OECD: Australia must prepare for house price “hard landing”

From the OECD today:

The latest OECD Economic Survey of Australia, to be released on Monday 10 December, assesses the continuing robust growth of the Australian economy, as well as the challenges to ensuring sustainable and more inclusive growth against a backdrop of globalization and technological change. The Survey discusses how Australian can limit financial sector risks, strengthen resilience to external shocks, improve environmental sustainability and create conditions for stronger competition, innovation and productivity. It also identifies how policies to improve education and deepen skills can ensure that all sectors of society benefit from future growth.

Australia’s housing market is a source of vulnerability. Prices have more than doubled in real terms since the early 2000s and household debt has surged. The market has started to cool over the last year, with prices falling most notably in Melbourne and Sydney. So far, data point to a soft landing without substantial consequence for the overall economy. Nevertheless, risk of a hard landing remains.

To date the decrease in house prices has been gradual. Prudential measures taken by the Australian authorities restricting certain types of housing credit have played a role. So too has a pick-up in new housing supply and construction activity remains elevated. Furthermore, some evidence suggests that Australia’s house prices have not been hugely overvalued; the IMF has estimated that as of Q3 2017 prices were above equilibrium by only between 5 and 15% (Heilbling andLi, 2018).

Several features of Australian financing limit the risk of financial fall-out from a house-price correction. Banks are well capitalised and their liquidity position is sound. Indebtedness is concentrated in middle- and high-income households, and data indicate declining financial stress in recent years, despite rising mortgage debt. Moreover,many mortgage holders have accumulated substantial buffers of advance payments(“mortgage prepayments”).

Nevertheless, risk of a macroeconomic downturn from the cooling housing market remains. Not withstanding the estimates that Australia’s market is not greatly overvalued, house prices could fall more substantially. Should this happen, household consumption could weaken. Households would cut their spending due to lower housing wealth and due to increased economic uncertainty generated by downturn. Households would also reduce expenditures related to the purchase, sale and maintenance of housing (such as spending on renovation and interior decoration). Sustained decreases in house prices would also weaken construction activity. Weakened aggregate demand could in turn lead to losses on loans to businesses, putting stress on the financial sector.

Sydney house prices falls are no longer “gradual” at minus 20%+ per annum. One must always remember that these outlooks are created in conjunction with the corrupt RBA and Treasury. Only in the warnings do you get any independence of thought and truth.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. They also had a go at the COALition on climate:

    Outside of the housing market, the OECD used its review of the economy to chide the federal government for its work on reducing greenhouse gas emissions.

    Saying Australia needed to “stabilise and strengthen climate change policy”, the organisation effectively blamed the government for its policy missteps around energy and emissions.

    “Australia has made little progress in reducing its environmental footprint in large part because frequent changes in core climate change instruments have created uncertainty for emitters, which has also discouraged energy security investment,” it said.

  2. I head the ABC talking about the report this morning and they went on to the RBA with it’s plans to lower rates to around 0.7% (can’t go lower due to offshore borrowing needs), and they might do QE. So just like the GFC experience in other countries, they still think QE driving asset prices higher is the answer. So driving the people into poverty is their solution to keep house prices higher.

    • Let us take the the same road that screwed over every other country that tried it. I thought we were a capitalist economy where the weak fall to be replaced by the strong? Turns out we’re a socialists dreamboat after all.

    • rob barrattMEMBER

      Afund
      Property is the only economy we have. Manufacturing etc left some time ago for lower labor cost, less militant environments. Mind you, I think the milk powder industry might be the exception…….

      • You’re right. We’re a science denying country ( all political parties regardless of what they say are the same – they only what power over the people and gouge everything we try to achieve) and as an engineer it’s always been that way here and why I left for a long time. On the milk it’s ok for a certain group to buy and export while denying the locals supply…sounds a bit like the LNG industry.

  3. https://www.heraldsun.com.au/news/victoria/top-melbourne-postcodes-targeted-by-illegal-foreign-investors/news-story/17b2d1d2b51fe06c3a0547eeded0421b

    ‘Realestate.com.au chief economist Nerida Conisbee said while foreign activity had fallen, interest in Melbourne property remained strong.

    “The fact they’ve stopped investing isn’t because they’re not interested. They’re struggling to get finance,” she said. “They’re also concerned about the direction of the market. A lot are sitting on their hands.”

    So what happened to the suitcases full of cash? I thought they were all rich?

  4. We need all taxpayers to prepare to bail out the banks.

    Meanwhile banks are busily showering shareholders in cash in denial of any problems. Record low impairments, record high payout ratios, record high dividends, and unquestionably strong capital backing – we are told.

  5. Can’t see much room in ‘biggest property falls in 40+ years’ for anything but a hard landing. It was a pretty hard landing post 1990.

  6. I spoke with a friend on the weekend who’s Mum recently passed away leaving him the family home. It’s a nice 1/4 acre place in Hunters Hill. I though prices would be holding up there if anywhere but apparently they are down 15% already. His mum’s place was worth at least 2.8M last year (as a tear-down) but this year Tear downs are out of fashion and he’s receiving offers just below $2M (that’s 30% not 15% down) according to the RE agent Hunters Hill is one of the worst performing post codes in NSW over the last year.
    I suggested he hang onto it if the best offers are 2017 prices – 30%. Even selling at a 15% discount to 2017 prices seems like a spooked market reaction since he has no debt. The logical choice would seem to rent the house and wait out the downturn.,
    What are others thoughts? especially given the location.

    • Diogenes the CynicMEMBER

      Yeah the premium places in Perth are off 30% which is twice the “average” you see from Core Logic so that isn’t that surprising – the market of buyers for these properties is smaller and they tend to be slightly more financially literate than a mass market property ie react a bit faster. I’d rephrase the convo in terms of yield after maintenance, council, rates, land tax, insurance etc. What could it be rented out for minus costs and if sold what are the alternatives for yield? If you are getting 2% or less than why not sell it and buy US$ treasuries or Aus Gov Bonds? There is also the time hassle factor of renting out a nice place – not to be underestimated!

      • Yeah that could be important but as far as I know he is debt free and owns a house in Ryde so it’s only a couple of miles away. (looking after it shouldn’t be a major hassle)
        I personally would take a longer horizon look and project what would be a reasonable price in 10 years even if prices are down 30% right at the moment.
        This is unprecedented territory for up-market Sydney properties, you’d have to go back to the 1930’s to find any price declines that are even close to these levels…and that in an economy that is not doing that badly with Interest rates near record lows.

      • Sell Sell Sell
        Implies that you have something better (or something with a lower holding risk) to buy with the cash.
        What would you be investing in atm if you suddenly had $2M cash in your pocket?
        Would that asset hold up any better in a down market?
        There’s no point in trading one depreciated asset for another about to depreciate asset.
        Is cash in the bank really safer than this 70 or 80 year old Sydney house in a really good location?

      • Fisho cash in the bank is only unsafe if you think the banks are going under because of a housing crash.

        In which case why hold housing?

    • If not wanting to accept the current market and wishes to hold for now, he needs to count on holding for at least 8-10 years. The exits are closing fast at that price point.

      • Probably true but selling today at an $800k discount (to 2017) if you reasonably expect to see prices return to 2017 levels within 8 years equates to ballpark returns of $100K/year on a $2M asset that’s a 5% rate of return.
        It would seem to me that before selling you would need to identify an asset (class of asset) that could deliver superior returns over that time horizon.
        Think about what will happen to Australian bank deposit rates IF housing really collapses (30+% down across the market)
        I suspect it will be more difficult to identify alternate investment opportunities that will fare better in a down market
        Of course Sydney RE could be down another 30% in another years time but is that really likely?

      • 30% more down in a year seems excessive but all the risk is to the downside.

        But if he insists on HODL, why not draw out enough equity to knock down and build a nice house on the block, then go and live there? Nice suburb. Nicer than Ryde. Rent the Ryde place out instead.

    • Fisho, Hunters Hill is Blue Chip as they come, tell him to HODL or better yet move in and rent out of his place in Ryde. Unless he wants to invest in something else?

      My mum sold her place in Caulfield South (Victoria) last year for $2m and I think Hunters Hill is far more Blue Chip than Caulfield long term.

      • That’s more or less what I told him.
        Basically If your not being forced to sell a high quality asset than why would you ever part with it cheaply.
        Of course we can now watch prices fall another 10% and I’ll look like the worlds greatest fool.

      • They will drop 10% more in my opinion, maybe even more than that! Especially if the house is next door to the Uranium mine there lol…

        But it all depends how long he wants to hold it for? Ongoing holding costs and taxes etc.. I’m nervous about QE and how that will devalue savings, hence why I’m a bit bullish for assets long term and not so eager to hold cash far into this crisis.

        I have no debt though and looking to buy land/house for long term view (30+ years). I’m still young and have many working years ahead of me. But I wish to spend my working life doing things I enjoy, not strapped to a mega mortgage that forces me to work certain jobs/locations etc..

      • @Arrow, I’m still shocked she managed it mate. I thought there was more upside, but she thought she was going to be too late. She was preparing to sell in January 2017, and sold Oct 2017.
        I looked at the photos today and still can’t believe it was $2.03M
        https://www.realestate.com.au/sold/property-house-vic-caulfield+south-108215496
        I think a few months earlier she could have got $2.2-$2.3M.
        The neighbors thought they would get $2.4M and let it pass in at Auction and still haven’t sold lol..
        https://www.realestate.com.au/property/11-seach-st-caulfield-south-vic-3162

        1A (top of the street) is on the market now.
        https://www.realestate.com.au/property-house-vic-caulfield+south-129618494
        Asking $2.1-$2.3M but double the land size of my mum’s place, (much more outdated however). Doubt they will get it now…

        Kind of miss the old house though, I said to mum I’d rent it and live there. (had a double-garage + workshop space). Oh well..

      • The question is – does he want to look after an old house for 10 years or not?

        He could be better off selling now and having 2 million in the bank. If prices drop further, or a crazy mortgagee in possession opportunity comes up, cash is king. He might pick up a better condition house for less.

        Or it might not. Speculation is not a science.

    • Fisho

      That is an interesting conundrum. They do not make more land at HH, do they? And that is a good sized block.

      However house prices are extremely variable depending where the house is located in HH.

      I looked them up on Realestate.com – see https://www.realestate.com.au/neighbourhoods/hunters%20hill-2110-nsw about 2.5-3 years ago, and found a nice newly built house going for “just” $1.7m on what seemed like a smaller block in what is the cheaper part of the suburb, a small street just off High Street. When looking at this area since prices seem to have risen by 25-30%, but are probably now going backwards at a good pace.

      This website indicates that that you can get a 4 bedroom house for around $2.6m. So depending on where your friend’s house is located the $2m price tag for the block could in fact be about right if its knockdown. When I lived in HH in the 1960s there were a lot of pretty ordinary/semi poor housing in the location (it was not a bit like what you find in the better areas of Sydney’s eastern suburbs such as double bay/ Vaucluse etc and is therefore much cheaper except for certain locations on the HH peninsular near the water (where I suppose its still mostly old and often larger housing).

      • Yeah the house is in the less ritzy end of HH, Farnell st if I remember correctly.not waterside but it is still a nice part of Sydney. I believe the actual lot size is 950sqm so it is definitely big enough for two houses, by modern standards.
        I’m somewhat surprised that this suburb is leading the Sydney Price declines
        As for 4 bedroom vs knockdown all the older stock is priced about the same.

      • Yeah, I sort of agree. however I suspect that Aussie will be right back into RE speculation as soon as the banks allow them because it’s what we do, this suggests that any plan to return to historic affordability ratios will be put on hold until we try everything else first.

  7. … AUSTRALIA … HOUSE OF CARDS …

    Property prices in most suburbs have already peaked. How hard have you been hit? – ABC News (Australian Broadcasting Corporation)

    https://www.abc.net.au/news/2018-12-10/how-hard-has-australias-property-downturn-hit-your-suburb/10588960

    The tide is turning on Australia’s $7.6-trillion property market.

    Home prices in more than four out of five council areas have reached their peak and are sliding towards an unknown nadir, according to the latest figures from property market analyst CoreLogic.

    As the slump moves into its second year with little or no prospect of rebound, the downturn in capital city property markets threatens to drag down the rest of the economy.

    And with a mixed outlook for the global economy, doubts are surfacing about where Australia is going to find the fuel to extend its near-record run of 27 years of unbroken economic growth.

    “The likelihood of Australia facing the longest housing downturn in history has increased,” says UBS chief economist George Tharenou.

    “It seems quite plausible to me that house prices will continue to fall for all of the next year into 2020.” … read more via hyperlink above …
    .
    .
    OECD warns Morrison government on potentially disastrous housing crash … Sydney Morning Herald

    https://www.smh.com.au/politics/federal/prepare-contingency-plans-oecd-warns-coalition-government-on-falling-house-prices-20181210-p50l7i.html
    .
    .
    Plan for worst-case housing falls: OECD … News com au

    https://www.news.com.au/national/breaking-news/plan-for-worstcase-housing-falls-oecd/news-story/8c4abd5890e373f9898b1c2d04fd02d4

    • … the unprecedented and lethal multiple stretch …

      Demographia International Housing Affordability Survey: All Editions

      http://www.demographia.com/db-dhi-index.htm

      Affordability Ratings for Various Dwelling Types … Performance Urban Planning

      http://www.performanceurbanplanning.org/affordability.html

      Falling Australian house prices a warning for NZ: commentator … Catherone Harris … Stuff NZ

      https://www.stuff.co.nz/business/property/108168646/falling-australian-house-prices-a-warning-for-nz-commentator

    • Just out of interest: Have you done any economic modelling on what it would mean for the Australian or NZ economy IF housing prices were to return to anything like 3 time Median income?
      Such a change would from my rough estimates knock at least 30% to 50% off Sydney’s GDP given the extreme over weighting of sectors related to RE within the Sydney economy.
      Where would these people find alternate employment?
      At what wages? (keep in mind falling median wages would put additional downward pressure on house prices)
      This is the point that I come back to each time I look at the problem.
      Seen at it’s most extreme we just don’t have any growth in the Sydney economy without RE appreciating.

      • Fisho … No I have not done a setailed analysis.

        In broad terms well in excess of half the current values on both sides of the Tasman should be considered ‘vulnerable bubble values’. .

        Take particular note too of the affordability ratings for various dwelling types I set out within a link above.

        I trust a few of my recent comments on an MB thread below are of some interest …

        https://www.macrobusiness.com.au/2018/12/deutsche-australian-property-crash-like-ireland/#comment-3240973

        … In 2007 the average unweighted Median Multiple across the major Irish metros was 4.7, which in subsequent years slumped to 2.8 … sending all its Banks to the wall and requiring about 70 billion euros of bailouts (from in the main German institutions looking after their own interests).

        Currently, the unweighted Median Multiples across the major metros of Australia and New Zealand are 5.9 and 5.8 respectively …

        … and too …

        Remarkably … Chris Joye noted within a recent article (partially republished behind paywall at MB) that

        Chris Joye climbs aboard the Big Australian Short – MacroBusiness Australia
        … behind paywall …

        https://www.macrobusiness.com.au/2018/12/chris-joye-climbs-aboard-big-australian-short/

        … extract …

        … In our due diligence, we told mortgage brokers and bank managers that we required a 95% loan-to-value mortgage at 10x our gross household income to buy our dream house, and we were consistently told it was not a problem at all. All we needed were two payslips and mortgage insurance. We asked if the bank would call our employer, and both reputable and disreputable brokers said banks rarely verified payslips. Also, “most of the people checking documents are in Indian call centres.” Furthermore, we were told that as long as the payslips had the right Australian Business Number (ABN) and the business checked out, that was enough. … … read more via hyperlink above…
        .
        .
        How much could it cost the Banks if the Courts in due course reset mortgages from ‘unconscionable levels’ to ‘normal levels’ … as the housing markets continues to collapse … driving massive numbers of households underwater ?

        In normal markets, housing does not exceed 3.0 times gross annual household incomes … requiring sensible mortgages of about 2.5 times.

        Some years ago the Bank of England imposed a general mortgage cap of 4.5 times and the Central Bank of Ireland soon after with 3.5 times.

        Refer below … this provides access to foundation research. The Central Bank of Ireland found high income multiple lending a much greater problem than high loan to value lending …

        Remarkably … Chris Joye noted within a recent article (partially republished behind paywall at MB) that

        Chris Joye climbs aboard the Big Australian Short – MacroBusiness Australia
        … behind paywall …

        https://www.macrobusiness.com.au/2018/12/chris-joye-climbs-aboard-big-australian-short/

        … extract …

        … In our due diligence, we told mortgage brokers and bank managers that we required a 95% loan-to-value mortgage at 10x our gross household income to buy our dream house, and we were consistently told it was not a problem at all. All we needed were two payslips and mortgage insurance. We asked if the bank would call our employer, and both reputable and disreputable brokers said banks rarely verified payslips. Also, “most of the people checking documents are in Indian call centres.” Furthermore, we were told that as long as the payslips had the right Australian Business Number (ABN) and the business checked out, that was enough. … … read more via hyperlink above…
        .
        .
        How much could it cost the Banks if the Courts in due course reset mortgages from ‘unconscionable levels’ to ‘normal levels’ … as the housing markets continues to collapse … driving massive numbers of households underwater ?

        In normal markets, housing does not exceed 3.0 times gross annual household incomes … requiring sensible mortgages of about 2.5 times.

        Some years ago the Bank of England imposed a general mortgage cap of 4.5 times and the Central Bank of Ireland soon after with 3.5 times.

      • Thanks HP
        Don’t get me wrong I’d love to see a return to sensible RE prices in Australia but in a way it’s like talking about a return to sensible Health care costs in America You just can’t ever get there if you maintain an economy with 15% to 20% of people employed in the sector.
        The 10% or more excess of our population that is employed in these sectors needs to find alternative employment, or in other words some other sector needs to grow while housing (in our case) collapses.
        What reasons do we have for believing that this will happen? this change of (economic) employment direction is definitely not evident in our recent employment stats both the Health care and Finance sectors are where most of the growth is happening.

  8. Quote:
    “Sydney house prices falls are no longer “gradual” at minus 20%+ per annum. One must always remember that these outlooks are created in conjunction with the corrupt RBA and Treasury. Only in the warnings do you get any independence of thought and truth.”

    So, even the RBA & Treasury are panicking ………………