There Are 80,000 Reasons Why Australian Housing Will Struggle to Rebound
Australia’s ailing housing market got a triple tonic this week as the central bank flagged interest rate cuts.
(Bloomberg) -- Australia’s ailing housing market got a triple tonic this week as the central bank flagged interest rate cuts, the banking regulator eased lending criteria and the threat of tax changes that could have hurt property investment abated with the government’s re-election.
But there are at least 80,000 reasons to suggest there’ll be no rapid rebound as the worst housing slump in a generation spreads deeper into the economy. That’s how many apartments were completed in recent years in Sydney -- adding about 5% to the housing stock -- while Melbourne and Brisbane have also seen relatively large additions, according to the Reserve Bank.
That raises the question: Who’s going to soak up all that new supply? On a recent Saturday morning in Wentworth Point, a suburb of high-rise apartments in west Sydney that largely sprung up during a five-year housing boom, the hordes of potential buyers seen at the peak has slowed to a trickle.
“We’ve seen the numbers of people attending our open homes drop dramatically,” said real estate agent Alex Chidiac, while hosting an inspection of a three-bedroom apartment looking over the city’s Parramatta River. “If this was on the market say two years ago, we would have expected at least 10 groups coming through on a Saturday. Now we’re averaging around 3 to 4.”
The fallout is weighing on weak inflation and consumer spending in an economy that’s already slowed enough to warrant a likely interest-rate cut next month. While last weekend’s election result and looser lending criteria may offer some support for buyers, the Reserve Bank this week warned the slump would likely soften the impact of any rate cut.
Nationwide house values are down an average 8% since their 2017 peak and more than 14% in Sydney. The hangover is hitting the economy, with signs a multi-year jobs boom is running out of steam as tepid wages and the downer from falling home prices curb consumption.
Forced Selling?
“The thing that I think would really shift the balance of risk is if we were staring down the barrel of a softer labor market,” said Sally Auld, senior strategist for interest rates at JPMorgan Chase & Co. in Sydney, who sees rate cuts in June and August. “That means that income growth will slow further, and it also brings into play the prospect of forced selling in the housing market, which is not something we’ve had as of yet.”
Australia’s property obsession soured largely thanks to a self-imposed credit crunch within the nation’s banks after they became the most exposed to housing in the world. A probe into the finance industry saw lenders become tougher on mortgage borrowers, especially for riskier investment loans. That may make them reluctant to increase lending, even if demand does pick up if interest rates are lowered.
Aranie Somanathan, a 29 year-old doctor inspecting the Wentworth Point apartment, who just received approval for an owner-occupier mortgage with her husband after about four months, was surprised at the level of scrutiny her loan application received.
“We had to fill out forms with every detail of our spending, from eating out to holidays to subscriptions, insurance, every detail had to go on the form,” she said.
The surprise re-election of the conservative Liberal-National coalition could boost market confidence a bit. Property investors had expected a new Labor government to strip them of lucrative tax perks. That won’t happen now.
But construction activity -- which feeds into gross domestic product -- has already plunged as developers scale back because of the glut of apartments hitting the market. In Wentworth Point alone, more than 3,000 units are still being planned or completed, with some large projects on hold for the foreseeable future.
“The good times weren’t going to last forever,” said Chidiac.
To contact the reporter on this story: Chris Bourke in Sydney at cbourke4@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Peter Vercoe
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