Welcome to Finance and Fury. Today will be a flow on episode from “What will happen to property prices if we continue along our economic decline?”, which was posted about a month ago. Due to the updated numbers and banks coming out with their forecasts for price declines, we will cover property again.
In the previous episode –looked at the Basics of property – where we were at prior to the government imposed economic decline
Summary - In Australia – the characteristic of our property market prices being high come down to urbanisation, interest rates and regulations Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population) Concentration of people (higher demand with population levels) and the limited supply available when people are concentrated in living space But more importantly – it is the Borrowed funds by the population – household debt to GDP In conjunction with the urbanised population – higher the amount people can borrow or put towards property – higher the prices will be With the interest rate drops recently – the affordability of debt would have gone up – assuming income also continued on the same trajectory – but with the government restricting occupations and business – incomes may struggle to growth and many people will be left unemployed High levels of correlation Historically - Australian house prices rose in correlation relative to average wage earning – up until 1996 - prior to the banking regulations changes and a massively declining interest rate environment - The Australian property market saw an average real price increase of around 0.5% per annum from 1890 to 1990, approximately matching CPI – 100 years From 1990s - prices have risen faster resulting in an elevated price to income ratio -all capital cities strong increases in property prices - Sydney and Melbourne been the largest - rising 105% and 93.5% respectively since 2009 coincide with record low wage growth, record low interest rates and record household debt equal to 130% of GDP - clearly shows unsustainable growth in property - driven by ever higher debt levels fuelled by the RBA - cutting rates beginning in 2011 Today – property prices 7 to 10 times equivalent of average full-time earnings - up from three in the 1890-90s The property market was technically in a bubble prior to the government shut downs – but if average full-time earnings go down -if interest rates are also going down and banks are giving holidays on repayments for the short term – prices won’t likely drop in the short term – or between now and close to the end of the year
Where may property prices go from here – supply is no the current issue – but demand -
Demand side – important to look at the individual under home ownership – but also the investor landscape -
Employment – ability to afford repayments – with the lower interest rates – affordability was okay – recent economic data: Australia's seasonally adjusted unemployment rate jumped to 6.2% in April 2020 was - 5.2% in March so a 1% rise – Silver lining is that this is below market expectations of 8.3% - but still the highest rate since 2015 number of unemployed surged by 104,500 to 823,300 – but these are people looking for work - People looking for full-time rose by 115,000 to 622,300, while those looking for only part-time work fell by 10,600 to 200,900 Still - Employment tumbled by 594,300, the largest drop on record, to 12,418,700, compared with estimates of a 575,000 fall, as full-time employment dropped by 220,500 to 8,656,900, and part-time employment declined by 373,800 to 3,761,800 These numbers don’t look great – but don’t show the full picture – when it comes to underemployment and participation rates – looks a little worse - The participation rate fell to an over 15-year low of 63.5% - unemployment only counts people looking for work – those who don’t fall into the non-participation rate The underemployment rate rose 4.9 points to a record of 13.7%, and the underutilization rate increased 5.9 points to an all-time high of 19.9%. Monthly hours worked in all jobs fell 163.9 million hours, or 8% to 1,625.8 million hours – when thinking about economic output in the consumption side – the 8% drop in hours is close to the estimate on the 8% unemployment rate So does this loss of overall income matter - could create a negative feedback loop that further weakened the already-vulnerable economy – and bursts the property bubble – The flow on effects of lowering incomes – first – if people don’t have jobs – means less income = decision on spending – people will cur any economic spending to make mortgage repayments first – but it comes back to the threshold of people who can’t make either – no discretionary spending which hurts consumption as part of GDP – but also mortgage/debt repayment which then hurts property prices if this increases the supply of property available through defaults – Data from banks - lenders have released their own estimates – CBA, Westpac, NAB and ANZ pencilled in almost $5 billion in provisions for bad and doubtful debts caused by the government shut downs The bad debt charges drove a 45% decline in the big four's combined half-year profit to $6.8 billion - Westpac and ANZ Bank also suspended their dividends – NAB dropped theirs to 0.3c – see what CBA does Difference between now and 2008 - during the GFC the bad debts mainly came from large companies that couldn't refinance, such as property groups and also within the financial system which had underwritten and gambled off debts – CDOs - current risks involve households — which make up a much larger share of banks' loan books – due to government shut downs – there is probably some longer lasting employment shock against a backdrop where households are highly leveraged But what about bank holidays – the attempt to keep households and businesses afloat during the shutdown, banks have hit the pause button on repayments for six months – total numbers are 392,000 home loans and around 170,000 business loans – these loan repayments will restart in October – that is when the true picture will be seen – as the loans are still accruing behind the scenes - but this $5 billion in COVID-19 bad loan write downs is only about 0.12% of lending that banks are exposed to - $4.1 trillion in total credit exposures These are the amounts the banks think will be needed to have on hand to deal with the slew of loans that turn bad and obviously these numbers can go further up or down if circumstances change Higher levels of Debt – which to date has been fuelled by lowering interest rates - But the high levels of household debt leaves the property market venerable – High household debt leaves workers more vulnerable – over the next few months - the situation could be worse than expected because of high household debt – the higher levels of debt amplify the risks of unemployment Australia's total debt to household income is at a record high of 186.5% If unemployment continues to trend upward - expect mortgage stress may rise and increase downward pressure on prices What are the major banks thinking when it comes to potential price declines - CBA outdoing all of the others with its “worst case’’ forecast that house prices could fall by an amazing 32% property price decline by the end of 2022 – again this is the worst case scenario - NAB also ran a prediction, which assumed a fall of about 30% in property prices. WBC had a “base case’’ scenario which assumed a 15% slide in house prices this year and another 5% decline next year – still around 20% ANZ used a “base case” forecast which assumed a 4.1% decline this year and a 6.3% fall in 2021 – minimum of 10% of the next 2 years Why are these forecasts being predicted - When bad loans start to mound up and property prices reverse strongly, even a well-capitalised bank can suddenly look cash strapped – and those they are lending to are also cash strapped – given the banks have the deed over property with a mortgage – they can fire sale a property out from under the owners to recoup loses CBAs base case scenario would see the economy drop by 6% this year -but then rebound with 6% growth in 2021 and growth of 3% in 2022 - That would entail a cumulative fall in house prices of 11% - this is the base case most pessimistic scenario showed the economy shrinking by 7.1% this year and 0.8% in 2021 before a weak recovery of 2.3% in 2022 - This would produce the average 32% fall in house prices but more than $65 billion in loans on pause – which would reduce the overall upside of property price growth CBA had received repayment deferral requests on about 71,000 business loans worth more than $15 billion, 144,000 home loans worth $50 billion and 25,000 personal loans question remains - what happens when those payment deferrals come to an end in September/October All of this is almost impossible to forecast – but the constrained supply is helping housing market – for now But the real issue comes back to affordability for owner occupied properties – and investment returns from investment properties Owner occupied – might be taking a hit if the number of Australians struggling to repay their mortgages lifts to higher levels over the next few months as people are laid off – but the government Job Keeper and Job Seeker payments may help to supplement this side of the property price conundrum – In addition – those most in financial distress can claim the bank holidays – to pay slightly more later when the holiday is over - One economist warned that Australia could see unemployment reach about 10 per cent and house prices drop 20 per cent RBA has maintained a low cash interest rate policy - reduced the cost of financing property purchase easy availability of interest-only loans has made investment borrowing more profitable – increasing incentive But interest rates are almost zero – so the upside of this is essentially gone What is happening – Have record low interest rates – Individual side – things are that bad – but investor side is worse – break dese each down Trouble is – once a recession has been triggered – it can go on for a very long time - and the worst can drag on for years Even if everything went back to normal today – the flow on effects may take 6 to 18 months to begin to recover The property market is a complex system – like the share market – many different factors but one of the key ones is confidence – went through this on Friday -Summary - Potential outcomes – do vary -
In the best-case scenario, capital cities could see house price declines of about 5% In the worst-case scenario, prices could fall about 20% - 30%All comes down to the level of unemployment – and affordability – bad loans increasing and properties needing to be put onto the market as fire sales -
Probably start with Investors having to sell off properties – cash strapped investors without tenants/rental incomes Even long term property’s upside may be limited for economic factors – interest rates bottoming out may be the biggest oneNo way to tell exactly – but regardless – property will likely take a hit – to the size of prices declines – who knows – be more or less suburb dependent – if already massively overvalued with larger available supply – not a good sign – but for some suburbs – may not be as drastic
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