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The Dark Side of the Boom - With Gain Comes Pain

Peter Raptis
Peter Raptis

Elections, Promises and Regrets

More than likely, many real estate agents across Australia breathed a sigh of relief late on Federal Election night, 18 May. Regardless of one's political leaning or preference, any new taxes, particular property related ones, never bode well for the property market.

Changes to negative gearing, capital gains tax, franking credits and a possible death duty on property would no doubt have already affected the declining property markets across Australia. As bold as these announcements were, Australians never like significant change or new taxes. In 1993 opposition leader Dr. John Hewson found out the hard way when he tried to introduce a Goods and Services Tax and "lost the unlosable election".

In recent times the opposition treasurer Chris Bowen suffered in a similar way when he regrettably uttered the words of, "if you don't like our policies, don't vote for us"; and Australian took him up on the offer.

For many businesses, individuals and of course the property market, they now feel it is "business as usual". There was so much conjecture as to what the impact would be from these new measures on the property market. Now, the discussion is over and a degree of certainty for many prevails. That said, there are still difficult times ahead for Australia's economy and property market. In a strange sense, Scott Morrison has done the easy bit and won the election, now his government needs to steer the economy through troubled waters.

Talk to anyone in business and most will say the same thing, "it's quiet". Few businesses are basking in strong conditions. Retail spending is weak, and the construction industry is in decline.

With a trade war between China and the United States, and threats of war in the Persian Gulf, it is likely that individuals and companies will adopt a very cautious approach. It's simple, markets like certainty, not uncertainty.

Property Markets - There's No Free Lunch

Residential property markets across Australia have been in the doldrums for a good 12-18 months. According to Corelogic, Sydney has suffered the most over the past 12-month period.

Source: Corelogic

Of all the measurements across the 5 Capital Cities, there was only one measurement above 0%. Buyers to a large degree have deserted the property market, mainly believing better buying opportunities lay ahead and not now whilst others have hit their affordability peaks.

The table below is based upon data from the Australian Bureau of Statistics (ABS) that reflects the numbers of properties sold in Sydney. Detached Dwellings are e.g. Houses, Terraces, Semi Detached Dwellings whilst Attached Dwellings include Apartments, Villas and Townhouses. The decline in volumes is driven by a variety of factors that have combined to create the lowest level of sales since March 2012.

Some of the contributing factors include, tighter lending controls, reduced foreign investment, up until recently rising interest rates, a sharp rise in house prices which has made buying unaffordable for many.

Source: Australia Bureau of Statistics.

After an extended boom period in Sydney from 2013 to mid-2017, the market has fatigued itself. This not an unusual occurrence as sharp rises in house prices result in high levels of debt.

In December 2008, the Median House Price in Sydney was $468,000 according to the Australian Bureau of Statistics. In June 2017 it was $1,050,000 and in December 2018 the Median House Price was $910,000.
Strangely the focus on the 13% decline from June 2017 to December 2018 completely ignores the 124% increase in 8.5 years from December 2008 to June 2017. It is reminiscent of that famous line from the Charles Dickens novel Oliver Twist, "Please Sir, I want some more".

Whilst it's a concern if you have highly geared property, according to the ABS, about 30% of Australian households are in fact debt free. Further, about 80% of those with debt have mortgages less than 80% of the value of their property. Of those 80%, a large proportion have debt levels well below the 80% gearing level.
Somewhere between 98%-99.5% of borrowers pay their mortgage repayments each and every month without missing a payment.

Whilst interest rates are a key consideration for many, a factor often pushed into the background is the unemployment rate. Even with interest rate rises, most borrowers are able to meet their repayments because of the key factor of employment. Typically, but not always, interest rates go up when the economy is performing well, this is often in an environment when business are doing well, and employment demands are high. With the advent of prudent lending, loan serviceability is not based upon the actual passing rate of interest but factors in a number of rate rises. This is how lenders stress test a borrowers capacity to repay loan.

Of course, there is a delicate balancing act by any government to manage interest rates and unemployment levels. Unfortunately, they don't always make the appropriate adjustments.

Source: Australia Bureau of Statistics.

The ABS National Unemployment Rate, whilst having increased from 5.1% to 5.2% from March 2019 to April 2019 is still considerably below levels over the past 5 years. The ongoing monitoring of this economic measure is considered more relevant in the current climate than interest rate movements.

A further measurement of the deterioration of the residential property market is the level of discounting by vendors from the asking price of a property and time on the market, measured in days. According to Corelogic the following has occurred:

Source: Corelogic

That said for Sydney, spare a thought for other capital cities such as Brisbane with a curent time on the market of 71 days for houses and 76 days for apartments. Perth is currently 82 days for houses and 86 days for apartments. Vendor price discounting in Perth for apartment is -10.3% but the record goes to Darwin -13.7% for apartments. On the positive side, Hobart holds the lowest time on the market with 38 days for houses and the lowest vendor price discounting is in Canberra at -4.0%. At least the politicians in Canberra are looking after the local market.

According to Corelogic research, auction clearance rates appear to be stable from 12 months ago. With any form of statistics, careful interpretation is advised. For example, in Sydney it would appear that auction clearance rates are higher than 12 months ago. This could be interpreted as a rebounding market; but is it? The reality is that in a soft market, many real estate agents advise against auction or withdraw properties from auctions unless they consider very strong demand exists for a particular property.

Consider the number of properties auctioned in 2018 and exactly 1 year later. There has been a significant reduction nationally and in Sydney. Whilst auction clearance rates are a headline grabbing measurment, according to Corelogic research, about 85% of properties are sold by private treaty and not by auction.

Source: Corelogic

The table below is based upon data from the ABS and represents the past 5 years. The data reflects the percentage change from one quarter to another. Highlighted are the negative quarters.

Source: Australia Bureau of Statistics.

Sydney since June 2002, has never experienced 6 consecutive quarters of negative growth. The deterioration highlighted in the above table is in fact far worse than the period during the 2008 Global Finacial Crisis (GFC) period.

Of the 5 major capital cities, Perth has been the worst performing market in the 5 year period. Of the 21 quarters in the above table, Perth experienced 12 quarters of negative growth and 3 quarters of 0.0% growth, leaving only 6 quarters of positive growth, with the highest being a modest 1.3%. in December 2017.

Adelaide has been the only Capital City to not record any negative growth. Other than growth of 3.7% in December 2013, the strongest growth since then has been a modest 1.8% in March 2017.

The Graph below is the annual growth per capital city from March 2003 until December 2018. Between June 2012 to around June 2017, Sydney clearly enjoyed growth beyond that of the national average and other capital cities such as Melbourne. Since then Sydney has nosedived to be the worst performing capital city. This is not unsual for Sydney, it had a similar experience in June 2004 until about March 2009, where it performed below the other capital cities but then began to quickly outperform most of the other cities.

Outlook - Where's It All Going?

The truth is, it comes down to informed opinions and not facts. Opinions will be varied over the short term outlook i.e. 18-24 month period. If we categorically knew, there wouldn't be so many property articles and authors offering opinions. We would all be discussing the same fact.

That said, it also depends on wether you are a believer of cycles and have faith that history does repeat or that markets are determined by differing circumstances. It was often claimed that property prices double every 7 years or that economic recessions occur every 10 years, however they no longer appear to be true.

Australia, thankfully, last had an economic recession in 1991. For most people under 45 years of age, they have no idea what an economic recession is or means. For those above 45 years of age, they are always convinced that another one is always around the corner.

Governments will always intervene, whether directly or indirectly via the central bank to stall any economic or property downturn. Such measures can include, reducing interest rates, reducing immigration, increasing infrastructure spending or as seen recently via APRA, loosening the regulatory requirements on lenders to stimulate borrowing. Politically, governments whether Federal or State, cannot afford recessions or prolonged downturns.

As a keen observer of the current property markets and historic cycles, it is considered that most residential property markets in the next 6 months will either be at the bottom of the downturn or close to it. After that, it is likley that a period of very modest capital gain will follow for at least 2-3 years. Beyond that, if all bodes well economically, it likely prices will begin to rise well above the long term average growth rates.

Of course, forecasts should be read with a degree of skeptisism. Why? Well, the future is never guaranteed. It always depends not just on dosmestic events such as political stability, government polices on numeous areas and business/consumer confidence, but on global events. How deep and serious wil the US and China trade war be? What does Brexit mean for Europe? Will one of history's most controversial political leaders, Donald Trump, be re-elected?

Ultimately whether you buy in a downturn or not, its more important to be dilligent about your process. Plenty have bought during a downturn but still paid too much. Sometimes, if you have to sell, you have to sell and deal with the market that prevails. Often events beyond our control determine when we buy and sell.

That said, interesting times over the next 12 - 18 months awaits in respect of global politics and events, domestic issues and property markets right around Australia.

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