The rate cuts in November and then December were supposed to save Australian house prices.
Yet less than six months later, recent economic data suggest things are getting worse.
According to RP Data, capital city house prices lost a combined 4.5% last year.
But ever the optimist, RP Data called this decline in April a ‘renewed softness’.
Even Tim Lawless, RP Data’s research director, admitted interest rate cuts won’t help the housing market. He said:
‘Our estimate of transaction volumes to February suggest that the two interest rate cuts in November and December last year are yet to provide a sustained stimulus to the market, with transaction volumes remaining reasonably steady around 31,000 each month. Comparing this with the sales rate through mid 2009 when around 45,000 homes were selling each month, the slowdown in buyer activity becomes quite clear.’
Housing sales by volume are down 31% since mid-2009. Adding to the housing woes is the amount of ‘housing stock’ available. It’s double that of five years ago.
And not only are more houses available, but they’re cheaper as well.
Increased housing stock is dragging down house prices. Yet, what will happen to house prices when high debt levels catch up with us?
Take a look the two charts below. In the first chart, the blue line shows you Australia’s private debt to disposable income. It stands at 150%. In comparison, at the peak, Americans had a private debt level of 300%.
The peak in American private debt levels occurred just as house prices began to fall.
The next chart gives you an idea of just how big the housing crash was in the US (blue line)…and a warning of what Aussie home owners can expect:
Those charts come from Professor Steve Keen. He’s an economist who predicts a US style housing crash in Australia. He’s convinced that high personal debt levels will bring on a crash in Aussie home values, much like what happened in the US.
Professor Keen’s thinking used to be at the fringe of economic thought. Today, it’s mainstream.
The International Monetary Fund (IMF) has confirmed the correlation of debt levels and house prices. In their World Economic and Financial Surveys publication, the IMF said:
‘Based on an analysis of advanced economies over the past three decades, we find that housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted.’
The thing is, even if we don’t see a US style housing crash, monthly housing data suggests home values are falling at a steady rate.
So rather than a quick housing bust, Aussie homeowners face a long-term housing bust.
And it’s already underway. Even so, some spruikers still won’t admit it. They won’t say prices have fallen, they’ll tell you prices are soft…weakening…easing…. Or any other word they can think of to avoid saying, ‘Aussie house prices are falling‘.
The good news is the spruikers can’t hide behind industry-speak for much longer. Each month, fresh numbers show a dismal housing market.
One in permanent decline.
How long will it last? We don’t know that for sure. But this sort of decline could drag on for years. The US is into its sixth year of falling house prices.
The housing bubble took two decades to build up…it might take another two decades before house prices go up again.
Shae Smith
Editor, Money Weekend
The Most Important Story This Week…
Every day it seems like the news gets worse in Europe. Greece is in political turmoil. France is going to change government. Spain has been forced to bail out a bank. The entire euro currency is under threat. You would have to be crazy to invest in Europe, right? Hold that thought. Practically every investing book says to go against the crowd or to buy “when there is blood in the streets”. This is because when investors are afraid, assets go cheap. Fear drives prices down, just as greed drives them up.
A climate of fear is the investor’s best chance to buy low and later sell high. It’s easier said than done. But it’s not enough for an asset just to be cheap. It might stay cheap. There needs to be an underlying trend of demand…an exciting catalyst for change coming….a spark for an asset to be re-rated by the market. Europe is the biggest trading bloc on the planet. It needs energy. How? Wind? Solar? No. Kris Sayce explains Why Europe Will Ditch Green Energy and the change he sees coming for investors to strike now.
Other Recent Highlights…
Dr. Alex Cowie on Why It’s Time to Buy Gold: “The Reserve Bank of Australia’s 50 basis point interest rate cut last week has really taken the wind out of the Aussie. Judging by the down-leg in previous interest rate cycles – not to mention the state of the Australian economy – more cuts are coming. Which should mean the Aussie may have further to fall yet…right now Australian gold investors are looking at a very good opportunity to buy gold.”
Dan Denning on Why You Should Be Watching Japan’s Economy: “When you reach the point where you have to borrow more money just to pay the interest on money you’ve previously borrowed, you’ve reached what Hyman Minsky called the stage of ‘Ponzi Finance’. Japan is nearly there. Now, the first consequence of reaching this point is that Japanese interest rates may start going up. That would be disaster.”
John Stepek on What the European Elections Mean for the Euro: “The euro is a political construct, not an economic one. As it stands, the euro cannot function in the long term, from an economic point of view. The various countries involved are too different. So the main thing holding the euro together so far is that European voters, by and large, still want it…they don’t yet blame the currency for their woes. This could be the year that all that changes…”
James Baldwin on The Great Push North for Arctic Oil Continues: “The Kremlin has been looking for ways to incentivize producers to help Rosneft replace waning production. Tax breaks have been one way, but companies also want a little bit of insurance when they work with Moscow… The answer is ‘hostage taking.’”
To End the Week…
