Update: The one Australian economic question that matters

I’ve written a few times recently about the imbalances in the Australian economy and how messed up the Australian housing cycle is. It looks as if the Australian economy is hanging on to positive growth based on one factor. Without that factor, there is significant economic downside. The one economic question that matters:

Can rising house prices drive the rest of the economy on their own without a construction boom?

There are three main areas to indicate if this is the case. Two have come out with more negative data since I last posted. One is a glass half empty: better current conditions, worse future conditions.

Upside Case

Can rising house prices drive the rest of the economy on their own without a construction boom?

For the optimists, the answer is a resounding yes. House prices have not only stopped falling but have risen over the last few months. Buyer queues are out the door for limited supply which will inevitably mean rising house prices. And Morrison’s 95% lending for first home buyers hasn’t even begun yet. Investors will follow first home buyers, which will lead prices higher and then upgraders will start buying again. Rising property prices will mean consumers will start spending once more, construction will recommence, and a new Australian economic growth cycle will begin.

It would appear that the Federal Government has this belief.

Downside Case

Can rising house prices drive the rest of the economy on their own without a construction boom?

The poorer arguments mounted by pessimists tend to have a moral angle: house prices are too high for children to afford, they will have to come down to a level that an ordinary person on a regular salary can afford. If that occurs, house prices will fall 30-40%. While these arguments are compelling from a social justice perspective, or on a long term basis, the same arguments have been valid for 15 years. Timing is important:

Mortgage Prices to Income

Other weak arguments base the downturn on extrapolating no intervention from governments. We know the current government is hell-bent on intervening in the housing market.

The better argument is that even if construction approvals rebound, employment would fall for at least another year as the construction decisions made over the past two years affect the number of people employed. And construction approvals are not rebounding.

Rising unemployment in Perth led to a 10% house price fall in the 2012-2017 period while Sydney/Melbourne house prices boomed. What is to stop the same fate for Australia as a whole?

Perth Housing Crash vs Sydney/Melbourne Boom

Per capita income has gone nowhere for 7 years, so it is hard to see any rescue coming from that front:

Five years of falling Australian per capita income

If rising unemployment does mean house prices fall further, then there are a range of probable adverse effects. There are some seriously negative economic effects if the effects snowball. And we won’t even get started about the impact on a fragile Australian housing market if an international shock (Brexit, Trade wars, Hong Kong unrest, corporate debt accidents, European recession) hits.

It doesn’t need to be one or the other

You don’t need to buy into the entire negative story to be cautious. If employment holds up, then the positive story has a chance (assuming benign international conditions). But, if unemployment rises, then Australia won’t need a global shock to see house prices resume a downward path.

When presented with an asset class that has limited upside in positive scenarios and significant downside in adverse scenarios, I usually opt to avoid the asset class and look for returns elsewhere.

 Update 1: Australian Credit growth:

The Royal Commission into banking reversed the credit boom and was enough to see house prices down around 10%. This came even while most other factors affecting house prices were still positive. 

Will the Morrison government manage to get the already over-levered Australian households to take on even more debt? If I am too bearish, particularly in the short term, this is where you will see the effects. So far there are none:

Australian Credit Growth at 50 year lows
Credit growth could fall a lot further without it being unusual

On the regulatory front, the Westpac v ASIC responsible lending court case win for Westpac has the potential to lead to easy lending conditions. ASIC is taking the case to the Federal court, so we are in limbo for some time.

Update 2: Unemployment

There is not enough space here to go into the detailed links between house prices and unemployment. Indicatively, during the 2012 to 2017 housing boom years, the Perth market faced mostly the same factors as Sydney/Melbourne except for (a) slightly weaker population growth and (b) rising unemployment. And Perth property prices fell more than 10% while the rest of Australia boomed.

We are expecting considerable job losses in the construction sector.

Having said that, construction jobs have been resilient so far. Forward indicators (job ads and approvals) continue to point to sizeable job losses.

Construction job ads

Source: ABS, Seek, UBS

Add to this scenario, job losses from state government austerity as budgets have been struck by falling transaction numbers in the housing market:

Housing turnover rate

Finally, any global shock (trade wars, recessions, debt crises) is likely to be transmitted to the housing market through higher unemployment.

Update 3: Foreign Buyers

Foreign demand was substantial for both the boom and the bust:

Will foreign buyers return to the Australian housing market?

China cracking down on its capital account and deteriorating relations between Australia and China suggests foreign investment will remain low.

The question is whether Hong Kong unrest translates to increased demand for Australian property.

The Answer

So, the answer to the one question

Can rising house prices drive the rest of the economy on their own without a construction boom?

will be found in whether increases in unemployment remain contained.

I’m skeptical. But if I’m wrong, the charts above will be where we will see the signs.

Recent data suggest my skepticism is warranted.


Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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  1. So the answer…will be found in whether increases in unemployment remain contained.

    The problem here is that most of the unemployment will be tradie unemployment, which is hard to measure. The RBA and ABS regard you as “employed” whether you work 1 hour or 60 hours in the month.

    There are a lot of underemployed tradies who can still scrape and beg for a few hours of work a month.

    • HadronCollisionMEMBER

      be interesting to see if 1st year apprentices still get charged out at 50/hr and qualified trades (cash) are 60-70/hr

      or diesel mechanics 90/hr

      • “or diesel mechanics 90/hr”

        I bet Kalgoorlie could get them at that price. They’re closer to $400 per hour

    • Those job ads are for direct employment in trades positions on building sites., Its not an ABS measurement.

      For the data to correct we are looking at a 300,000 job losses. Across the board I would put it at half a million.

      IF that were to occur we are looking at a scorched earth scenario in Australian housing.

  2. High housing prices are driven by the massive Third World net immigration program.
    However, the massive Third World net immigration program is causing wages to stagnate or go downward.
    The country reached the limits of housing affordability mid 2017 just before the Royal Commission.
    The housing price explosion had been going since the traitor named Howard unleashed massive immigration on the people, then later when housing inevitably became unaffordable, the banks relaxed lending standards to keep the whole stinking mess going.
    The neoliberal model of open borders mass immigration has reached the end.

    Rising house prices won’t drive the economy, because house prices can’t rise, because the people have no money, even the majority of immigrants have no money.

    • It’s definitely reached a stage of diminished returns but I’m far from convinced it’s anywhere near the finish line, sadly.

    • John Howards Bowling Coach

      patrick I don’t see that many poor immigrants to Australia in 2019. This is a huge difference to the past when we received a lot of relatively poor Brits and Europeans who were ready to become part of Australia to build a life here. Now they come for a better lifestyle but more often than not are relatively wealthy Asians with little to no interest in becoming Australians (or contributing to our society/culture)

      I also don’t imagine the 10 pound poms needed to pay any type of migration service/agent either.

  3. Professor DemographyMEMBER

    When Perth experienced higher unemployment it reduced population. The same won’t happen in Melbourne in particular. What matters is the absolute amount of credit competing for the available desirable houses. Plenty more upside to come.

  4. We are yet to see if it can go higher or whether mid 2017 was the natural ceiling. It could be that’s the natural absolute limit of the ponzi economy, Australia-style. But, of course, I thought that in 2012…

    • Tell us what you thought in 2008, mate!

      Also do tell us what the interest rates were in 2008 and 2012.

  5. Even StevenMEMBER

    A well written piece. Personally, I hope the property market goes down in flames. I’m prepared to wear the collateral damage to my investment portfolio.

  6. According to last nights 7:30 report there are lots of people with IO loans feeling the pain with the threat of the IO period ending, even with lower rates.

    • Yup.

      Main effect will commence in 2020, as will unemployment. If there is a gush of spring selling then we will see a resume in price falls as the only people buying right now are the very top.

  7. Ain’t seeing any particular rise in unemployment yet. Have been waiting months. How lagging will it be…?!

    • Yeah. I am getting lots of letterbox drops from tradies looking for work (odd jobs, paint your roof, pressure hose your drive, cash in hand); 12 months ago it didn’t occur at all.
      Not seeing it in numbers yet….

    • The apartments being built right now were commenced two to three years ago.

      Unemployment would be a minimum of 18 months from peak I would suggest meaning unemployment will begin to spike in mid 2020 from people LOSING their jobs.

      That said the continued migration crush will be adding to the dole queue everyday pressuring wages and welfare.

      Interest only reset starts in 2020 as well.

  8. Yes. I definitely agree wages should be dropping even if unemployment isn’t.

    it’s nothing like Perth, where people lost their high paid FIFO jobs in droves and went back to Syd and Melb en masse.