Last week Louis Christopher from SQM research, otherwise known as black dragon, made it very clear about his expectations for the Australian Real estate market over the coming months:
…. but by the fact that most of us here in Australia are worried about our debt, and, as the Reserve Bank of Australia has reported, we are doing everything we can to pay down this debt as quickly as possible.
And what is the relevance here to housing? Other analysts may say that more of us will now buy housing because of the sharemarket volatility.
However, due to the fact that the primary concern here is debt, and for most buying a property means taking a massive loan, I strongly beg to differ.
Even before the events of this month, house prices were largely falling around the country.
And that was because of our own excessive levels of mortgage debt, which is at such a point that even having low lending rates of 7 per cent is too much to bear.
And to think we will all now go and buy a property because we sold out of shares?
Not a chance!
I have to agree with Louis here. It is very obvious from the recent credit data that Australia has entered a period of low-to-negative credit growth and my readers would be well aware that credit issuance is the key driver for house price growth. This is not some recent discovery however, I first started talking about the likelihood of price falls in the Australian market based on sales volumes back in June 2010.
As I explained then, and many times since, without a re-newed burst of credit issuance house prices will continue to fall. RPData’s nation sale volume chart makes it pretty clear that 2011 has been a period of low transaction volumes and it must be remembered that this chart is not adjusted for population growth.
A quick glance at the average vendor discount tells you that sales volumes are probably only holding up at those levels because of vendor capitulation. June is looking like it could have been the start of a Minsky event for units/apartments, but we will obviously have to wait for future data as a single month is certainly not enough information to go on to make a call like that.
Louis continues:
No, what will be happening is most of us will use the proceeds to pay down debt or leave the money in the bank.
So the answer is, the market is not about to take off, given what has happened in the sharemarket. And it is not yet the right time to buy.
But for those of you want to roll the dice and can afford to take a risk, perhaps now it is time to start to look and to get ready to buy.
Although I agree with Louis’s prognosis on credit I once again have to ask whether it is appropriate for data providers or any other marketer to make statements about whether it is the right time to buy. I have previously lambasted property spruikers and real estate agents for this type of behaviour and although I agree with Louis’s statements on credit I find these particular words inappropriate.
It should be up to individuals to make their own judgements about whether it is the right time to purchase any asset, and if need be they should be using the services of a registered financial planner to make that decision. Housing specifically is much more than just a financial transaction for many people and a judgement of the “right time to buy” may be based on more than just simple finances.
Louis continues:
If buyers are going to attempt to time the cycle, they are best off waiting until it is obvious the RBA is about to cut rates or has just cut rates.
That should herald the bottom of this downturn. This is what has triggered market recoveries in the past. And for now, the odds have increased that rates may well be cut.
But even if there is a rate cut before Christmas, there still isn’t any rush to jump into the housing market. You see, stock listings are in oversupply around the country, including Sydney.
Right now there are 32,000 properties for sale on the Sydney market. Not the highest ever recorded, but nevertheless it is elevated and likely to rise given the approaching spring selling season.
I think the RBA and the government have made it quite clear over the last couple of months that this is not going to be a repeat of 2008. Rightly or wrongly government debt is now a dirty word. It is going to take a catastrophe on the scale of a Europe implosion to allow the federal government the political leverage to re-stimulate the market and it is questionable whether the banking system will be in a position to support the level of credit expansion required to kick start the market again if that occurs.
In my opinion we are looking at a slow but inevitable deflation in house prices in real terms and the only reason you will see the RBA lowering rates without a crisis is to regulate the pace of the fall. I obviously may be wrong about this, and will be the first to admit it if I am, but in my opinion house prices have further to fall because the long term trend in credit issuance has actually been down since 2007 and the last cycle of house price growth has only been attainable via direct market stimulation which as I said above is unlikely to occur again.
There are two sides to this story though. Although there are reasons to be concerned about falls in house prices and the broader economic implications, there are also many reasons to be concerned about more house prices rises. When I can find articles in the paper about parents pressuring the education system to extend government schooling to ever younger children because they can no longer afford child care let alone care for their children themselves, then one has to ask whether the true cost of high house prices is actually being measured. That sort of behaviour, if true, suggests to me that our society is paying a much higher price for housing than many of us appreciate and lower prices would actually bring many benefits once we get over the initial shock.