Official figures have been released showing the extent of the Australian property market slide. $133 billion was wiped off the value of property prices in the December quarter 2018.
Figures from the Australian Bureau of Statistics show that Sydney had a quarterly fall of 3.7%; Melbourne 2.4%; Brisbane 1.1%; Darwin 0.6%; and Canberra 0.2%. Only Adelaide and Hobart showed any signs of an increase with 0.1% and 0.7% respectively.
Regarding the price declines, Angie Zigomanis, senior manager at BIS Oxford Economics, said:
“Investors were a key driver of price growth through their upturns and the fall in investor demand is now underpinning the decline in prices. The weakness in prices and likely concerns about further falls will continue to play on purchaser sentiment through 2019, with further price falls in Sydney and Melbourne expected.”
Mr Zigomanis did some research into “real” house prices, that is, he took into account inflation. Based on these figures, you can see that the current downfall in Sydney home prices since June 2017 has fallen 16% in only six quarters. This decline has occurred at about twice as fast as the historical average.
Melbourne, on the other hand, is facing its steepest property decline of all time. Although it’s only down 14% since its peak in December 2017, it’s done so at a staggering pace! 14% over only four quarters.
Due to the falling property market, many economists have argued that the Reserve Bank needs to cut interest rates even further in order to spur on the economy. NAB, JP Morgan, Westpac, UBS and AMP are all calling for the RBA to cut interest rates.
The ASX futures market has priced in a full 25 basis point cut by September 2019. JP Morgan seems to think that there will be two cuts by August this year, because “interest movements are like cockroaches — there's always likely to be more than one”.
All this is indicative of a global slowdown. Interest rates are already low across the developed world. The US is currently at 2.5%, Canada at 1.75%, Australia 1.5%, Britain at 0.75%, and poor old Japan at -0.10%. But according to economists, Australia still has a little bit of wiggle room.
If the RBA does cut interest rates, how far will it need to cut them to meet its targets? Average Australians are running out of cash thanks to rising debt levels and stagnant wage growth. Small businesses are closing down everywhere you look.
A bank analyst at UBS, Jonathan Mott, stated:
“We believe it is more likely the major banks pass through around 30 basis points of the RBA's potential 50 basis points in rate cuts to mortgagors.”
He said that it’s often mistakenly thought that mortgage rates are highly correlated with the RBA’s cash rate. He stated:
“While this works in theory during higher interest rate environments, in periods of very low interest rates or when credit spreads move wider, there may be a breakdown in this relationship.”
Furthermore, banking regulators require borrowers to pass a loan serviceability test where they can handle interest rates rising to “at least 7%”. He stated:
“As a result, any further reductions in the RBA cash rate and reductions to bank mortgage borrowing rates will not lead to an increase in borrowing capacity given rates are already below the floor rate.”
The Australian housing downturn is having real effects on local businesses. A number of building companies in South Australia are facing collapse, and another is facing court action. Adelaide construction company, Tudor Homes, has gone into liquidation, and JML Home Constructions, which runs the Onkaparinga GJ Gardner franchise, has already closed its doors. Here’s a picture of one of their unfinished homes in the suburb of Campbelltown.
Cubic Homes, based in Kilburn, have applied to close their doors, and will be heard later this month.
Tudor Homes has been a defendant in litigation for some time. The company's liquidators said the firm was insolvent with outstanding creditors. A number of customers have been impacted by the collapse.
ODM Group, OAS Group, and Platinum Fine Homes have also fallen victim to the property downturn. It is believed that OAS Group have left 40 houses unfinished, but they said that property owners should be covered by building indemnity insurance.
So there you go. That’s what’s happening in Australia thanks to the deflating property bubble. What do you think? Will the RBA continue to reduce interest rates in the vain attempt to keep people borrowing? Will the government intervene and do something unexpected? Or are we all just doomed and the Australian economy will crash and burn along with its property market? Let me know your thoughts below.
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