Property Correction

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<div class="separator">Some years ago there were doomsday predictions of a property correction in Australia since dwelling prices had reached three times the value of our Gross Domestic Product (the exact relevance of the three times figure was never adequately explained).</div>
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<div class="separator">Today, the ratio is just over 3.6 times, having ticked down slightly over the past six months of publicly available official figures.</div>
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<div class="separator">Is there a link between the two measures? Kind of, but it's not very strong.</div>
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<div class="separator">In fact, as a predictor of property prices the ratio has been useless in recent years. Actually, no, it's been worse than useless - it has been a contra-indicator!</div>
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<div class="separator">One problem with GDP is that it's historic in nature, so at best it tells you what was happening in the economy months ago - thus as an indicator of future outcomes it's necessarily all that useful.</div>
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<div class="separator">More pertinently this ratio doesn't make a lot of logical sense since it compares a <strong>stock</strong> value at a fixed point in time with a <strong>flow</strong>, being the value of goods and services produced over a specified period of time (in the example in the chart below, one year).   </div>
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<br><div>Furthermore, some types of property in thinner markets fare much better in times of boom, and worse in times of bust. And some types of property in some inner suburban locations tend to outperform the averages over time, while properties is lower demand generally fail to keep pace with the averages.</div>
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<div class="separator"><strong><span style="text-decoration: underline;">Key national accounts aggregates</span></strong></div>
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<div class="separator">In today's electronically connected world, hordes have wanted to be the person to 'call' the next Australian recession. But the economy has proved to be surprisingly robust, with the annualised rate of GDP growth for the past six months accelerating to 3.6 per cent. </div>
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<div class="separator">The riposte has been that GDP is the "wrong" measure - we should ignore GDP and look at national income. </div>
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<div class="separator">It is indeed true that real (i.e. adjusted for inflation) gross national income has stalled, but then again Australia's commodity prices could not and did not grow to the sky, so this isn't necessarily that surprising. </div>
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<div class="separator">Another way to look at this is that national income has more than doubled over the past twenty years, even after accounting for inflation.</div>
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<div class="separator">Moreover, if GDP is an unreliable measure of the performance of the economy, how can it be a good measure of dwelling prices? Can't have it both ways! </div>
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<div class="separator"><strong><span style="text-decoration: underline;">National accounts</span></strong></div>
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<div class="separator">The national accounts provide us with a range of figures relating to the property markets, but as implied by the name of the data release the figures are national and backward-looking in nature, and therefore don't really tell us much of interest about what sub-regional property markets are up to or will be up to.</div>
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<div class="separator">As noted, the national accounts lag a bit, but broadly home owners owe about $1 trillion in mortgage debt, and investors about $550 billion. What is not so well shown by these figures is that mortgage buffers and offset accounts are also at record high levels. </div>
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<br><div>With dwelling price growth having outpaced the growth in household debt, gearing ratios have declined in recent years.</div>
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<br><div class="separator">None of which tells of much of any predictive value. We can all think of housing markets in Australia that are overvalued; but equally we can all name others where prices are getting walloped or have already crashed. </div>
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<div class="separator">If there is one ratio from the national accounts which is useful in predicting where to next for dwelling prices - and I'm not saying that there necessarily is - it's the ratio of housing interest payable to income. </div>
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<div class="separator">The actual quoted percentage figure is skewed lower since so many households have no mortgage debt at all, but has declined from a peak of 16.4 per cent in June 2008 to 9.7 per cent by December 2015. </div>
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<div class="separator">On this measure, mortgage repayments are more than 40 per cent cheaper than they were at their 2008 peak.</div>
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<div class="separator"><strong><span style="text-decoration: underline;">Rates heading lower?</span></strong></div>
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<div class="separator">It would be fair to say that if mortgage rates head back to where they were at their most recent peak of about 8 to 9 per cent, then many of Australia's housing markets are heading into correction territory. </div>
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<div class="separator">It's an interesting bet if you want to take it on. But money markets are begging to differ, with yields grinding out new lows in anticipation of possible Brexit turmoil. </div>
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<div class="separator">Yesterday Australia's 10 year government bond yield fell to its lowest ever level at well below 2 per cent.</div>
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<br><div>Meanwhile, OIS rates are on a seek and destroy mission to crunch out new record lows, and they are winning that particular battle. We are now just one benign inflation print from seeing a new record low cash rate in August.</div>
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<img src="/images/2016/07/06/OIS.jpg" alt=""><br><br><strong><span style="text-decoration: underline;">The wrap</span></strong><br><br><div>GDP is a useful measure of the strength or otherwise of the economy. And over the long term stronger economic growth may be reflected in higher dwelling prices - but not necessarily so, since there are so many other contributory factors, such as tax settings or the supply of new dwellings, for example. </div>
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<div>It's true that property prices can fall during recessions. But then again they can fall when GDP is positive such as they did in 2011 and early 2012.<br><br>And what about China, where real GDP growth has slowed from above 13 per cent in 2007 to just 6.7 per cent (if you can call 6.7 per cent slow), yet house prices in Shenzhen have skyrocketed by more than 50 per cent within the past year?<br><br>Obviously there are many other factors at play than purely economic growth.  And if there is a correlation between GDP and dwelling stock valuations, it's a tenuous one. </div>
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<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em></p>
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pwargent-M4siyDbqQY

The GDP myth and doomsday property predictions: Pete Wargent

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<p>The Australian states' mid-year reviews (MYRs) revealed that revenue pressures from the housing market correction will partly offset gains from the GST funding reform, according to Moody's Investors Service.</p>
<p>Moody's Investors Service noted that at the same time, they expect higher-than-budgeted capital spending to become a major challenge for states as most embark on record capital spending programs, causing debt to rise more rapidly than revenue.</p>
<p>They added that for some states, debt will start rising from a lower level than in earlier budget projections, overall debt burdens will remain elevated over the next four years, increasing vulnerability to risks such as unbudgeted health and education reform costs.</p>
<p><strong>Housing correction will partly erode revenue gains from GST reform:</strong></p>
<p>Additional Commonwealth GST top-up payments will be offset by a weaker housing market according to Moody's</p>
<p>However, a weaker housing market will offset these gains.</p>
<p>John Manning, Vice President, Moody’s Investors Service said, "following strong growth in transfer duty revenue in recent years, particularly driven by very strong house prices along the Australian east coast, the MYRs forecast a larger drop in property-related revenue than previously budgeted."</p>
<p>"Despite already projecting lower property-related revenue in their FY2019 budgets, the larger states of NSW and Victoria now forecast further declines in transfer duty and land tax revenue as a result of weakening residential property market prices and falling sales volumes."</p>
<p>He noted however, "revenue projections for both states increased overall."</p>
<p>"Both NSW and Victoria expect to receive additional Commonwealth grant revenue to offset lower transfer duty revenue."</p>
<p>"Higher payroll tax revenue, mineral royalties and an upward revision to GST also increased NSW’s revenue projections, while Victoria’s projections improved due to higher payroll taxes from stronger full-time employment and wage growth," he concluded.</p>
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j.ballantyne1990-6AQqhLzZaK

New South Wales and Victoria feeling the pressure from housing correction: Moody's

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<p>Australia’s property market isn't going to crash, according to the Commonwealth Bank economist Gareth Aird.</p>
<p>Nor even a hard landing, but something not too dissimilar to the corrections of 2010 and 1989, he said.</p>
<p>But he has forecast that house prices in Sydney and Melbourne will continue declining until the end of next year.</p>
<p>“We (CBA) see the peak to trough being around 10% in Sydney and a little less in Melbourne (8.8%)," he told Business Insider.</p>
<p>Click <a href="https://edge.alluremedia.com.au/uploads/businessinsider/2018/09/CBA1.jpg" target="_blank">here</a> to enlarge</p>
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<img src="https://edge.alluremedia.com.au/uploads/businessinsider/2018/09/CBA1.jpg" alt="">Source: <small>Commonwealth Bank</small>
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<p>Aird’s model is calculated as a function of the four variables listed below.</p>
<p>1. Annual changes in mortgage rates (1 year advanced);</p>
<p>2. The annual change in the flow of credit (six months advanced);</p>
<p>3. Auction clearance rates (four months advanced);</p>
<p>and 4. The house price expectations index from the Westpac/Melbourne Insitute consumer sentiment survey (2 months advanced).</p>
<p>He concedes that “predicting property prices can look foolish retrospectively”.</p>
<p>However, the chart below shows that the four leading indicators outlined above track actual movements in house prices “very well”.</p>
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<img src="https://edge.alluremedia.com.au/uploads/businessinsider/2018/09/CBA2.jpg" alt="">Source: <small>Commonwealth Bank</small>
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<p>“Clearly, we can’t forecast auction clearance rates or the household perception around the future path of dwelling prices.”</p>
<p>CBA’s base case is that Sydney home prices will decline by 5% annually in 2018 — a relatively mild assessment given the latest weekly data from CoreLogic Sydney house prices are currently 5.9% lower than this time last year.</p>
<p>That would take overall declines from Sydney’s July 2017 peak to around 7.5%.</p>
<p>“For Melbourne, prices would be down by around 5% from their November 2017 peak,” Aird said.</p>
<p>“Nationally, we think prices will end the year down by around 3% with a roughly similar outcome likely in 2019."</p>
<p>Aird noted the broader economy outside of housing is still performing well, along with the continued strength in Australia’s labour market.</p>
<p>He expects the unemployment rate will decline further which lowers the risk of mortgage defaults.</p>
<p>There’s Australian rate of population growth, he added.</p>
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CBA's Gareth Aird forecasts 10 percent decline in Sydney house prices into 2019

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<p>McGrath founder and real estate veteran John McGrath has said he was misquoted in a report that the Sydney market was 40% overvalued.</p>
<p>“The Sydney market is most of the way thought its sales cycle and very near the top of its cycle.</p>
<p>"My view is there is no bubble, and no chance of a 40% correction,” clarified McGrath. </p>
<p>He had been misquoted saying he thought the Sydney market was 40 per cent overvalued, comments first published by Mortgage Business website, repeated on the Smart Property Investment site and then picked up by Business Insider, prompting a denial by John McGrath.</p>
<p>At the same time - and in the same article - he'd advised he thought there might be a <span> “small correction while the market catches its breath.”</span></p>
<p>The real estate expert had been attending the mortgage broker AussieThink conference on Monday on the Gold Coast where he sat on a panel with Aussie John Symond and banker Ian Narev, hosted by 2GB's Ross Greenwood.</p>
<p>He noted that there are “two housing markets” in Australia, and according to him the one that incorporated the two major cities of Sydney and Melbourne was at the end of its cycle.</p>
<p>“There are two markets in Australia, the Sydney/Melbourne market being one and the rest of Australia, and that could be broken into regionals and other capitals. If you look at the last 10 years, we have seen Sydney/Melbourne [prices] have doubled and we’ve seen most of the other capital cities increase by 10–20 per cent, so it really is a big separation of the two markets,” McGrath was quoted as saying by the Mortgage Business.</p>
<p>The report quoted him as saying that the two cities were “at least 95 per cent through their current cycle”, adding that “it could be 100 per cent in Sydney”.</p>
<p>“I don’t see any material capital growth in the next few years and, equally confidently, I don’t see any material drop either. I’ve been through five cycles and each time the market does see significant growth over a two- to three-year period."</p>
<p>“Yes Sydney is overvalued compared to other areas of Australia, however it is a world class international city and a major financial centre. I’ve long said that South East Queensland is undervalued and shows great growth potential,” said McGrath in a media release clarifying his remarks. </p>
<p>He said the market had strong drivers including deep demand, population growth, overseas investment and low interest rates but there was a possibility of a small and short correction of a few percent, and “I believe that is healthy for the sustainability of the market”.</p>
<p>His firm's <a href="https://www.urban.com.au/news/74896-mcgrath-profit-tumbles-on-low-listings" target="_blank">profit fell 42 percent</a> for the year ended June 30 and the company announced a share buyback to support its sliding share price.</p>
<p>The Australian Financial Review's Street Talk column has written private equity firms are "circling" the company.</p>
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<p>It advised Anchorage Capital, Adamantem Capital, Advent Partners and Crescent Capital Partners are among firms reputedly having run the numbers on McGrath.</p>
<p>Street Talk was not suggesting any approach has been made to the board, or that talks are under way ahead of a formal end to an escrow period - for about 46.3 per cent of total issued capital - on September 8. </p>
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<div>More than half of these shares are held by founder John McGrath, who retains the biggest shareholding with a 27 per cent stake.</div>
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<div>"Once the escrow period ends as much as 20 per cent of the register could change hands, should founding agents and others opt to sell," the AFR suggested.</div>
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<p>McGrath is speculated as potentially proceeding with a privatisation of the the nation's third-largest real estate sale business.</p>
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