in 2019. Today’s headline is: ‘Weakest property market since 2008: Sydney, Melbourne house prices tumble’.

According to the article, Sydney house prices fell 10% for 2018, while Melbourne prices are down 9%. Australia’s two largest cities contributed to a nationwide property fall of 4.8% for the year.

The good news is that the average Joe didn’t bear the brunt of the falls.

Turns out, the worst ‘performing’ areas are where the rich people live.

It seems that houses in inner Sydney and Melbourne’s inner east are falling the most. Both areas saw double-digit falls for 2018.

Basically, multimillion-dollar houses are dropping back and becoming ‘just’ million-dollar homes.

This skews the data somewhat, in the sense that the percentage figure of property price falls looks bigger. I mean, there’s only a select group of people who can buy in those areas. So, already the number of purchases is reduced.

But the gloomy outlook doesn’t end there.

Not only that, but The Age has wheeled out an economist or two to suggest that the falls will get even bigger in 2019.

Ah yes. New year but with the same old news.

It’s worse than you think

If you weren’t over the constant house price chatter in 2018, get set to be damn near fatigued by the end of 2019.

Of course, that’s what happens when you have an economy reliant on houses and holes.

Australia’s economic prosperity relies on the construction of houses and the near one million odd people employed to build them, market them and sell you things to put in them.

Falling house prices drastically affect Australia’s wealth.

Right now, we are being hit where it hurts. And it could have a drastic impact on the overall health of the Aussie economy.

Here’s why.

For most Aussies, our biggest asset is our house. And as long as the value of that goes up, we are likely to feel rich. Even though we can’t cash in the bricks, the ‘paper value’ of our house makes us feel wealthy.

Wealthy enough to perhaps spend more than we normally would. Perhaps take out a loan to buy a car, or even a luxury item like a boat or jet ski.

Even renovations contribute to the wealth effect.

People renovate for two reasons. One is that they want a bigger or better house without having to move.

The other is because rising property prices mean they feel ‘priced’ out of a desired area of the property market. Sure, that means they aren’t ‘upgrading’ to a bigger house. But renovation is a costly experience and contributes to ‘spending’ in the Aussie economy.

On top of that, there’s general discretionary spending. You know, splashing the cash on the fun things.

If the value of your house has gone up, chances are you don’t mind spending a bit more at the shops.

iPads for Christmas? Sure. What about a new gaming console for the kids? Why not.

Plus, when people feel the mortgage repayments are easily managed, they’ll lash out on ‘experiences’. Overpriced day spa sessions and hot air balloon trips don’t seem so expensive when your pile of bricks has risen 10% in value over the year.

But when house prices fall that’s when things start to come undone.

And this is what is so warped about the Aussie economy.

Australia’s livelihood is wrapped up in the perceived value of our houses. We spend our money based on what we think our pile of bricks is worth on paper.

Even without nationwide wage growth, rising house prices meant we collectively still felt wealthy enough to buy frivolous things.

So yes, the house price chatter will continue into 2019. And you may get a little sick of it.

But the reason why it matters is because it gives you valuable insight into how people are going to spend their money in the future.

Falling house prices mean people are going to reduce their spending.

And that could lead to a significant drop in Australia’s economic prosperity.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia