Every day now we have investment banks and others telling us that the Australian housing party is over. Estimates for price falls over the next year or so vary from  7.5% to 25%. Even the Reserve Bank of Australia is in on the act. But it is trying to but a positive spin on any downturn after having encouraged new house and apartment construction as being “good for the economy”.

The full impact of new housing supply will not be felt for a year or so. It is almost certain that there will be a surplus when everything now under construction is complete. This is a bad omen for the Australian economy as there is not much to it, if you remove the building and selling of new houses and apartments. Macquarie Bank has estimated that new supply will be >200,000 dwellings, whereas demand will be 170,000 to 180,000.

The effect will be downward pressure on both house prices and rents. And possibly an economy driven into recession. There are many signs of a coming downturn.

  • For Sale signs are springing up everywhere.
  • Auction clearance rates continue to decline. In parts of Sydney it is down to 40%.
  • More properties are now being bought by investors, mostly domestic, than by owner-occupiers.
  • Household debt has soared, it is now around 140% of income.
  • The house price to income ratio is a stratospheric 6.4 times.
  • Rental yield is now around 1% after costs.
  • Some banks have raised mortgage rates in an attempt to calm the market and are charging investors more than owner-occupiers.
  • The big four banks have recently raised $18 billion to help cover potential losses from the housing market.
  • Some sell side analysts now have the big four banks as a sell because of housing exposure.

In my opinion the situation could quickly become very grim. As prices decline people start to move into a negative equity position. If the bank takes possession of the house and sells it, any outstanding debt still has to be repaid. The alternative is bankruptcy. A downturn is accelerated by those who are forced sellers. Job losses, divorce, deaths all put stress on mortgagees ability to pay.

Read more about the Australian housing market here and here, and about banks here.

Conclusion

This is not a good time to buy a house in Australia, particularly in Sydney and Melbourne; the cities that have seen the biggest gains. In fact, I know people who have sold and are now renting. They expect to buy back in at lower levels.

The financial sector makes up around 50% of the Australia stock market. In turn, the big four banks make up around half of the finance sector. Most of their income comes from mortgage repayments on residential and commercial real estate. They have had a great year in earnings, but share prices are well off the March 2015 highs. They currently look like a risky investment, especially with potentially lower future dividends.

09 November 2015 Markets