According to a report from the Australian, almost 50% of new units in Sydney and Melbourne which settled last month are now worth LESS than what they were purchased for.
It is not surprising why people were so bullish on housing in Australia, given that the last recession was in 1991. Despite the recent fall in house prices and change in sentiment, there is a huge pipeline of supply still being constructed today, posing major settlement risks for both the purchasers, developers and the financial institutions that provide the funding.
Australia’s banking sector is a huge part of its economy, the ‘big four’ alone, make up approximately 25% of the ASX200 index. Any implications for the financial sector may have spillover effects on other industries regardless if they are tied to the housing market.
If the recent trend continues, a sudden rise in interest rates in addition to a reduction in foreign capital coming into the country, would have catastrophic implications for the housing market. Those who have leveraged (i.e. most people) may be forced to unload their speculative homes onto the market, ultimately adding to the already increasing supply. The banks and financial institutions will be forced to reassess their positions if they holding ‘securities’ that are falling in value.
Australia’s household debt to GDP was 120.5 per cent as of September last year, according to the Bank for International Settlements, one of the highest in the world. In 2007, Ireland was sitting at around 100 per cent.
At the same time, the RBA puts Australia’s household debt to disposable income at 188.6 per cent. Ireland was 200 per cent in 2007, while the US was only 116.3 per cent at the start of 2008.
RBA figures also show more than two thirds of the country’s net household wealth is invested in real estate. In 2008, that figure was 83 per cent in Ireland and 48 per cent in the US. Meanwhile, 60 per cent of all lending by Australian financial institutions is in the property sector.
In 2007, the International Monetary Fund gave the Irish economy and banking system a clean bill of health and suggested that a “soft landing” was the most likely outcome. Last month, the IMF said Australia’s property market was heading for a “soft landing”.
Although this is all speculation, Australia is arguably different from Ireland and has been ‘recession proof’ for the past 20+ years, this might just be another reason to discredit economists for another failed prediction of a collapse. But it is important to identify trends, understand risks, adapt and adjust to the changing environment. No one knows exactly how it will fold out, even if they say they do, there are multiple factors that they have most likely missing out on. Do your own research, hedge accordingly.
You can read our previous coverage here.
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