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B1 Intermediate US 64 Folder Collection
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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 (shown by the dotted navy blue line)
has fallen 16% in only six quarters.
This decline has occurred at about twice as
fast as the historical average.
The worst downfall in history (as shown by
the yellowy colour) occurred in the first
half of the 1980s where property prices fell
almost 34%!
But that occurred over a period of 23 quarters.
At the current rate of decline, is Sydney
on track to have its worst property decline
in history?
Time will tell.
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.
Melbourne's worst decline (shown in teal)
occurred between 1976 and 1983 where the property
market fell by about 25%.
Looking at the graph, it was a very bumpy
ride.
With regards to this data, Mr Zigomanis said:
“So far, the period of decline in these
two markets has been much shorter than the
longest downturn duration and around half
of their respective average downturn lengths
in both the house and unit markets.
Therefore it is foreseeable that the current
downturn in the Sydney and Melbourne markets
may have at least another year to run before
reaching the cyclical trough.”
With regards to the difference between house
and unit prices, Mr Zigomanis said:
“The disparity in the rates of decline between
houses (-14%) and units (-6%) has been predominantly
as a result of the sharper acceleration in
house-price growth in the lead-up to the downturn,
with houses rising by 52% in the five years
to December 2017, compared with a 14% rise
in unit prices.”
Referencing the other capital cities, he said:
“The ongoing oversupply in Western Australia,
combined with its weak economic and population
environment, will continue to drag on prices
in both the unit and separate housing markets
in the year ahead.
However, given the already extended nature
of Perth's downturn, the rate of decline in
prices is expected to begin to ease.
It's been a mixed bag across the other markets,
although with the 1.1% decline in the Brisbane
index in the quarter also concerning given
that prices have been flat for most of the
year, there is a danger that prices could
fall further.
The modest growth in the index in Hobart in
the December 2018 quarter and fall in Canberra
suggests that the rise in these markets is
now running its course, with price growth
to potentially flatten out over 2019.”
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.
Speaking of rate cuts, Su-Lin Ong, Chief Economist
at RBC, said:
“Rate cuts are unlikely to be particularly
effective and may well not be the right policy
response.
Households are already pretty indebted; will
they want any more debt and, more importantly,
do you want them to [borrow more]?
Even if households are willing to load up
on more debt, what will they get from an RBA
rate cut?
The odds are the banks won't pass on the full
amount and the tightening in lending standards
will remain.
It's about the supply of credit not the price
of credit.”
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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B1 Intermediate US

Australian Property Values Fell $133 Billion Last Quarter

64 Folder Collection
m925304 published on May 16, 2019

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