I’m probably the last person you want to get stuck sitting next to at a dinner party.
At least that’s what I reckon the people sitting next to me on Saturday night were thinking.
To be fair, my social skills weren’t at their sharpest. My wife has just had a beautiful baby girl. After two weeks of sleepless nights, this was my first outing into the world. So I was a bit rusty.
Of course, as an immensely proud father, I was beaming about the latest addition to the clan. I have a ’10-photo rule’ in this situation. I probably have 2000 photos of my kids on my iPhone. Apart from my family – and that includes our two year old who navigates the iPhone better than me – no one wants to see them. So … after 10 photos, that phone goes back in my pocket. And that’s ‘the 10-photo rule’.
Note to self: Most sensible people don’t want to hear about how tight the short-term fundamentals of the copper market are. At least not on a Saturday night!
When the people sitting around me gave me that ‘I don’t give a rodent’s rectum about Chinese copper inventory levels’ look, I thought hmmm … maybe it’s time to switch to a more inclusive topic: Aussie property.
Turns out, everyone at the dinner party had a view on the Australian property market. And they were fighting to be heard. I was happy to have a chance to catch my breath and sip on my first beer in a fortnight. But after listening to five minutes of an ‘Australian property will go up forever’ chorus, I bludgeoned my way into the conversation…
Maybe I should have stuck to the baby photos!
Why the Property Market is Running Out of Gas
It seems almost no Australian property owner wants to hear anything negative about the property market – even if it is the truth.
So when I started throwing about a few iffy statistics I’d had my eye on, I felt about as welcome as a fart in a spacesuit.
Do you think they wanted to hear that annual housing credit growth is at a 35-year low?
But it is.
Housing credit is the ‘gas’ that inflated the property bubble. As investors and home buyers take out more loans, it facilitates property demand, which leads to higher prices. A month ago, annual housing credit had fallen to a record low of 5.4% year on year. Last week, this fell again to set a new 35-year low of 5.3% year-on-year growth.
The result? At best – housing holds its ground. At worst, gravity finally catches up with the Australian property market in earnest, and we see it fall significantly as it has in every other Western property market.
Housing credit is the lifeblood of rising property prices. Housing credit growth levels spent most of the last 20 years in the double digits. With levels of only 5.3% year-on-year growth today, it is impossible to see property prices staying at their ‘laws-of-physics-defying’ high levels.
We have also just got news that new homes sales in Australia crashed by a record monthly fall of 7.3% in January. The monthly fall in new sales was not a one off, and is part of a trend. Multi-unit sales have been smashed 25.1% if you compare sales over the last three months to the same period in 2011.
So where do we stand now?
The chart from the Reserve Bank of Australia gives us an idea.
Australian Property Prices Are Clearly Trending Down
Australian property prices did actually pick up 0.8% in February, and these charts don’t show this. I’m not reading too much into this. One month’s figures are meaningless on their own, and this is likely to be just a blip. The trend is still clearly down, which suggests prices have further to fall just yet.
The Australian services index contracted in a big way last month. Anything under 50 means the sector is shrinking – and in February it was at 46.7, plummeting down from a barely expansionary 51.9 in January. The ‘employment measure’ figure dropped from 51.2 to 47.5. Sales and new orders also fell by a similar amount.
This matters to Australian property owners because the retail industry directly employs around 15% of the Australian workforce, and indirectly employs far more. When such a large chunk of the Aussie workforce is starting to do it tough, you should expect a slowdown in the Australian economy and a further fall in property prices.
Betting on Australian Property Prices Falling
Many large hedge funds overseas are betting on Australian property prices to crack sometime this year. They don’t tend to reveal how they are doing this, but I expect they are shorting property funds, the Aussie dollar, or possibly interest rate futures.
The easiest way for most everyday investors to do the same is to sell their homes. However, RP Data-Rismark are now launching an index that allows investors to trade Australian property prices on a daily basis. It is not up and running yet, and it’s not clear yet whether it is possible to short sell the index to profit from falling prices.
If it is possible to short sell this index, it may have started just at the right time for property bears.
It looks increasingly like Australian property could face the same dose of salts that has affected nearly every other property market in the world in the last few years.
But … do you think the other dinner guests wanted to hear all that?
After retreating to some banal small talk about how nice the food was, I politely moved seats to sit next to the birthday girl who wanted to see those baby photos.
She’d just bought an apartment as well.
So … I tactfully broke my 10-photo rule, and kept those cute baby pictures coming.
Dr. Alex Cowie
Editor, Diggers & Drillers
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Written by Dr. Alex Cowie
Dr Alex Cowie is Money Morning‘s Chief Resources Analyst. (To have his newest investment ideas delivered straight to your inbox you can subscribe to Money Morning for free here).
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