Why Aussie House Prices Could Crash in 2016…

Is trouble brewing in the Aussie housing market?

It looks that way.

Two big Aussie investment banks say house prices are set to fall.

But another big Aussie bank isn’t listening.

It’s going all in. And after Sydney house prices gained 19.8% over the past year, this bank plans to make New South Wales its chief focus…

Macquarie Research says that Aussie house prices could fall 7.5% from 2016 to 2017, after peaking next year.

Bank of America Merrill Lynch says prices could fall 6% through 2017.

It’s not the first time folks have predicted a price fall for Aussie housing (your editor made a big call on this in 2009, to no avail).

But not everyone is bearish on Aussie house prices. One of Australia’s big four banks plans to increase its exposure to the domestic mortgage market.

ANZ wants in on the Aussie housing boom

The Age reports:

ANZ Banking Group will seek to grow by selling more home loans in Australia after years of touting its growth opportunities in Asia, with incoming chief executive Shayne Elliott flagging a more aggressive push into mortgages in NSW and a period of consolidation in Asia in an effort to lift shareholder returns.

Aussie house prices have enjoyed a terrific run.

The price gains have drowned out even the most eloquent and well-argued case for a house price crash.

Since 2012, Sydney house prices have gained nearly 50%.

The latest data from Corelogic, puts the median house price in Sydney at $773,000. The median house price in the second most expensive city, Melbourne, languishes behind at a paltry $563,500.

It’s no wonder that Australia & New Zealand Banking Group Ltd [ASX:ANZ] wants to get in on the action, after missing the biggest gains.

If ANZ had focused more on the Aussie market, it could be creaming it in as homeowners churn in and out from one house to the next — ‘trading up’ as the saying goes.

All the while, not realising that as they ‘trade up’, they rarely get to enjoy any of that built in equity…because it doesn’t really exist. So all they end up with is a bigger house with a bigger debt.

But hey, we’ve got the whole house price crash thing wrong from the start, so what do we know?

Wages growth slowing

One thing we do know is that no asset price can keep rising forever.

Remember that one of the big reasons folks thought Aussie house prices would keep going up is that there was a housing shortage…and huge immigration levels.

Now, even the housing bulls no longer believe that.

And that’s not the only problem. According to the Age:

…current household indebtedness measures, which have soared to the highest ever.

These include the dwelling price-to-income ratio, currently at “never before observed” levels of five and a half times, and a household debt-to-gross-domestic-product ratio, which is at a “record high” 133.6 per cent.

That’s not good. Moreover, housing debt to income has increased 449% since the late 1970s.

But what could be even more troubling for house prices is if wages growth continues to slow. As the chart below shows, year-on-year wages growth (blue line) is heading towards zero:

Source: Bloomberg

The yellow line indicates the annual growth in housing debt to income. It continues to rise as wages growth falls.

Is that sustainable?

No ‘get out of jail free’ card this time

The last time wages growth fell this low was during the height of the 2008 and 2009 financial meltdown. But back then, Australia had a proverbial ‘get out of jail free’ card…otherwise known as China.

It’s unlikely that ‘card’ exists this time.

In order for house prices to keep rising, the market needs rising wages, tight supply, and rising demand. And not just in one part of the market, but everywhere.

Investment banks Macquarie Research and Bank of America don’t seem convinced that can happen.

Perhaps this is why ANZ Bank is so keen to lift its presence in the Aussie market. Especially the New South Wales market. The three other big banks have done all the heavy lifting to boost house prices. Now it’s up to ANZ to do all it can to stop prices falling.

Good luck to them. But Australia is on the verge of its first recession in nearly 25 years, and it has been the same length of time since a major house price crash.

Nothing can last forever. An economy can’t grow forever, nor can the stock market, and neither can a housing market.

Leveraged homebuyers beware.



Join Money Morning on Google+

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia