House prices only go up.
It’s the one certainty of the Australian economy.
And who can argue with that?
Stories abound of folks buying a house for $50,000 in 1980, and then selling it for $2 million 30 years later.
So what could go wrong? Buy a house, and wait for the price to rise.
But hold that thought for a moment. While Aussie house prices may have soared in price over the past 30 years, that good run may soon end.
And it’s not just us saying it. An influential global ratings agency says the Aussie housing market could be in trouble…big trouble…
It’s hard to think of a more controversial topic than Aussie house prices.
It has long ceased to be a rational topic. The housing bulls will say property prices double every seven or 10 years. They say house prices can’t and won’t go down.
On the other side, the housing bears say the housing bull market is unsustainable. They’ll say a crash is certain…it will happen.
So, who’s right? Here’s our take…
Cash-strapped homeowners on the rise
We look at all markets and asset prices the same way — no price can rise continuously forever.
There must always be a period of correction and falling prices.
However, that doesn’t mean prices rise and fall at the same time or frequency. We certainly wouldn’t expect house prices to rise and fall like stock prices.
But just because house prices haven’t fallen, it doesn’t mean they won’t fall. And according to analysis from Moody’s, Aussie house prices could be in trouble.
As The Age reports:
‘More Australian homeowners are set to fall behind on their mortgages, Moody’s predicts, due to the slump in the resources sector and the potential fallout from an apartment-building boom.
‘The credit ratings agency on Wednesday said the proportion of borrowers that were more than 30 days behind on their home loans climbed to a three-year high in May, of 1.5 per cent.’
Not surprisingly, the delinquency rates are highest in Western Australia, the home of the Aussie resources boom.
It’s not surprising for two reasons. First, house prices in the west soared as workers poured into Perth, Kalgoorlie, Karratha and Port Hedland.
But it wasn’t just owner-occupiers who pushed up prices. Investors poured in too, on the promise of huge capital growth, and a secure income stream.
After all, many experts predicted the Aussie mining boom would last for 50 years or more.
As you know, it didn’t quite turn out that way. The mining boom turned to bust, mining companies went out of business or shuttered mines, and thousands of mine workers lost their jobs.
Now mortgage delinquency rates are on the rise as cash-strapped mineworkers struggle to keep up repayments.
The outcome is clear to us: A housing bust is on the cards in Western Australia, and potentially in the other mining state of Queensland, and the Northern Territory.
That’s all well and good. Even the housing bulls may concede it’s not looking good for those states. But is it the same picture for the non-mining states? States such as Victoria and New South Wales?
That’s harder to say.
No crash for Sydney or Melbourne…yet
Ultimately, we believe the entire Aussie housing market will hit the skids. But for house prices to crash in the two biggest states, it will likely need to be because of more widespread economic problems.
Remember, WA house prices soared due to an influx of folks from the eastern states. With the mining boom over, those migrants will likely head back to the east.
In the short term at least, that could help support prices in Melbourne and Sydney.
But don’t for a minute think it will save Melbourne and Sydney house prices forever.
Prices in both cities are at astronomical levels. If the mining slowdown spreads to other parts of the economy, or if another global meltdown strikes again, it’s hard to see how the Aussie economy could survive unscathed.
In our view, Aussie house prices will crash eventually. And when they do, it will be bad news for those mortgaged up to the eyeballs.
Publisher, Money Morning
PS: We have no doubt that house prices will be one of the key talking points at next week’s Great Repression conference. If you can’t make it to Port Douglas in person, don’t worry. There’s another way you can tune in to enjoy the action, and it costs only a fraction of the price of a full ticket. Details here.