Given the amount of money being thrown to the construction and property sector and incentives (or bribes as they should be called) to prospective purchasers, there is a path to higher home prices, especially away from the high-rise disasters in our main urban centres. We now give this a 20% probability, as the Government and Regulators attempt to keep the balloon in the air until after the next election.
However, at the other end of the spectrum falls of more than 30%, or worse are are in the cards if we get a second wave of COVID, or if the Central Bank support for the financial system starts to trigger a range of unintended consequences. Perhaps the truth lays somewhere in between, but anyone who takes a definitive stance on where prices will be ahead, are not understanding what is really going on.
These scenarios are much stronger than earlier guesstimates. Seems to me that we’re headed firmly into the “best case” now. -5 to -15% in nominal terms. I remain bearish on:
high unemployment;
permanently lower migration;
plunging rents, and
bank tightening.
Eventually, I see prices falling much further in real terms but not until China runs out of puff and iron ore sinks back to $20.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
Aussie housing is the most amazing asset class ever. Mass unemployment, whole industries shut down possibly for good. Aussie houses just keep going up though. Maybe we will have ScoMo Ninja loans to pump more credit into the system.
Really we are in Great Depression 2. Its going to be brutal.
Mega65MEMBER
I don’t think it’s amazing. It’s just what happens when you sacrafice a country and its people for a desired outcome. Maintaining high house prices is easy if you are prepared to descend a country into a dark age to do it. And of course, our politicians, and a majority of our community are willing to do just that.
Simon
Imagine any asset class…
Now allow negative gearing.
Then add to that class 50% CGT.
Then provide first time buyer grants to both the sale of new and established assets.
Then ignore sales of this domestic asset on the global market.
Before you know it, Australian potatoes are worth more than gold.
ShadowGen
Potators….tulip bulbs….
I don’t think sentiment will be the same in 12 months. There is an undercurrent of fear and sadness in society. That irrational ‘equity maaate’ exuberance now appears like yesterday’s old beer mug with some winnie blues in the ashtray. No clean up has happened yet…just sitting staring complacently and dead-eyed on the couch.
Strange Economics - why not 50% down?MEMBER
So Up 100% in 5 years, 200% in 15, and now “Horror” down 5 to 15? or down 30? Stockmarkets do -15% every year or 2..
Yet fundamentals such as rent will be lower than 5 years ago., while costs and outgoings are higher.
Surely the worst case is actually 50% down, back to 5 years ago.
Wait for new policies such as swap super into housing . Note that the 20k super withdrawals already used now – and where will that be going? Into keeping mortgage payments going.
SnappedUpSavvyMEMBER
Koala bears are less protected then Aussie RE – just look at how quickly Mortgage Keeper was rolled out
Herman Milson
China running out of puff is a good counter-cyclical for Aussie property.
Things starting to look bad in China make rich Chinese (and there are millions of them) buy a bolt hole in Australia, Canada or NZ.
No, it hasn’t. If anything, there is even more relatives, friends, neighbours already settled in those countries who would help facilitate the transaction.
ShadowGen
I agree David. Next will be China knocking on the door to get its money back.
ShawnoMEMBER
Does the fact that average Politician own 2.5 IP’s shape some form of moral hazard for them? If they were to lose 30% on them, maybe they could be staring bankruptcy in the face, and then they would be jobless as you can’t be a Politician and a bankrupt at the same time? I expect the powers to be will keep on stimulating the housing market until it goes up.
yogiman
This is a side show, to be honest. Even if it were illegal for politicians to own property, they would still be influenced by their many friends and supporters who own property.
DominicMEMBER
There’s only so much they can practically do, short of outright buying every property for sale.
ZevombatMEMBER
Depends if they are quietly selling their IPs, as some bank execs are selling
BrentonMEMBER
If Perth saw 21% falls in nominal terms, after only a mild pullback in the economy, I’ll be curious to see what high unemployment and no rate relief does to the far more bloated east coast economies.
I remain a disciple of the longterm debt cycle. High debt, with a credit dependent economy that is tethered to a bubble in asset values… and now rates @ zero bound. Recipe for a bursting of said asset values.
BrentonMEMBER
I didn’t expect the final 1.25% in cuts to engineer one last minicycle, but we’ll see what happens now that they’re in unconventional territory and with the banks trapped by NIM.
The credit tightening that kicked off the 2017-19 crash was tame compared to the setup now in play. The efficacy of Government intervention is questionable and difficult to see how the multi decade credit cycle is prevented from playing out by some fiscal tinkering.
Does it say much that the bears are giving up right as we meet all the criteria for the late stage of the debt cycle?
DominicMEMBER
+1
Agree all
BrentonMEMBER
I think 2019 broke all the bears.
If I had thrown the below at MB in 2016/2017, they’d have been calling for the end times (them and a legion of MBers):
– Rates already at 0.25%
– Banks credit tightening
– 1st recession in 30 years
– No immigration
– No foreign buyers
– Just had a double digit surge in house prices, that failed near highs
Instead it’s like a depresso fest in here. All capitulated bears going on about permanent highs and alleged government omnipotence.
bolstroodMEMBER
Yes to all that … but the crash cannot happen util the last bear capitulates.
Add this bear to the pile.
Les
“No foreign buyers”
False. Foreign buyers are still going at it. Even more so as a proportion of sales.
Foreign buyers are the only single piece that if removed, prices fall. Negative gearing and CGT discounts won’t make a speck of difference if cancelled tomorrow. Unemployment doesn’t matter to prices. Perceived or real mortgage stress doesn’t matter to prices. Recession doesn’t matter to prices either.
BrentonMEMBER
a) Australia’s household debt is 2nd highest on the planet, look into relevance and why every up cycle corresponds with rate cuts/credit easing
I still have my happy bear face on. Brenton, history will show that you are correct. The 30% is likely (give or take and region matters) but it will take more time . The Oz property prices will be sticky due to over-confidence. People see past performance as the indicator of future performances- and the bull case has ruled for a few decades. History shows assets adjust to reflect fundamentals over time- and this market is no different. The market in total cannot be gamed (like it has been) as the chips are in the pot already. The fundamentals are bad for property now as you note- and for all to see. But there will be a delay- there always is with significant illiquid assets. Punters will do anything to avoid mark-to-market. This happened in the early 1990’s. Sadly, once all the cash savings are gone, the cars are sold, the extended family has been asked to help- eventually the FOR SALE signs multiply and then the real market rules dicatate price.
It seems the bear mistake is to assume a timeline that parallels events on the ground- even if extrapolated out somewhat. Perhaps a closer model is to assume reality drives price but adjusted for falling confidence- and that is non-linear. If you think back to last year post-RC, it looked bad for property. Add in an anti-NG policy from Shorten (our political Bradbury) and prices could not be sustained. Maybe finance was crimped slightly but it was at the margins compared to upward pressure from immigration/invasion. It was confidence that flagged very very quickly. The re-boot in confidence with Scotty is what saw prices de-couple from fundamentals and increase very rapidly. Even the most rusted on property bull would struggle to argue last year was rational and reflected fundamentals. It was a demonstration that confidence is king.
Now how confident are we? As a society? Are we feeling good? How’s the animals spirits? And this WhFlu effect has only just started. Wind back stimulus and the unemployed are revealed, maybe get some unforseen events in inflation, some debt worries with the majors, etc. And all these are highly likely. Folk will be wondering how on earth a million dollar property related debt was ever a good idea. Again, if you remember the 1990’s that is exactly the feeling. And this time it will be worse.
L
We’d also have double digit unemployment if not for Jobkeeper.
Each pillar that props up the property market is being knocked out from under it, so I’m expecting the downward trajectory to continue. Perth is a good comparison, because they never got the immigration boosts that the eastern states did.
haroldusMEMBER
Nice formatting Northy, why can’t you do nice graphs instead of those horror spaghetti things.
Gone Baby
maybe he’s Pastafarianism
JohnRMEMBER
+1
Toby
If a bear sh!ts 24-36 months later, rather than the standard 18 months, are they still a real bear?
SnappedUpSavvyMEMBER
i’d say a rather gassy and uncomfortable bear for sure
Toby
Don’t hold now!
haroldusMEMBER
A drizzly bear?
Sorry, that was hopeless.
Absolute BeachMEMBER
You are better than that Harold.
haroldusMEMBER
Brown bear? Pokey the bear?
Nothing’s c0ming out right.
I’ve got writer’s block, I even put away the laptop and tried to work it out with a pencil.
I’ll give it another crack later.
SnappedUpSavvyMEMBER
just as constipated as the poor bear Harry
give it a big ol crack and see what comes out
bolstroodMEMBER
@SUS
Poo Bare
MB readerMEMBER
Probability of the first four scenarios is more or less the same. Yep, no one knows where we are going!
doctorX
Prices are already -15%
NorthMEMBER
Spoke to a guy at the settlements end of the property development supply chain. Settlement failures aren’t too bad now but he says the whole industry is very anxious about Q4 2020 when they are worried the SWHTF
Aussie housing is the most amazing asset class ever. Mass unemployment, whole industries shut down possibly for good. Aussie houses just keep going up though. Maybe we will have ScoMo Ninja loans to pump more credit into the system.
Really we are in Great Depression 2. Its going to be brutal.
I don’t think it’s amazing. It’s just what happens when you sacrafice a country and its people for a desired outcome. Maintaining high house prices is easy if you are prepared to descend a country into a dark age to do it. And of course, our politicians, and a majority of our community are willing to do just that.
Imagine any asset class…
Now allow negative gearing.
Then add to that class 50% CGT.
Then provide first time buyer grants to both the sale of new and established assets.
Then ignore sales of this domestic asset on the global market.
Before you know it, Australian potatoes are worth more than gold.
Potators….tulip bulbs….
I don’t think sentiment will be the same in 12 months. There is an undercurrent of fear and sadness in society. That irrational ‘equity maaate’ exuberance now appears like yesterday’s old beer mug with some winnie blues in the ashtray. No clean up has happened yet…just sitting staring complacently and dead-eyed on the couch.
So Up 100% in 5 years, 200% in 15, and now “Horror” down 5 to 15? or down 30? Stockmarkets do -15% every year or 2..
Yet fundamentals such as rent will be lower than 5 years ago., while costs and outgoings are higher.
Surely the worst case is actually 50% down, back to 5 years ago.
Wait for new policies such as swap super into housing . Note that the 20k super withdrawals already used now – and where will that be going? Into keeping mortgage payments going.
Koala bears are less protected then Aussie RE – just look at how quickly Mortgage Keeper was rolled out
China running out of puff is a good counter-cyclical for Aussie property.
Things starting to look bad in China make rich Chinese (and there are millions of them) buy a bolt hole in Australia, Canada or NZ.
Lol. Politics mate. That ship has sailed.
No, it hasn’t. If anything, there is even more relatives, friends, neighbours already settled in those countries who would help facilitate the transaction.
I agree David. Next will be China knocking on the door to get its money back.
Does the fact that average Politician own 2.5 IP’s shape some form of moral hazard for them? If they were to lose 30% on them, maybe they could be staring bankruptcy in the face, and then they would be jobless as you can’t be a Politician and a bankrupt at the same time? I expect the powers to be will keep on stimulating the housing market until it goes up.
This is a side show, to be honest. Even if it were illegal for politicians to own property, they would still be influenced by their many friends and supporters who own property.
There’s only so much they can practically do, short of outright buying every property for sale.
Depends if they are quietly selling their IPs, as some bank execs are selling
If Perth saw 21% falls in nominal terms, after only a mild pullback in the economy, I’ll be curious to see what high unemployment and no rate relief does to the far more bloated east coast economies.
I remain a disciple of the longterm debt cycle. High debt, with a credit dependent economy that is tethered to a bubble in asset values… and now rates @ zero bound. Recipe for a bursting of said asset values.
I didn’t expect the final 1.25% in cuts to engineer one last minicycle, but we’ll see what happens now that they’re in unconventional territory and with the banks trapped by NIM.
The credit tightening that kicked off the 2017-19 crash was tame compared to the setup now in play. The efficacy of Government intervention is questionable and difficult to see how the multi decade credit cycle is prevented from playing out by some fiscal tinkering.
Does it say much that the bears are giving up right as we meet all the criteria for the late stage of the debt cycle?
+1
Agree all
I think 2019 broke all the bears.
If I had thrown the below at MB in 2016/2017, they’d have been calling for the end times (them and a legion of MBers):
– Rates already at 0.25%
– Banks credit tightening
– 1st recession in 30 years
– No immigration
– No foreign buyers
– Just had a double digit surge in house prices, that failed near highs
Instead it’s like a depresso fest in here. All capitulated bears going on about permanent highs and alleged government omnipotence.
Yes to all that … but the crash cannot happen util the last bear capitulates.
Add this bear to the pile.
“No foreign buyers”
False. Foreign buyers are still going at it. Even more so as a proportion of sales.
Foreign buyers are the only single piece that if removed, prices fall. Negative gearing and CGT discounts won’t make a speck of difference if cancelled tomorrow. Unemployment doesn’t matter to prices. Perceived or real mortgage stress doesn’t matter to prices. Recession doesn’t matter to prices either.
a) Australia’s household debt is 2nd highest on the planet, look into relevance and why every up cycle corresponds with rate cuts/credit easing
b) https://www.macrobusiness.com.au/2020/05/chinese-abandon-australian-property/
I still have my happy bear face on. Brenton, history will show that you are correct. The 30% is likely (give or take and region matters) but it will take more time . The Oz property prices will be sticky due to over-confidence. People see past performance as the indicator of future performances- and the bull case has ruled for a few decades. History shows assets adjust to reflect fundamentals over time- and this market is no different. The market in total cannot be gamed (like it has been) as the chips are in the pot already. The fundamentals are bad for property now as you note- and for all to see. But there will be a delay- there always is with significant illiquid assets. Punters will do anything to avoid mark-to-market. This happened in the early 1990’s. Sadly, once all the cash savings are gone, the cars are sold, the extended family has been asked to help- eventually the FOR SALE signs multiply and then the real market rules dicatate price.
It seems the bear mistake is to assume a timeline that parallels events on the ground- even if extrapolated out somewhat. Perhaps a closer model is to assume reality drives price but adjusted for falling confidence- and that is non-linear. If you think back to last year post-RC, it looked bad for property. Add in an anti-NG policy from Shorten (our political Bradbury) and prices could not be sustained. Maybe finance was crimped slightly but it was at the margins compared to upward pressure from immigration/invasion. It was confidence that flagged very very quickly. The re-boot in confidence with Scotty is what saw prices de-couple from fundamentals and increase very rapidly. Even the most rusted on property bull would struggle to argue last year was rational and reflected fundamentals. It was a demonstration that confidence is king.
Now how confident are we? As a society? Are we feeling good? How’s the animals spirits? And this WhFlu effect has only just started. Wind back stimulus and the unemployed are revealed, maybe get some unforseen events in inflation, some debt worries with the majors, etc. And all these are highly likely. Folk will be wondering how on earth a million dollar property related debt was ever a good idea. Again, if you remember the 1990’s that is exactly the feeling. And this time it will be worse.
We’d also have double digit unemployment if not for Jobkeeper.
Each pillar that props up the property market is being knocked out from under it, so I’m expecting the downward trajectory to continue. Perth is a good comparison, because they never got the immigration boosts that the eastern states did.
Nice formatting Northy, why can’t you do nice graphs instead of those horror spaghetti things.
maybe he’s Pastafarianism
+1
If a bear sh!ts 24-36 months later, rather than the standard 18 months, are they still a real bear?
i’d say a rather gassy and uncomfortable bear for sure
Don’t hold now!
A drizzly bear?
Sorry, that was hopeless.
You are better than that Harold.
Brown bear? Pokey the bear?
Nothing’s c0ming out right.
I’ve got writer’s block, I even put away the laptop and tried to work it out with a pencil.
I’ll give it another crack later.
just as constipated as the poor bear Harry
give it a big ol crack and see what comes out
@SUS
Poo Bare
Probability of the first four scenarios is more or less the same. Yep, no one knows where we are going!
Prices are already -15%
Spoke to a guy at the settlements end of the property development supply chain. Settlement failures aren’t too bad now but he says the whole industry is very anxious about Q4 2020 when they are worried the SWHTF