Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
The four signs Australian property
A year ago, I would’ve said house prices were too high. And I’d lament that I couldn’t find an affordable place to buy.
But my outlook has changed.
Lately, property prices have fallen just enough to make a modest unit affordable.
I check out new properties frequently.
But I rarely get past the garage.
Before I even set foot inside a property, I measure the height of the car parking space. Unless it cracks that 2.4-metre mark, I turn and walk away.
I’ve left dozens of puzzled real estate agents in my wake.
Look, my giant 4WD probably doesn’t need its own house at night. But street parking for big cars is hard to come by. If I buy a unit with a shared driveway, it’s going to create problems for me and the neighbours.
Finding a new place has been a 12-month mission of mine.
The good news is that things are different a year on.
Around this time last year, one or two properties a month fell into my price range.
Nowadays, I can go to one inspection a week.
It’s not because there are more properties on the market. In fact, the number of new homes for sale in Australia is down 28% in the past year.
But the properties I inspected last year that were out of my price range are now well within it.
While that may be good news for me, it’s a rather ominous confirmation that cracks are beginning to show in the Aussie housing market.
Four signs of a rickety housing sector
In Tuesday Daily Reckoning Australia, I reasoned that there’s a mortgage debt reset coming our way as $400 billion worth of home loans move from interest-only to principal-and-interest repayments.
Turns out, that’s just the start of the debt reset story.
Real estate website Domain claims that one-third of the 18–34-year-olds can’t refinance their homes due to falling property valuations.
Domain puts the blame for this squarely at the feet of property valuers, suggesting that they don’t know how to how value properties during a market downturn.
Domain calls it the ‘experience gap’ — a younger generation of valuers being too conservative because property prices have dropped a few percentage points.
I disagree. In my view, assessments lowering the value of properties remove the hype that was partly responsible for driving up prices in the first place.
But there are other reasons to explain why Australia’s property market is rickety.
Home prices in Sydney and Melbourne have fallen for nine months in a row. That’s not too surprising considering both cities saw a decade of double-digit price gains.
On top of this, there’s the realisation of just how much damage even the smallest rate impact will have on many households.
Digital Finance Analytics (DFA), a research firm, says that the number of Australian households on the financial ‘edge’ is growing.
In November last year, Martin North, an analyst at DFA, said that 910,000 households were susceptible to any increase in their mortgage repayments. That’s 20% more than in May 2017.
Less than a year on, North now says that figure has grown to 945,000 households.
Let’s put that in perspective.
That’s almost one million households — 9.8% of the total Australian housing stock — that would struggle dealing with a small interest rate increase.
What’s more, he points out that the people most at risk are owner-occupiers, and not investors.
That information alone flies in the face of conventional thinking. We are regularly told that owner-occupiers will do ‘whatever it takes’ to meet mortgage repayments. And, of course, they will until that can’t anymore, that is.
It’s this segment of the market that could come precariously close to financial ruin with even a 0.15% rise in their mortgage rate, according to North.
Now, in my view, it’s not likely that any rate rise is going to come from the Reserve Bank of Australia until 2020.
But Aussie banks are increasing mortgage rates.
Macquarie Bank quietly upped its owner-occupier loan rate for principal-and-interest loans by 0.06%. Interest-only loans scored a 0.10% increase.
This follows similar moves from AMP, Suncorp, Bank of Queensland and ME Bank.
The Big Four banks, meanwhile, haven’t increased rates yet. But it appears that it won’t be much longer until they have to.
How international markets drive up Aussie mortgage costs
The Australian three-month interbank rate — which extends into the London Interbank Offered Rates (LIBOR) — is the rate at which Australian banks can borrow in international markets.
Those costs have been going up. Take a look:
Australian three-month interbank rate (left) versus RBA cash rate(right)
Source: Trading Economics
The RBA hasn’t moved rates since August 2016. Whereas rates in international markets have been going up since the Federal Reserve Bank started raising the Fed funds rate at the end of last year.
In other words, the costs for Aussie banks borrowing money to fund their activities are rising.
But the Aussie banks can’t hide behind rate rises from the Reserve Bank of Australia. Which means that they must increase the costs of home loans.
Yet with nearly 10% of households in trouble of defaulting with even tiny mortgage rate increases, it paints a gloomy picture for the future of the property market.
Australia may not undergo a US-style housing bust anytime soon. But a growing number of households are stranded without any buffer, placing millions of Australians at threat of a market shock.