Aussie Economy Hits: Could this Lead to the Next GFC?

In recent months we’ve spent a lot of time discussing and looking at the housing market.

It may seem repetitive, but it’s almost shocking how much worse it gets from week to week.

And this week is no different.

But this week, not only are house prices taking a beating, Australia’s economic growth looks set to stall, making it quite a shaky time for the country.

And we can directly relate the hit the economy could take with the downturn in Aussie house prices.

How, you may ask?

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Two factors that are affecting the Aussie economy


Construction has played a huge role in the demand for dwellings in Australia. And was a significant factor in the cost of homes.

Now, it has been revealed that construction took quite a hit in the September quarter of this year.

The ABS reports that construction values fell by 2.8% to $53.144 billion. This was a disappointing outcome for markets that were hoping for a 0.9% increase.

If we look at the whole year since the 2017 September quarter, the value of work has fallen by 16.9%, according to Business Insider.

The fall looks more significant than it is, due to the one-off increase in the September 2017 quarter in the value of engineering work.

This is evident in the graph below:

MoneyMorning 01-12-18

Source: ABS

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So why was there a drop in construction work?

It was due to the decline in engineering work by 4.5% to $23.028 billion.

Furthermore, there is a divide in the declines of the public sector versus private sector.

The public sector saw engineering values slip by 0.1% to $9.828 billion. This is juxtaposed to the private sector, which saw a much more significant drop, 7.5% to $13.2 billion.

Kristina Clifton, Senior Economist at the Commonwealth Bank, believes that ‘The fall in private sector engineering work is related to the winding down of mining investment.’

And all this was only in the last quarter.

Over the past year however, the decline has been much greater. As Business Insider explains:

Over the year, the value of total engineering work in this category fell by 34.4%. In the public sector values lifted by 8.5%, down from 17.8% in the year to June. Private sector work plunged by 49.3% over the same period.’

Like construction and engineering, residential and nonresidential building construction also fell for the quarter by 1.5% to $30.116. 

Why construction falls and house prices are related

If we compare residential to non-residential building construction values, we can see that both fell. However, residential felt it a lot more than non-residential. Work fell for residential by 2.4% and for non-residential by 1% to $10.486 billion and $19.63 billion respectively.

So what does all this have to do with the housing market?

Well that sector is also looking bleak.

With sectors down, Australia’s housing market dropped another 0.9% in November.

This means that this will be the biggest monthly loss in Australia’s property market since the GFC.

In the graph below, you can see the values falling across Australia’s largest cities:

MoneyMorning 01-12-18

Source: Macquarie Bank

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The fastest falling cities are Melbourne, Sydney and Perth. With modest weakness in Adelaide and Brisbane.

Demand continues to weaken, yet property listings are elevated. The reason for this is that vendors continue to list at high values, and buyers are not willing to over pay for properties anymore.

It’s currently looking quite bleak for the five above cities regarding the monthly declines in house prices. As Business Insider put it:

Combined, prices in these five capitals are falling at an annualised monthly pace of around 10% in average weighted terms, accelerating from the declines seen earlier in the year.’

And if the trend of high values and low demand continues, it looks like Australia’s house prices in capital cities could log their biggest declines since the GFC.

Could all these declines really hit the economy and lead us into the next recession?

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This week in Money Morning

In Monday’s Money Morning, Harje discusses how everyone will pick up losers at some point or another. Why do you think so many fund managers hold a wide variety of stocks? They know they can’t always pick winners. (That’s why investors diversify their portfolios. And Harje explains that if you’re going to run a concentrated portfolio you better be right. If you only buy three or five stocks next year, you’re running a very concentrated portfolio. There’s nothing wrong with that. But all it takes is one big loser to ruin the year. It’s why you’ve got to be sure you’re right. But if you can get concentration right (make big bets on winners) the rewards could potentially be enormous, Harje claims. To find out more, go here.

In Tuesday’s Money Morning, Harje decides to discuss the current political climate. On the verge of being pulled apart — that’s what’s in store for the Liberals according to the mainstream. I trust you know the outcome. Victoria remains Labor. What’s surprising is the sheer volume of Victorians that turned from Liberal to Labor. Before the election, Labor had a one seat majority. The problem Harje has with the current political view is about the government’s role.

Housing is unaffordable. Education is another pressure point. The government should do more to solve these problems, but Harje doesn’t agree. To find out more about Harje’s views on the current political climate, go here.

On Wednesday, Harje looked at the difference between the lottery and stocks. We all know that lotteries are a bad investment. But as Harje explains, there are also stocks out there that you shouldn’t buy, no matter how good they look. Specifically, expensive stocks. And yet investors continue to buy into them. To find out more about the stocks Harje is talking about, click here.

In Thursday’s Money Morning, Harje talks about how central banks have no idea what higher or lower interest rates will do. And this is because so many factors can affect the economy. In the early 1900s, the Fed created so much money it led to double-digit growth in asset prices in 1920. To curb inflation, they then had to lift interest from 4.75% to 7%. It pushed America into a sharp recession.

One more example is the Great Inflation of the 1960s. New money pushed inflation up from 1.6% to 13.5% by 1980. By that time, the Fed finally flipped and pushed interest rates to 19%. America fell into another recession. Then there was 2008 and the GFC. So what could happen in 2019? According to Harje, there could be more volatility still to come. To find out more, go here.

In Friday’s Money Morning, Harje looks to 2019. He believes the Fed is going to have to make some tough decisions: hold, cut or hike. Harje explains that businesses will still make money. Investors will keep buying and selling stocks. Prices might just be a lot lower. As an individual investor, this is exactly what you want. You don’t need to figure out what the market is doing or why. Your goal should be finding a few great names and sitting on those investments for years to come. Even as Aussie markets fell this year, there’s been plenty of stocks that have bucked the trend. To find out more, go here.

Kind regards,

Alana Sumic,
Editor, Money Weekend

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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