More warnings of a property bull trap

Via Mortgage Business:

The recent spike in housing market sentiment could be luring speculators into a “bull trap” with the dwelling values to continue falling, according to analysts.

Over the past few months, there have been suggestions that green shoots have begun to emerge in the housing market, following two years of price declines.

Some indicators have suggested that the outcome of the federal election – which signalled the defeat of the Labor opposition’s proposed changes to negative gearing and the capital gains tax (CGT) – as well as recent cuts to the official cash rate from the Reserve Bank of Australia (RBA) and changes to the Australian Prudential Regulation Authority’s (APRA) mortgage serviceability assessment guidance have improved market sentiment, which may in turn trigger a rise in demand for housing.

Recent property price data has also indicated that, on average, dwelling values are beginning to stabilise.

CoreLogic’s latest Hedonic Home Value Index reported that values increased for the first time since July 2017 in Sydney and November 2017 in Melbourne, rising by 0.1 per cent and 0.2 per cent, respectively.

However, according to principal of Digital Finance Analytics Martin North and investment manager of Aldo Capital Tony Locantro, housing market speculators are at risk of being ensnared in a “bull trap”, claiming that recent reports of a recovery in the housing market may be premature.

Speaking to Mortgage Business, Mr North noted that recent mortgage rate cuts would not provide universal relief to borrowers, claiming that the continued crackdown on living expenses for home loan applications would imprison some mortgage holders looking to refinance.

“We know that interest rates have dropped and that means lending rates are lower, and that does mean that there’s a little bit of latitude with regards to the multiples that you can get,” he said.

“But of course, there is still much tighter lending standards, relative to where we were 18 months to two years prior.

“My research suggests that around 300,000 households across Australia are potentially in risk of being mortgage prisoners.”

Mr North added that while demand for housing may have lifted in some segments of the market, overall activity remains “weak”.

The DFA principal said that while first home buyers (FHBs) may have been emboldened to enter the market as prices fell, interest from foreign investors has waned.

“There are international reasons for that. There’s been a tightening in China, so property investors are not really convinced that there’s going to be any capital growth from this point,” he continued.

According to Mr North, domestic property investors are also reluctant to take risks with strong capital growth unlikely.

“If you’re a property investor, you would not buy now, because even the most bullish of people are saying that it’s an ‘L-shaped’ recovery – in other words, prices may go sideways. That may be a little true, but nothing like the capital growth that we saw previously,” he said.

“If you look at rentals, they’re going backwards, not growing. Basically, you might pay a little less because interest rates are lower, but rentals are offsetting that.

“My calculations suggest that we’ve still got half of property investors underwater now on a net rental basis, which suggests that the property investment sector is pretty weak.”

Moreover, Mr North claimed that concerns over building quality, brought to the fore by the Opal Tower crisis, would also weigh on demand, and in turn stunt price growth.

“It’s really playing out more aggressively than I expected,” he said. “We’re finding more and more properties that have issues.”

He added: “My worry is that there’s a whole bunch of people who are sitting in properties with defects, but nobody wants to talk about them because if you start talking about them, then you basically pull the value of your property down.

“I think we’re going to see tighter regulations and changes to the supervision processes ahead. If people are going to pay more for indemnities, then that’s going to flow through to greater costs or cost of insurance going up.”

Further, the analyst said that “worrisome” domestic and international economic conditions would also hinder any potential for a recovery in the housing market.

“I don’t think we’re going to see any growth in income, and I think that we’re going to find that the broader unemployment number goes the wrong way,” he said.

“The Reserve Bank wants the unemployment rate to be [below 5 per cent], but I think it’s going to be [above 5 per cent].

“We also know that there’s significant pressure on the retails sector, and I don’t see that turning around.

“I guess my question is, where is growth going to come from to actually stimulate it? I can’t see where that is coming from.”

Mr North said that while some locations may experience price growth over the coming years, he expects dwelling values to continue falling in the outskirts of major capital cities.

“If you put all that in perspective, sure there will be some postcodes, particularly houses close to the major centres in Sydney and Melbourne where there is limited supply and some demand from local buyers who want to trade up,” he said.

“You will probably see some upward movement in those areas, but it will be offset by more falls on the urban fringe where we’ve had massive oversupply.

“Even in a steady state scenario, I can’t see any significant price growth from this point.”

More from Martin North:

Latest posts by David Llewellyn-Smith (see all)


    • Watching Adams and North earlier in the week mentioning the $10k withdrawal limit put forward late last Friday. Amongst Adams hysterics could actually be some truth that the RBA and govt are looking well down the path to preserve the market at any cost. That external shock is probably the only thing threatening to break the flattening out.

      • $10k transaction limit does not help over-indebted households or prevent them from deleveraging.

        A bubble is built upon speculative capital gains. Without capital gains the bubble bursts (impossible for plateauing, as there is no fundamental income to drive price sustainability).

        After it bursts, the legacy of the debt remains, which is what all this unconventional monetary policy is attempting to address.

        Even Japan, which many point to as a ‘success’ of zombification, they still went through a crash in asset prices. The unconventional monetary policies are merely seeking to deal with the hangover of over-indebtedness (putting it on life support).

      • Jumping jack flash

        +1×10^4 Brenton!

        Houses are not inherently productive so in order for them to provide the guise of productivity, constantly increasing amounts of debt must be used to inflate their price through greed, and other natural processes that occur when 3 trillion freshly conjured debt dollars are plonked into any single market over a 10 year period.

        Shove 3 trillion debt dollars into anything and watch what happens. Its not rocket science, in fact it is completely simple to understand.

        The important point is its all fake productivity, a debt ponzi, and all the greed in the world doesn’t mean anything when debt isn’t easy for the unsuspecting rubes to obtain to satisfy it.

  1. Yes, thank goodness for the home equity deposit grant scheme not starting until next year. I have managed to get young ones to delay signing their life away until then by pleading for them to wait on the scheme.

    By then the short term future should be a lot clearer.

  2. when someone is right for the wrong reasons …

    Yeas this looks like a typical bull trap but because of construction bust that is going to drag economy down the sink. the fact that few hundred homes get sold at higher price every week doesn’t affect construction at all

    prices are going up but at volumes so low that it will not help in any sense the construction industry and once that giant GDP boost machine crashes (it’s lagging due to nature of projects duration). unemployment will rise, GDP fall, and confidence together with house prices go down the sink

    nothing can offset potential direct loss of 500k jobs in construction and few times that of indirect jobs

  3. Jumping jack flash

    not enough debt to keep it going? The living cost gouging and wage theft have done all they can?
    Can nobody afford more living costs, and have foreign workers saturated low-skilled jobs?

    They’re trying their best to stay positive though, but its as if the banks have given up. Maybe the slow melt is back on?

    Come on guys! 7 trillion in new mortgages by 2029 to get the economy ticking along like it was in ’06.
    Come on guys, gouge those living costs!
    Come on guys, reduce the hours of expensive local workers and increase the hours of cheap imported workers and pocket the difference.

    You can do eeet! One more push for houses!

  4. I think this is likely. Construction bust and ‘recessionary’ conditions in retail will drive up unemployment, enough people will be forced to sell, less buyers with cash, credit will drop enough and eventually that will lead to a technical recession (nominal GDP) too.

  5. I agree entirely with that analysis. The RBA can do whatever the fcuk it likes, but it’s not gonna work.

    The big tell for me is that prices have flatlined in SydMelb but are continuing to fall elsewhere. A true recovery would be marketwide across the nation.

    I have almost $400K in cash as a house deposit and I could borrow as much as I wanted and buy whatever I wanted, but I’m putting my money where my mouth is and continuing to rent.

    I spoke to my landlord last night as my lease is about to end. No rental increase for me.

    • You’re a smart man. People think I’m smart for only having a $230K mortgage on a little postwar 3 bedder in Brisbane but you sir, are all sorts of genius.

      • reusachtigeMEMBER

        I have high hopes that the likes of this drain on investment will have their underutilized capital absorbed into the fixes that will be implemented to save banks and borrowers if the evil people on here get their crash.

      • I still remember Stagmal’s investment advice: “give it all to me”.

        (Yes this is advice. Returns will not vary).

  6. david collyerMEMBER

    “It’s an illiquid market.”

    32% of households in mortgage stress.

    Don’t Buy Now!

  7. Tis but a winter solace hangover hiatus to be followed by by a permanent plateau of prosperity in property by both investors and home owners/mortgage holders. The micro is on your side.