“Domestically, the unwinding of housing-market tensions to date may presage dramatic and destabilising developments, rather than herald a soft landing.”
This is the latest warning from the OECD Economic Outlook and comes after the Reserve Bank of Australia stoked the hot coals last month, slashing the official cash rate by 25 basis points and sending Sydney’s property prices surging 3.1 per cent in the month of May.
It highlights the enormous challenge the Reserve Bank faces in trying to support an ailing economy while engineering a soft landing in Australia’s unprecedented housing bubble. No central bank has ever pulled off such a feat – anywhere in the world.
Some economists argue cutting the official cash rate is actually detrimental to the economy. Australian households are burdened with some of the highest levels of household debt in the world.
Conventional monetary policy wisdom is that cutting interest rates should spur more spending by both households and businesses, but this is looking less likely with each rate cut as Australia joins in the race to the bottom.
Most banks don’t automatically pass on rate cuts with a lower repayment amount unless asked. With an uncertain outlook for jobs and growth, many households are opting to maintain repayments at previous rates. On the other hand, savers, such as retirees are forced to cut back spending. Poor deposit rates are forcing savers to leverage into equities and property bubbles in the pursuit of perceived higher yields.
The latest GDP numbers indicate business investment is contracting sharply. Private sector capital expenditure on buildings, equipment, plant and machinery fell 5.2 per cent in the March quarter, contributing to a 15.4 per cent annual decline. While mining investment plunged a foreseeable 12 per cent in the quarter, the manufacturing sector, currently experiencing soft demand simply didn’t have the confidence to invest in capital expenditure, also fell 10 per cent. Outside of mining and manufacturing, however, was a glimmer of hope with capital expenditure picking up 1.8 per cent but failed to contribute anything significant.
The latest CPI figures show a deflationary 0.2 per cent fall in consumer prices over the quarter including a “shock” 0.2 per cent decline in Food and non-alcoholic beverages. A statement on the monetary policy decision released by the reserve bank suggested the decision to lower the cash rate last month “follows information showing inflationary pressures are lower than expected.” (‘Australia joins club deflation, cuts cash rate.‘)
Further cuts are expected in the coming months as the Reserve bank endeavors to combat falling inflation.
It would be reasonable to expect, cutting interest rates in today’s abnormally low cash rate will only reduce consumption, fuel housing and stock bubbles and increase debilitating household leverage. It’s not hard to fathom how the Reserve Bank will lose control of the economy, if it hasn’t already, resulting in the “dramatic and destabilising” demise of the Australian economy.
Excessively high household leverage and monetary policy mistakes will not be the only contributor.
Property developers and banks prepare for onset of apartment crash
In order to justify bubble prices, property spruikers had repeatedly shouted their call to action, Australia has a chronic shortage of homes. But like so many bubbles that have burst before, Australia now faces a growing oversupply.
Australia’s property frenzy and the fear of missing out has seen an unprecedented surge of apartment building along the east coast. It has now developed into an alarming supply overhang resulting with prices slumping.
According to the Australian Financial Review apartments in Melbourne’s Docklands, Southbank and the CBD are reselling for up to 24 per cent less than their off the plan purchase price. A WBP Property Group Survey of 1,794 of-the-plan apartment purchases in Victoria from December 2009 to August 2015 found the average resale loss was 9.4 per cent.
The decline in apartment prices as oversupply balloons has seen banks tighten lending for apartment purchases. Macquarie bank now requires a 30 per cent deposit to purchase apartments in at-risk postcodes.
Lender Firstmac also requires a 30 per cent deposit, but has excluded rental income from serviceability tests due to the sheer number of empty rental apartments. Non-resident lending has been suspended for high density apartments, something Firstmac categorises as over 6 floors.
Insolvency specialists, PPB advisory are warning apartment developers to be prudent toward settlement risk.
“They need to ask themselves some simple questions about the purchaser – can I locate them, where do they live, what is their capacity to settle, are they a cash buyer or will they be seeking finance, who is their financier?”
“A complete due diligence of their purchasers will assist developers to mitigate settlement risk in the residential developments nearing completion.”
$5 billion worth of residential developments got suspended in the week ending 27th May, according to the Australian Financial Review,
Another Australian Financial Review article suggests half of Sydney’s suburbs face a housing oversupply. (Half of Sydney suburbs face housing oversupply; buyers agent)
Despite signs of cooling (pre RBA rate cut), the OECD recommends “close vigilance on housing-market developments is still required.”
» New apartment resale prices tumbling in Melbourne – The Australian Financial Review, 27th May 2016.
» Lender Firstmac adds to squeeze on apartment borrowing – The Australian Financial Review, 27th May 2016.
» Risk and fear rise as failed apartment deals reach $5b – Australian Financial Review, 27th May 2016.
» Half of Sydney suburbs face housing oversupply; buyers agent – The Australian Financial Review, 31st May 2016.
We’ve all known it’s coming. For quite some time.
But even I’m shocked at how fast the MSM are shouting that there are over supply problems. The reality being that there NEVER was a shortage, as the residents per dwelling figure has been trending down for years (a shortage would be confirmed by INCREASING residents per dwelling).
So what’s changed? The few buyers at the top of the market have slowed down their purchasing velocity, and the whole house of cards is wobbly.
Will it crash into 2017? I don’t know. The maths says it should have crashed years ago, but the herd kept buying. Now that things are a bit shaky, is it enough to snuff the flame? I’m not convinced.
After all, we’ve proved Australian’s are a special kind of property investor.
Hi Matty, think it will crash in 2017 but not because the world has turned off the flood of hot money which has inflated it. Think it will crash as China hits the wall, interesting figures out showing the (from nothing) massive spike in collapse of SEOs in April and May after the colossal injection of capital in March in a vain attempt to keep the show on the road. All it did was pump GDP growth and the commodities market for a brief one month flash but it collapsed the month after. Expecting to see blood on the floor in June as gravity reasserts itself. Australia has shown itself as unwilling as anywhere else to tackle their bubble and will suffer the consequences. We wait.
Lol every time there is a rate cut , it is gobbled up by the property owners who are selling whom jack up their prices to make sure sellers get the benefit, and not the buyers. And the dumb buyers go right along with it.
and what about the donkeys who comment here saying the house market is under supplied? ABS stats have proved otherwise for a long time, and wowee it look like the Financial Times is only about 8 years out of step.
This whole bubble is hilarious.
“No one could have seen this coming”….
Settle down Titty. No need to go around calling people donkeys. They’re probably in complete agreement with you. You just don’t know how to read the subtlety in someone’s comments.
A bubble, by its nature is an artificial shortage. So when someone uses the word shortage, check the context and what they might mean is “artificial shortage”.
When I’ve commented on the 100,000 homeless people in Australia, I’ve been referring to the shortage of affordable housing, which is very much apparent to these people, you numpty.
The oversupply of apartments will make itself more evident as the coming months and years will demonstrate. As time goes on, and their newness wears off, who will want a shoddily built, thin-walled, overpriced tiny dogbox when there is a multitude of the same on offer?
However, for many, there might not be much of a choice. There is a shortage of affordable houses, the type that families might want to live in, for rent or purchase. Every house on a full block is seen through the eyes of development potential, as in how many dwellings can be crammed in for maximum profit while new houses on new estates are built on ever-shrinking blocks.
As we try to grow Australia’s population at breakneck speed in an effort to keep the Ponzi scheme propped up, I envisage more people living in apartments, but not because they want to. Australia’s liveability, at least in the main cities, is going to go downhill fast.
Yep, looks like the donkey recognised himself.
” We are living in a fool’s paradise.”
“shortage of affordable housing” – Exactly David.
Heart bleeds to see the homeless sleeping on benches, parks, & corners around George st., & Elizabeth st etc.
Few weeks back, saw a young Aussie, maybe around 35, golden brown beard, ripped trouser & broken shoes on York st, Wynyard. He was struggling with work but gently denied any help with a warm smile. His condition brought tears to my eyes.
@6 md
Don’t worry too much about about developers, the minute they can’t make a buck (or their funding gets culled more likely) is the same time full block houses will be left alone.
Once the crash occurs proper, you’ll see people buying ajoining properties to build one decent one. I know that’s my plan. And builders will be doing it for pennies on the pound.
Don’t think it will happen? It will, it’s equilibrium. No matter what the powers to be try to do, what comes around will go around. Remember, although Detroit is frowned upon, it is now known as the come back city. 1/3 of the metropolitan is uninhabited. The smart guys with cash and good business brains/reliable jobs are living a great lifestyle there. I suspect the same will come to places like Adelaide.
The real secret to this life is to only (only and only then) take on debt when the debt provides you an asset at a faster rate than the debt grows. For a while housing has fitted this model, but you MUST sell out, get your cash back, but of course we know this isn’t happening as people have bought to -vely gear, where selling breaks the model!
Avoid debt, it’s hard, it’ll cost you friends and possible partners, but the reward is/will be worth it. I’d rather be called a perma-bear (when I’m far from) and cash up, than join the ridiculous merri-go round that most Aussies are on: Their lives will become a living hell when this is through.
Something like 60% of Aussies are 3 pay cheques from broke….. This at 1.75% interest and while the asset bubble is fully inflated! Just wait til the pop, they are going to be destroyed, society as we know it will be gone for ever: In some ways it already has; Employees accepting below minimum wage, contractors earning less than employees, people are already fighting for work to make ends meet.
It’s not gonna be pretty. So don’t join the herd: Only 4% of Australian’s will be financially independent of the government. Which really means 96% of people are going about life all wrong……Don’t follow the herd, it doesn’t end well.
Titty, here is what I said:
If you just read the first half of that sentence and didn’t read the second half or failed to comprehend it within the context in which it was stated then you deserve to be called a numpty.
I then went on to state this:
in a comment in a more recent post. But sure go on and tell everyone I’m a donkey for claiming that we have too few houses.
Would you like a carrot ?
Once the bad debts start hitting could it be possible that the big 4’s lenders simply jack up their rates due to risk?? Could we get to a situation whereby the RBA rate no longer matters?
Many of these newly build dog-boxes are empty as indicated by the lack of lights at night and data on water usage. It suggests that 75% of the dog-boxes in Melbourne have no one in them and renting and they continue to build.
It will be interesting to see how many bad loans are out there are when the market turns down. The RBA rate drop may be the one that pops the bubble.
@WestPerthpunter – The banks get a significant portion of their wholesale funding from overseas and this has been identified as a large risk for the Australian banking sector. If the banks or the government lose their credit rating, then the cost of overseas funding will increase and interest rates will have to go up out of cycle.
Moody’s has expressed grave concern in recent days about the recent surge in house prices and say this is a credit negative for the banks. Liberals and Labor are both having a competition on how much debt they can rack up. I think it’s far to say, a loss of a credit rating is imminent.
@Pete
Whilst aware of the overseas funding your comment got me thinking.
If (when) the govt gets downgraded, then it would automatically make sense for the banks to immediately as well.
Some are predicting two downgrades within a year or so, this could create a very slippery slope considering banks are now aggressively going after more investor leverage.
Goodbye retirement savings and hello govt pension.
@Steve. My understanding the banks have an implicit guarantee by the government in that the government will bail them out. Hence a downgrade of the government’s credit rating, should see a automatic downgrade of the big 4 banks.
Great conversation.
So the potential downgrades will increase borrowing rates, the AUD will drop and then the debt (owing to overseas financiers) the big 4 banks will increase.
Commentators say this is nothing like ‘subprime crisis’ but all these loans (and the factors affecting them) aren’t as simple as they seem. And let’s not forget many of them are interest only and at least 20 years.
I wonder how much any future governments will bail out the banks? Potentially they will just have to raise funds on the open market and have to jack up rates to compensate for the higher finance costs?
The government guarantee as far as I am aware covers savings to 250k per person in banks and major credit unions. There is likely limited coverage for mortgage holders with bankruptcy legislation and mortgage insurance (which generally covers ninety days) the most likely relevance to lenders and mortgage holders.