Waking up to a housing market nightmare

Sydney real estate agent Peter McGuinn has witnessed first-hand the recent dramatic shift in the local property market.

"Fifteen months, two years ago, selling was easy. You could sell a dog kennel for a fortune," he says.

But offloading a property in Australia is now hard work following a steep decline in house prices.

Take, for instance, the three-bedroom house in Sydney's beachside suburb of Maroubra — 10km from the centre of the city — that McGuinn put to auction recently.

A year ago, it would have been quickly snapped up for about A$1.8 million ($1.90m), says McGuinn, a co-director of South Eastern Reality, but when it went to auction in late November it failed to attract a single bid.

As of late December, it remained on the market for less than A$1.6m.

Sydney house prices have suffered their steepest decline in three decades and are down 10.1 per cent from their July 2017 peak. Falls in Melbourne are similar.

McGuinn says in reality the falls are around 15 per cent and up to 20 per cent in some suburbs. That will be confirmed when updated figures are published in February.

It's not just real estate agents and homeowners who are nervously watching the house price decline. The Government, investors and economists are also keeping a close eye on the property market.

AMP Capital chief economist Shane Oliver says the housing downturn is now the biggest threat to the economy.

"That weakness in the housing market is slowly starting to show up in a downturn in the housing construction cycle which, on its own, is not necessarily a major problem because there's other parts of the economy that will keep things going," says Oliver.

"More importantly, the weakness in the housing and house prices is and will act as a dampener on consumer spending."

Household spending is already soft, growing just 0.3 per cent in the third quarter of last year, and a major factor behind quarterly GDP growth to just 0.3 per cent.

Australia goes into the new year, after the economy grew around 3 per cent in 2018, on the back of infrastructure spending, improving business investment and strong exports.

Despite the risk from falling house prices, Oliver expects growth to continue and for Australia to enter its 28th year without a recession.

"My feeling is that it turns out to be a relatively soft landing although I think, if you're in Sydney or in Melbourne and you borrowed recently and bought into a house in the last year or so, you probably may not regard it as a soft landing," he says.

Oliver expects the economy to grow 2.5-3 per cent in 2019, underpinned by strong exports of commodities, business investment and ongoing infrastructure investment.

However, global economic weakness could hit export volumes and prices, as could US President Donald Trump's game of brinksmanship with China over trade tariffs. There is a risk weaker consumer spending could flow over to a slowdown in business investment.

House prices have surged in Australia for the past decade, putting a home beyond the reach of many in the capital cities, but making those who already own a home feel increasingly affluent.

This so-called wealth effect has underpinned consumer spending, as homeowners have felt more relaxed about dipping into their savings or their mortgages as they watched the value of their homes rise by literally thousands of dollars a week.

But with headlines now telling homeowners how much money they have lost, economists are concerned consumers will keep more money in the bank.

The Reserve Bank of Australia is also concerned. "The outlook for household consumption continued to be a source of uncertainty because growth in household income remained low, debt levels were high and housing prices had declined," minutes from the RBA's final board meeting of the year revealed.

Anna Carrabs, chief executive of premium furniture maker and retailer King Living, says she expects consumers will be more cautious in their spending as home values fall.

However, she is hoping this translates into a focus on quality and better spending decisions at the company's 16 stores around Australia (it also has a store in Auckland's Parnell).

"I think there will be more caution, but I think usually caution means, if we're going to make the investment, let's make it last. People think a lot more like that rather than, 'Hey, let's just buy it and then we can always get rid of that if we don't like it next year and just change it again'," she says.

"That's the message that we're putting out there."

Adding to the risk from the house price fall is that Australian consumers already have high debt levels and banks are making it harder for people to get loans.

Banks are tightening up their loan requirements in response to tougher new regulations but also after the Banking Royal Commission, which has put a spotlight on the sale of unsuitable products to customers and on unsustainable lending.

According to news reports, a bank recently went so far as to look through a potential borrower's bank statements and asked why he was spending so much on kebabs.

It will put further downward pressure on house prices, particularly in Sydney and Melbourne where many buyers load up with as much debt as possible to enable them to compete with other homebuyers.

On top of that, regulators have placed a brake on the amount of money banks can lend for investment properties.

Adding to pressure on property investors is the possibility of a Federal Labor government taking power next year. Labor's pledge to wind back the favourable tax treatment of investment property will deal another blow to the housing sector.

While consumers will be more cautious, the average household will save about $10 a week from lower petrol prices and that will provide some support to household spending, says Shane Oliver.

There is also the prospect of large income tax cuts this year. At its mid-year economic update in late December, the Government announced the deficit was shrinking and the 2019-20 year was on track for the first annual surplus in a decade.

More importantly for consumers (and voters) the Government has put aside A$9.2b for what the Treasury papers coyly calls "decisions taken but not yet announced", which are actually tax cuts.

Treasurer Josh Frydenberg will hold off the details until closer to the election due by May, although analysts estimate they will be worth about A$6 a week to middle income earners.

Low income earnings are already in line to receive a A$500 tax refund in July thanks to previously announced tax cuts.

While the Government insists the return to surplus is due to its good economic management, in reality it's due to higher commodity prices, infrastructure spending and higher company tax collections.

But the Treasury papers suggest the economy will slow to 2.75 per cent growth in 2018. Investment bank UBS has a similar forecast — growth of 2.7 per cent in 2019 and of 2.5 for 2020.

The slowing growth and benign inflation will keep the Reserve Bank of Australia on the sidelines and keep the official cash rate at 1.5 per cent, where it has remained steady for the past two and a half years.

Certainly, UBS economist Carlos Cacho doesn't expect a rise in interest rates until after 2020, particularly as lower oil prices keep inflation low.

"We don't think they're going to hike any time soon. With soft consumption, falling house prices, it's not an environment they want to hike into," he says.

Cacho says a rate cut is also unlikely, unless the economy deteriorates further.

"The housing market is the key downside risk to the domestic economy, mostly to the consumption channel but also through employment and the construction sector if we do see activity slow down," he says.

For his part, McGuinn is optimistic about the property market and economy.

"At some stage, probably in the next month, in the next six months, things will bottom. And then, people will say, 'S***, the whole world didn't blow up. Property prices doesn't go back down to pre-2000 numbers. It did drop back a bit, but they're still better than they were in 2014. Now is a good time to buy — while the market's bottomed'," he says.

"And then, all of a sudden, there'll be a change."