Could Trump ‘Trump’ Australia’s Property Market?

The old, rundown five-bedroom home in Chatswood, NSW had only been on sale for four short months. When it went to auction, it had a reserve price of $3 million.

Quite a good price considering it looks like this:

Source: AFR
Click to enlarge

During the auction, there was strong competition for the house. Bids were flying in, as none of the four strong bidders were willing to give up on the house.

The lengthy auction soon turned into a battlefield. The auctioneer, full of adrenaline, kept going. A crowd soon built up, as onlookers and neighbours stopped to watch the show.

64 minutes and 206 bids later, the house sold. The price: a whopping $3,910,000, almost 25% above the reserve price.

This auction in Chatswood may have gone on record as the longest in 30 years, yet it is not the only one to sell above the reserve price. In fact, according to Domain, property prices have been soaring over the reserve price for a while. Now, eager spring-buyers are pushing property prices even higher. Many homes are now selling for more than $100,000 over the reserve price in Sydney.

The Australian property market still seems to be going strong, unaffected by turmoil abroad. On 8 November, Donald Trump shocked the world by winning the US presidential election. The increasing uncertainty that his election has caused hasn´t deterred buyers.

Last weekend, Sydney achieved a preliminary clearance rate of 84.2%, up from last week’s 78.8%. For Melbourne, this week’s data had also increased from 76.1% last week to 77.2%.

Long-term low interest rates have been great for property prices. As interest rates go down, the value of property rises, and, as interest rates go up, the value of property decreases. Historically, low interest rates have meant that people have seen their equity increase to buy property.

Yet this could all change soon with Trump’s election. You see, president-elect Donald Trump may mark the end of interest rate cuts in the US. During the election, he accused the Federal Reserve of keeping interest rates low, saying that its interest rate policy should change.

And, after so many years of low growth and depressed rates, a US rate rise could give the excuse the rest of the world has needed to follow on the same path.

This ´Trump effect´ could mark the end of the low interest rate era in Australia, and it could lead to the bursting of the Australian property bubble.

As the Australian Financial Review reported:

“This is the turning point that will cause the repricing of assets all over the world,” former Reserve Bank of Australia board member Warwick McKibbin said.

Both with the victory of Trump and the view by central banks that lower interest rates are not solving any problems.

When the long-term rate rises in the US, it will rise around the world. People will adjust all their asset portfolios that are driven by long-term interest rates such as housing.

You see, while home buyers have been taking advantage of low rates to increase their equity and buy property, savers and banks have been losing money. For savers, reduced profitability in pension plans could be an issue in the future.

Low interest rates have also affected banks’ profitability in particular. In Europe, rates have been driven into the negative, and have stayed there for over two years. They have undermined the stability of European banks, increasing concerns that Deutsche Bank and Italian banks are in trouble.

Some of Australia’s biggest non-bank lenders are now taking Trump’s victory as a sign that interest rates will go up. They have already started to raise fixed rate mortgages. As the Australian Financial Review reported yesterday:

Firstmac, the nation’s biggest non-bank lender, and nine other smaller lenders are discreetly raising fixed-rate mortgages by up to 45 basis points in a move expected to be followed by others as the “Trump effect” begins to bite local borrowers, according to lenders and market analysts.

And as spokesperson for Mortgage Choice Jessica Darnbrough said to the AFR: ‘When lenders start to lift the pricing on their fixed rates the variable rates don’t tend to fall any lower.

Donald Trump has promised infrastructure spending and tax cuts. If Trump turns on to debt to fund his infrastructure spending, which he most likely will, we could expect an interest rate rise…and higher inflation.

The problem is the US does not have much room to pile on more debt. The US government debt to GDP is at a high 104.17%. The only way to service that mountain of debt, all the while taking on more debt, will be to create inflation. And Trump will need to create a lot of it.

You see, high interest rates not only mean higher returns for savers, they also mean that, unless inflation takes off, debt is harder to service.

And as interest rates rise in Australia, mortgage holders could be in trouble.

Australian households have been bingeing on debt to keep up with property price increases. Australian household debt-to-GDP has reached a whopping 125.2%, which has caused the IMF to recently single out Australia.

According to the IMF’s report, ‘In some cases, however, private debt has continued to accumulate at a fast pace — notably, Australia, Canada and Singapore.’ And as IMF’s fiscal chief Victor Gaspar told the Sydney Morning Herald, ‘Excessive private debt is a major headwind against the global recovery and a risk to financial stability.

The question now is this: If interest rates go up, making mortgages pricier, will households be able to service the mounds of debt they’ve taken? If they can’t, we have a big problem.

Considering that homebuyers are already struggling with their mortgages, even at today’s historically low interest rates, the likelihood of this happening is quite high. New research published by UBank found that one in four Australians are financially stressed in relation to meeting their mortgage payments, and are sacrificing their personal and social lives in order to make ends meet.

According to the AFR, house prices in Sydney have gone up a whopping 60% since 2012. Yet salaries have been growing at the slowest rate on record.

Morgan Stanley is already warning that the Australian housing market has passed its peak. Now, there is talk of a correction, yet ‘experts’ assure us that it won’t be a ‘massive correction’.

Won’t it? I heard something similar while I lived in Spain in 2006…just before prices fell almost 45%.

Buyers beware.


Selva Freigedo,
Contributing Editor, Money Morning

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Selva Freigedo is an analyst at Money Morning. She has a background in financial economics, but what makes Selva´s experiences different to many are the places she has lived and worked. Born in Argentina, she has also lived in Brazil, the US, Spain, and now Australia. She has seen up close many of the economic phenomena that worry Fat Tail Investment Research readers, like hyperinflation, bank bail-ins and governments burdened with so much debt it cannot possibly be repaid.

Every week, she goes through each article, research note and recommendation produced by our experts around the world to give you information on how to build and protect your wealth. Selva packages the week’s best ideas into one easy to read report: Port Phillip Insider Extra.

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