Could property, Australia’s salvation, ever cause you and me a recession?
Yes.
Will we have a recession?
Maybe. (Recessions used to be normal).
I have only ever worked through one recession, the one Paul Keating said “we had to have” in 1991. I’ve seen my fair share of ups and downs.
Since 1991 our property market has helped Australia avoid recessions, including in 2001 and 2008.
Australia broke the world record in 2018 for the longest ever economy to avoid recession, thanks to our property market.
My clients know that I have been cautious on property prices for many years. Here are some of the things I have been saying for a while now:
Banks underwrite house prices: banks avoid mortgagee sales … so property crashes are rare. Last time property prices fell 10% banks wrote to “at risk” clients and gave them 2 years to find a solution (2011).
Baby boomers have way more wealth in their family home than in super. When they need to stop working they will still need to eat. And they cannot sell their third bedroom. (AirBNB may help in the short term).
Government policy will increasingly shove Baby Boomers out of their empty bedroom homes. Think downsizing provisions (super) and assets tests (aged pension)
There are one million empty bedrooms in NSW, owned predominantly by people older than me. I was born in 1965.
Wealthier Baby Boomers are subsidising Millenials. Unsustainable over another generation. People who work and live in a town need to be able to afford to live in that town and prices are hopelessly out of reach of graduating Millenials.
3.9% of people in NSW are unemployed, a career low.
Interest rates are at a career low.
All these facts would hopefully point to yet another soft landing.
But…
Westpac’s Bill Evans last week called two rate cuts in 2019!
Last time Bill was this brave (2009), he was alone. But he was right.
If Bill is right again; blame the economy: blame house prices.
Bill’s employer, Westpac is feeling the heat with a brand new class action by borrowers because Westpac may have lent too much in the last boom.
Property prices are down 10%. This is the technical definition of a “correction”, which is completely normal. Shares correct every other year.
UBS is a global investment bank and they have been grabbing headlines suggesting the risk of a 40% crash in property prices.
20% is the technical definition of a crash. Like with shares, it is less common and it is also normal.
In some residential markets, we are clearly in the middle of a normal crash.
My eldest daughter was born in 1999 and fortunately is young enough to have missed that last boom, she did not borrow 80% interest only at the top of the market, she is not facing a reset to Principal and Interest and inevitable rate rises. She may avoid 10 years of pain.
My nephew born in 1989 may prove to be among a generation of Australia’s Biggest Losers.
This week I attended 2 meetings
- A buyer was trying to forfeit a 2018 “frenzy ballot” property development at a 20% loss
- A big developer is laying off staff.
So let me ask my questions again:
Could falling house prices stuff our economy?
Yes.
Are we in a credit crunch …where banks actually force sales?
Yes. Watch this space
Could we have our first recession in 28 years?
Not sure yet. But crashing property prices are the most likely cause
Time to get advice?
Yes.
Recessions used to be normal. We are so much better in 2019 at managing recessions globally, they are getting shorter.
Please have a clear plan to ride through this one if it comes.
Asset prices may jump around a bit. Please seek advice and always focus on the safety and reliability of your income.
Yes it is un-Australian. But could property (actually, unexpectedly) cause a recession?
Yes. I think we are at greatest risk of a recession because so many Australians rely on a good property market.
A good property market has massive flow-on effect to designers, concreters, agents, builders, retailers, crane servicers, traffic lollypop people and our whole economy. A good property market has saved Australia countless times in the past. None of these people have anywhere to hide if our property market stops. Just Stops.
Tony Bates
Senior
Wealth Advisor
General advice warning: Any advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.