The Recession We Need to Have
Australian Property Market Update
7th August, 2018
Housing Supply and Demand
Over the past month, the nationwide auction clearance rate has continued to hover around the low-to-mid-50s. These are the lowest consistent results recorded since 2012. The total number of auctions held across the country over the past month has also remained quite low, with auction volume in the 1200 to 1500 range.
Looking at last week’s preliminary data, which posted yesterday, results are still on par with the July range, however, both demand and supply seem to have declined from the previous week. Typically, when auction volume is lower, the clearance rate should rise if demand remains the same. But the falling clearance rate on declining volume highlights a further weakening of demand.
Melbourne continues to outperform Sydney, but by a much narrower margin than previous weeks. Adelaide appears to be the strongest auction market, with a success rate of 73.2 percent across 56 auctions.
Here are all the latest preliminary auction numbers, as reported by CoreLogic:
Recent Changes in Home Prices
The annual decline in house prices around Sydney is now over 5 percent. In Melbourne, house prices have only fallen 1.4 percent in the past year, but the vast majority of that decline has come in the past month alone. That could mean that the price falls in the Victorian capital have only just begun.
In Brisbane, Darwin and Canberra, prices rose in the month of July. Hobart was flat.
Here is all of CoreLogic’s latest median house price data:
Where to From Here?
“The Only Way Is Up”
If you ask former Domain senior economist Andrew Wilson, “the only way is up.”
Sydney Auction Market Lifts Over July – The Only Way Is Up Now— Andrew Wilson (@DocAndrewWilson) August 1, 2018
Sydney’s mid-winter auction market has predictably bottomed out over June and July with lower clearance rates and listings reflectingthe mid-winter holiday…..https://t.co/jOdlMrRaWC#auctionresults #houseprices pic.twitter.com/vGMxR4fQr5
Spring is certainly a season for optimism, but with all the new sellers coming to market, we’ll need to see a significant boost in demand to more than absorb the new supply and lift auction clearance rates.
“The Only Way… Is Down”
Louis Christopher over at SQM Research has a different take. He claims, “The only way clearance rates can go from here is down,” and expects a seller success rate nearer to the low 40 percent range.
We could see a short term reprieve bounce back. However our view is trend to continue down for many months.— Louis Christopher (@LouiChristopher) July 31, 2018
Or if you’re looking for something a little gloomier… A recent post over at realestate.com.au is referring to some mysterious “experts” forecasting clearance rates to plummet into the mid-30 percent range. That doomsday scenario would take us all the way back in time to 1989 when auction clearance rates hit 35 percent, interest rates rose to 18 percent and dwelling prices fell off a cliff.
The Interest Rate Outlook
Speaking of interest rates, the RBA decided today to leave the cash rate on hold yet again for a record 24 consecutive months. That’s right; it’s been two years since the RBA adjusted interest rates from our record lows, and nearly that long since Philip Lowe took over as Governor. What a cushy job. Sign me up!
If you’re wondering where interest rates may go from here, take note that the RBA has never in the history of its existence raised interest rates when house prices were falling. Besides, the Fed across the Pacific made it nearly 10 years without a rate rise from near 0 percent. Add to that our wage growth struggling to keep pace with inflation, an Aussie dollar at the mercy of the Fed and a heap of unknowns around Trump’s trade wars, the only way for the RBA’s cash rate to go is down.
Of course, Philip Lowe will need to repent for declaring “the next move will be up.” But I expect he’d rather eat crow than allow us to have the recession we need to have.
The Recession We Need to Have
Every economy since the beginning of time has had its ebbs and flows – times of expansion followed by times of contraction. It’s the contractionary times – also known as recessions – when the economy has an opportunity to catch its breath and reset.
Those who got a little too greedy and took on too much debt pay the price for their folly and learn the hard way that “the borrower is the slave to the lender.” The absurdity of malinvestment (badly allocated business investments due to artificially low interest rates and unsustainable increases in the money supply) is revealed and the boom turns to bust as the greater fools get caught swimming naked (holding highly leveraged, inflated assets).
It’s my belief that before we can have healthy sustainable economic growth in Australia again, we need this malinvestment to unwind. But somehow, we have come to believe that Australia – the Lucky Country – is immune to economic recessions.
Who can blame us? It’s been 27 years since “the recession we had to have.”
We also have regulators who think it’s their job to prevent recessions at all cost and stimulate (think Viagra) us into a perpetual state of economic growth.
But if history is our guide, “the recession we need to have” is just around the corner. If however Philip Lowe cuts rates and kicks the can a little further down the road, then our recession will be just around the corner after that.
Either way, a recession is coming, and it’s nothing to fear. It’s a necessary (although painful for some) step toward the next season of growth. It’s the winter before the Spring and Summer.
Just be sure to rug up.
What do you think? Is a long-overdue recession just around the corner?