housing bubble

Housing Contagion Hitting Wider Economy

The ripple effects of Australia’s property downturn continue to spread.

The question now is, will they peter out into calm waters…or magnify into tsunamis?

Average dwelling prices in Sydney fell 11% over the past year, according to CoreLogic. Melbourne prices fell 10%. And the slide continues…

Now you could argue that the falls come from greatly inflated heights. And you’d be right.

A number of factors combined to drive house price growth to an unsustainable rate, sending prices in the major cities to unsustainable levels.

Think cheap, easy credit; foreign buyers; rapid population growth; and the burning angst of FOMO (fear of missing out).

And there was good reason for that FOMO in 2014.

If you’d bought a home in one of the fast growing Sydney or Melbourne suburbs in 2014 for $1 million, you would likely have been able to sell that same home for $1.2 million by the end of 2017.

A tidy $200,000 gain.

However, if you bought that home for $1.2 million at the end of 2017, it would likely ‘only’ be worth $1.05 million today.

A stomach dropping $150,000 loss.

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These late cycle buyers are the ones most likely to find themselves in trouble. The people who bought near the height of the hype. Near the peak of the bubble. Regardless of how the market now values their homes, they still need to repay their full, outsized mortgages.

That’s going to create a ripple effect in itself. These homeowners will likely cut back on other expenditures. Purchases they would have felt comfortable making if their properties hadn’t shed tens or even hundreds of thousands of dollars. With some 58% of Australia’s GDP reliant on consumption, that has the potential to drag down growth.

The housing slump’s impact on the construction industry

The slumping property market is already having direct negative impacts in the sectors you’d expect. Like construction.

Citing the Ai Group and the Housing Industry Association, The Australian Financial Review reports:

Construction industry employment fell at its fastest rate in six years in April, as declines in house- and apartment-building, along with weaker commercial work more than offset modest growth in infrastructure work.

This ripple effect doesn’t look like it’s going to peter out any time soon. These kinds of trends, once in motion, tend to feed on themselves.

You may have read that the housing slump has seen Purplebricks Group PLC [LON:PURP] exit Australia.

When the company launched its Australian operations in September 2016, the property market was red hot. And Purplebricks’ budget online real estate services had high hopes.

Explaining the company’s departure, The Australian offers this quote from the company’s chief operating officer Vic Darvey:

This is not a decision we have taken lightly, but with market conditions becoming increasingly challenging, we do not believe that the prospective returns in Australia are enough to justify continued investment.

Purplebricks’ share price closed down 10.08% on Wednesday. That puts it down 68.68% over the last 12 months.

Purplebricks is far from the only company feeling the pain. Also from The Australian:

Australian cement maker Adelaide Brighton says its annual net profit will fall by up to 15 per cent due to softening residential demand for construction materials and higher raw material costs.

Adding up the ripples it’s looking more and more like the Aussie property and stock markets have steered out of calm waters and are heading for a tsunami.

Brace for impact.

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Bernd Struben

Bernd Struben

Bernd Struben is the lead editor at The Australian Tribune. Bernd makes use of his extensive network to bring you the top stories you need to know about each day. Stories the mainstream may miss. Or bury somewhere you’re unlikely to ever read them. Bernd studied aerospace engineering and journalism at the University of Michigan, before graduating with a degree in economics. Over the past two decades he’s worked in media, management, and finance in the US, the Caribbean, Europe, and Australia. His other role, as the editor of the Port Phillip Insider, puts him in a unique position to read Australia’s most exclusive financial advice. Some of which he shares with readers of The Australian Tribune for free.
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