When it comes to housing bubbles, the bigger the bubble, the bigger the pop. That’s what Australia is probably experiencing at the moment — A large deflation that isn’t showing any signs of slowing down. It was once thought that it was just a healthy, but overdue, correction. But now regulators, policy makers, and the Reserve Bank of Australia, are all beginning to worry. Although the current slide hasn’t shown too much of a threat to the broader economy, even the most conservative of observers are suggesting that prices will continue to fall at least until the end of 2019. The biggest problem is that the main causes of the downfall cannot be altered easily. The only tool left in the RBA’s arsenal is another rate cut, but many commentators have argued that such a cut will only ease the pain — not cure the affliction.
There are two major forces at play here — 1. Tighter credit conditions; and 2. A looming supply glut. Slashing interest rates will not fix either of them.
Some pundits have argued that banks should just go back to the days where they made it easy to borrow money. Open up the money tap and let it flow. (That is, go back to the days of irresponsible lending). Easy cash equals increased asset prices. But that’s simply not going to happen anymore — at least, not anytime soon. The banks have tightened their lending standards, rigorously checking borrowers’ ability to repay (something they should have done all along).
There’s a risk that falling house prices will push some borrowers into negative equity, that is, the amount owing on their mortgage will be higher than the value of their property. Currently, just a tad under 3% of borrowers are in this situation, but if the housing market continues to slide, this number will only get worse.
Due to the wind-back of the mining boom, the states most affected by negative equity are Western Australia, the Northern Territory, and my home state of Queensland.
The RBA also warned of the risk of unemployment.
The RBA also mentioned that the market would have to fall “significantly further” in order for negative equity to become widespread. The current unemployment rate of 4.9% is offering some protection against mass mortgage default.
The RBA’s Financial Stability Review optimistically states that despite Australians having high household debt, many Australians would still be able to service their mortgage after losing their job because of “accumulated prepayment buffers” — whatever that means.
The RBA have also noted that the rate of households making excess mortgage payments has fallen.
There are other factors that could potentially hurt the Australian economy: Trade tensions between the US and China; A sudden rise in official interest rates; and a potential for a hard economic landing in China. Also, the risk of cyber attack.
The looming housing glut is certainly on everyone’s minds. Unit construction has increased dramatically since the housing boom began in around 2009. Ultimately, this oversupply will affect prices.
Developers have already started to fear a glut. In the March quarter 2019, new construction has already dropped by about 16%.
Moody's Analytics has made a prediction that house prices — especially in Sydney, Melbourne and Perth — are set to continue to slide for the rest of 2019, but will start to recover in 2020.
It’s certainly not looking good for older Australians, either. Our entire retirement system was built on the notion that most retirees would own their own home. This is simply not the case anymore. Research from the Grattan Institute shows the share of over 65s who own their home will fall from 76% today to about 57% by 2056.
The Grattan Institute’s 2018 report titled, ‘Money in Retirement’, warned of the risk of renting during one’s retirement years.
As housing affordability becomes a real issue among retirees, renting will become more widespread. More and more retirees will be at risk of poverty and financial stress, particularly if the Australian Government’s rent assistance program does not keep pace with the actual increase in rents paid by low-income renters.
House prices have simply outstripped income growth over the last 25 years. In the early 1990s, median house prices were around four times annual income. Now they’re more than seven times. In Sydney, it’s more than eight times!
House prices are falling, at least for the rest of 2019, even if you consider only conservative estimates. Retirees are struggling. More and more people are renting. The financial future isn’t looking any brighter for the average Australian. What can be done about it? I don’t know. Some people say, just vote for Labor (or the Greens, or whoever else) and everything will be fixed. Somehow, I doubt that.
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