Michael Marquette’s “View from the Bridge”
There is a confusing array of messages being conveyed by journalists, real estate brokers, economists and Government and sorting through it all is hard work to say the least. Are prices going up? Are rental prices on the rise? Is the economy powering ahead? These are questions that need answering and by looking at some of the available evidence we can sort through the haze.
Since peaking in the March quarter Australian weekly rental prices have dropped on average by 4%. Many people have used the First Home Owner’s Grant to purchase a home and that has relieved some of the pressure on rental prices. It’s also worth looking at the number of properties advertised for sale right now. There are 14% less properties on the market this October as compared to the same time last year.
This decrease in stock levels is assisting to hold residential sale prices up, especially for homes below the $1 million level. The high-demand Coastal areas are selling for significant price reductions when compared to the same time last year, with the ever popular Gold Coast recording sales with an 8% price reduction (approximately). The activity has without doubt been at the lower end of the market, in line with the First Home Owner Grant.
So what other information might help us establish what is really happening out there? Australia’s second largest real estate Group, LJ Hooker, has made a net profit of $8 million in the last 12 months as compared to $14 million the previous year. In short, sales activity has decreased on the whole and sales have been at the lower end of the market, with fewer trophy sales. Average sales commissions are significantly lower than 12 months ago.
Australians have purchased homes with the help of the big four banks over the last 12 months, especially at the First Home Owner Level. The First Home Owner Grant has created an artificial price bubble and banks have loaned money to people with small deposits and little room to move as interest rates increase – this is a frightening situation.
The International Monetary Fund has warned Australian Banks could be at risk of losing $33 billion AUD due to bad loans to customers who would struggle to repay the debt. We are still seeing companies collapse or go into receivership on an almost daily basis and the level of underemployed in the country is estimated to be anything from 10-15% of the total workforce or around 1 million people.
Household debt is still at around $3.5 trillion AUD, up from around $700 million AUD just 10 years ago. Essential debt deflation from households is still to come and employers are being careful with wages and increases in wages will be minimal at best in the foreseeable future.
With all of this evidence would a reasonable person expect property prices to boom anytime soon? Are predictions of 20% increases in property prices realistic? According to the 5th Annual Demographia International Housing Affordability Survey, Australia already has over a third of the sixty housing markets ranked “Severely Unaffordable”. Australian home buyers are already stretched further than most other home buyers – there is little room to move toward even higher levels of borrowing.