After yesterday’s mauling of the housing market on Channel 7’s Sunrise program the theme of Louis Christopher’s words in the latest newsletter from SQM research is no surprise.
The media spotlight has been shining on our company this week and on that note- we would like to say thank you to those who have been writing in messages of support, whether that be via facebook, twitter, email or even just referring to us via their own blogs. It is greatly appreciated.
Interestingly, many of the messages have been coming from real estate agents who have simply been confirming what is happening on the ground, in that house prices are falling in most areas at this point in time.
Here is an example from a Sydney Northern Beaches real estate agent –
“Hi Louis, I saw you on the 7.30 report last night and you are correct, the real estate market is very sensitive to interest rate moves. I am involved on the Northern Beaches and believe me, it is tough and has got a lot worse since the last interest rate rise. There are no buyers!
I can quote you many examples from Palmy to Mona Vale. For example- Max Delmage beach front is still available- down from a valuation of $9m, $4.5m would buy it today. It will be withdrawn from auction tomorrow night (Saturday night last week) due to no prospects!”
So far, its real estate agents who are wearing the full force of this downturn as sales turnover appears to have fallen nationwide by about 25%. Now I know many of you won’t exactly be crying tears over this, but I can assure you that agents have one of the harder jobs in the world. Personally I would not like to be treated with scorn and distrust nearly each working day of my life. And yes, there are many good, trustworthy, hard-working agents out there, individuals who I regularly contact to find out what is happening on the ground.
Of course, not everyone agrees with us (particularly our more optimistic competitors) and thats fine. I am still yet to read anything from them that explicitly states that house prices are currently falling, even though their own data states as such.
The bull fight continues I see.
Outside the skirmishes between the various data reporting houses and research firms, the downturn does indeed continue. Fortunately, the market is bigger than those of us that publicly comment about it, it’s like a tide or river. It will head in the direction that mass purchasing power and mass self-interest takes it to.
The geographical extent and magnitude of the downturn and when the downturn will end is increasingly becoming the question that should now be considered. The geographical extent, from what we can see is significant in that it appears to be now affecting most regions in the country. The magnitude of the downturn is clearly in the minus five percent bracket and we think a number of regions are going to (and already have) fall more than this.
We have a strong conviction that the bottom won’t be this year – not unless we see an imminent cut in interest rates or a new government stimulus program. These two factors are most likely the events that will trigger a bottom in the market.
I completely agree with this, in fact, that is exactly what I have been saying for months. Although I would question if that was just a short to medium term bottom given that demographics is the major contributor to the market in the long term. Over the last 2 years we have seen medium term effects of stimulus, it was simply a hump in the road in terms of the underlying downward trend of disleveraging that begun when the GFC hit Australia.
As I have said before I cannot see any imminent change in pro-housing fiscal policy coming, and adjusting monetary policy is just not on the RBA’s agenda at this time. Trying to bring forward even more first home buyer demand or increasing foreign investment are both policy options, but there are monetary and political barriers to both of these and I just can’t see the current government attempting them at this time.
But there are some other external events that may make this analysis irrelevant. As Louis explains.
Until then there are many x-factors out there which may have their own bearing on it, such as:
* Could a second and deeper European sovereign crisis effect our housing market? In short, yes it can as a new European sovereign crisis at its worst, will likely drive up the cost of housing credit. Our banks were very recently downgraded due to their reliance on overseas facilities and that will already be putting upward pressure on their cost of capital.
* What would happen in the Australian Dollar now fell by a considerable margin? This potentially would be a positive for the market, particularly for those holiday areas.
* Will the strong rental market create a buffer effect on the for-sale market? In short, yes, it is one of the reasons why we think Sydney and Canberra are likely to suffer less in this downturn then the other cities.
I agree with the first point but take issue with the second and third points here. On Europe, yes, it is the big one in the short term. Deus Forex Machina analysed some of the possible outcomes this morning, and I can’t overstate how immediate the issues for Greece are. Selling public assets seems like the last “kick of the can”. But like the previous bailouts, it is not a real solution. Greece’s issues are the fact that their price of labour does not match their productivity. Selling assets will not make that go away and austerity continues to make the problem worse. Quite simply, in my opinion, the question is no longer will Greece default, the question is how.
On a falling Australian dollar, that may be bad for housing because of a resulting rise in inflation via the oil price, leading to higher interest rates. As the writing of Deus Forex Machina has shown, the primary reason the Aussie would fall is China slowing. In that event, all commodities would also fall. What worries me though is that the oil price may remain higher than others on the MENA crisis.
Mind you, China could also have a major positive effect on housing. It is quite possible that bearish chaps such as myself are underestimating the effect that the coming resource boom II is going to have on the Australian economy, and therefore the housing market’s resilience. I see no evidence at this point that this is the case and with the RBA ready to pounce on any increased consumer confidence I think it unlikely. Still, if that does occur I will be the first to admit I was too bearish
But I digress …
I also disagree with Louis on his last point. As I mentioned yesterday rental markets are effected negatively by falling housing sales and there is some recent evidence from other countries that the trend in rising rental vacancies will be sustained if housing takes the path that Louis is suggesting. Although every country is slightly different the overall dynamics tend to be the same. In Australia there are currently a number of trends at work, but I am struggling to see any of them will lead to increased rental demand.
Aussies are choosing share houses over expensive rentals to save for a home deposit. After moving in with your parents, a share house is one of the most popular accommodation for wannabe buyers, says a Mortgage Choice survey.
The survey of more than 1000 Aussies planning on buying in the next two years found 18 per cent were living with their parents to save, but 8 per cent had saved or planned to save by moving to a share house.
About 14 per cent planned to rent out rooms after they’d bought to help with the mortgage. Mortgage Choice spokeswoman Kristy Sheppard said share houses were becoming more common, for longer periods.
“Inhabiting the same rental space with people outside your family or romantic relationship is often a financial necessity when utility, petrol and other costs increase,” she said. Living in a share house may also relieve financial pressure from baby boomer parents whose children still live at home.
“It’s a bit of an issue for those parents because they are at a stage of life where they are trying to pay off the rest of their mortgage or wanting to downsize, but they are still subsidising the lifestyles of their children,” Eureka Financial Group financial planner Greg Cook said.
With boomers looking to downsize their primary place of residence on top of decreasing their exposure to real estate as they retire, and their children increasingly willing to share their accommodation spaces, I simply cannot see how this will lead to pressure on the rental market. As Houses and Holes mentioned recently, the demand for buying and/or renting is elastic and be affected by all sorts of things.
Although I don’t completely agree with Louis’s assessment of the market I do have say that I am thankful that he seems to be providing a realistic view of where the market current sits and a reasonably balanced view for people considering housing as an investment in the near future. That is not to say that I don’t think that Louis doesn’t have a vested interest, I am sure he does as he works for a private company. But he’s had the sense to acknowledge the obvious rather than treat people like fools.