20 April 2024

The rise and fall of the Australian housing sector

| The European |

Demographia, a well-known name in Housing Sector Survey companies, categorises Australian property prices as “severely unaffordable”, for the 14th time. However, this is about to change.

A Housing Market meltdown – FitchSolutions, in its Country Risk Report, said (7 August, 2018) that the Australian Housing Market has entered into “bearish mode” and “further decline is expected”. Economists are trying hard to predict the size of the correction. Forecasts may vary, but the meltdown has just started.

Economists can continue on with their work. However, the general population and foreign investors want to know the answers to these questions; How did this happen? Will the crisis affect the population in general? How will banks, hedge funds and the Australian government react?

14th Annual Demographia International Housing Affordability Survey: 2018

The rise of the Australian Housing Market is an interesting case-study. The bubble was initially formed due to droves of immigrants coming to Australia in search for a better future. Unlike some other immigration destinations, Australia focuses on “highly skilled workers”. Those immigrants are engineers, doctors, qualified accountants and professionals belonging to the IT industry. These professionals are required to bring “significant funds” to bear living expenses till the time they are able to secure a job. All these factors favour the Australian economy. The immigrants, once employed with well-paid jobs are well positioned to invest in the property market. This was one of the main reasons that kept Australian Housing market on an upward trajectory.

China Factor – Just like everywhere else in the global economy, Chinese investors demonstrated ferocious appetite for Australian Housing Market. Sydney property prices touched new highs with Melbourne racing just behind.

All in all it was an unrestricted buying market. Anyone with access to money had access to Australian property.

Entry of International Money-Laundering watchdogs; the likelihood of increasing house prices is much greater than many people realise, given the hidden nature of the problem.

Due to lack of regulation in the Australian real estate industry and the staggering sums involved, it was no surprise that the housing sector was on the watch-list.

AMPCAPITAL is an Australian Investment Advisory Firm. Its Chief Economist, Shane Oliver says criminals willing to pay extra to wash illicit funds have probably already had an impact on the high end of the housing market. He says, “Even one transaction can have a huge effect that pulls the whole lot up.”

The world’s top financial corruption watchdogs, including Transparency International, the Financial Action Task force, the IMF and the OECD, have called for Australian real estate agents and other property professionals to be subject to anti-money laundering laws that would force them to identify corrupt house buyers.

Australia’s financial crime intelligence authority, Austrac, reported $1 billion in suspicious transactions flowing into the nation’s housing from China alone during 2015, but some analysts believe that’s just the start. A Transparency International report last year (2017) found that Australia’s housing market is more open to laundering than the US, Britain or Canada, failing in all “ten areas” that allow criminals to easily purchase properties anonymously to hide stolen money.

In anticipation of new legislations that will affect the Housing sector, Banks have become more cautious and lending for the purpose of buying property has significantly declined.

A Catch-22 situation

Austrac says the government is consulting with the real estate industry and plans to introduce new legislation this year (2018), which would involve an extension of the Anti-Money Laundering and Counter-Terrorism Financing Act, subjecting estate agents to the same oversight as banks. It would require them to report suspicious transactions after verifying the beneficial owners of properties they sell by obtaining documents or data from a reliable and independent source.

On the other hand, REIA (Real Estate Institute of Australia) president, Malcolm Gunning says the proposed laws would throw the real estate industry into turmoil. He says, “Smaller agents would be forced to close, it would drive up fees and commissions and bring auctions across the country to a halt. If these regulations come in and we have to ask potential purchasers a whole range of questions, auctions would disappear. We’re not financial detectives.”

The above are the developments taking place within Australia. Chinese factor once again comes into play at this moment, though not in a positive way. China has implemented tight controls on fund outflows from its economy. The screws have already been tightened. No more significant investment can be expected even from “genuine” Chinese investors.

General Population – as always, in the case of any financial meltdown the general population largely suffers. Already many home owners are in “negative equity” situation. Either they sell their homes at a loss or continue paying the mortgage. This is the exact situation that was witnessed during the Housing Market crash in US (Year 2008).

Australian Banks – The existing and anticipated future positioning of Australian Banks can be understood from the FitchSolutions review report of 7 August, 2018. (Relevant excerpt stated below)

“We (FitchSolutions) are maintaining our long-held view that the outlook for Australian banks will remain subdued over the coming quarters, which will be mainly driven by the ongoing downturn in the domestic housing market. We expect credit growth to be negatively impacted given that mortgages account for approximately 60% of the total loan portfolio of the banking sector. We forecast credit growth to slow to 4.0% in 2018 and 3.5% in 2019. Banks will also be negatively impacted by the low interest rate environment and heightened regulatory oversight as the authorities seek to improve the conduct of the (housing) sector.”

Australian Fund Managers – Never to miss an opportunity for profit, the fund managers will be the profiteers during this whole crisis BUT at the cost of Australian economy. They are “shorting stocks” related to housing sector.

Totus Capital, which oversees A$200 million ($148 million), housing-related shorts across retail, building materials and financial services stocks now amount to 15 percent of the firm’s net assets, according to Sydney-based fund manager Ben McGarry. It’s also betting against Wesfarmers Ltd., which owns Bunnings, a chain of home improvement stores, and Boral Ltd., a construction-materials supplier. Many more funds are following the same strategy.

When will the Australian Housing Market recover?

No one can predict the exact time frame. With the Chinese investment factor now almost eliminated, the time taken by International Money-Laundering watchdogs in partnership with Australian Government to implement stringent property buying laws will be a primary catalyst to get out of this crisis.

The causes of Australian Housing Market crash are quite different from the earlier US Housing Market crash. However, path to recovery might contain some common elements. To successfully maneuver through the challenge of bringing the Housing Sector back on track, the Australian Government might have to look at the Pundits of Wall Street to gain insight as to how they “recovered” from 2008 Housing Market downturn.

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