Please, Not Now! My title is pleading for rational sense with respect to the proposed carbon dioxide tax to prevail. Let me explain why. I have almost completed my quarterly review of all states as I write our Residex Reports for June 2011. These Reports will be available this week and they contain some startling statistical observations that all who are involved in residential property need to take note of. Some of the information is quite negative but equally so, there are some positive numbers for some areas of Australia. I have been studying the housing markets for more than 25 years and have probably looked at more models on the residential property market than anyone else in Australia (other than my chief statistician). Yes, you may claim that I have passed my used-by date, but this time and experience has brought about a wisdom that is very difficult to learn or teach. I can tell you that in the whole time I have been studying the market I have not seen the makings of such a perfect storm. The June quarter numbers in some states are the worst recorded for more than 30 years (you would probably have to go back to the 1960s to find worse). The market right now is very patchy. There are bright stars on the horizon but they could be dimmed very easily as their glow is weak and flickering, like any new flame is in its infancy. Our star is Sydney, which is the market that generally points to the future performance of other markets across Australia, and the worst performing capital city, Brisbane, is in trend terms indicating that the worst of its corrections are probably over. Before we look at the trends in various markets let me point out another observation ? our housing markets are usually a lead indicator/pointer to what is happening on the domestic economic front. This should clearly be the case as consumer mood will be largely driven by the view of their financial health. We can often point to potential increases of unemployment in areas of a city by simply looking at how that housing market is performing. People stall their buying activity when they think their jobs are at risk or their wealth is falling. We also have changes of government when the housing market is adjusting. It is clear what would happen if we had a Federal Election tomorrow. Leading into the global financial crisis, I called the potential for a 1 in a 100 year event when all markets in Australia were correcting. The event was averted as the Reserve Bank held back on making an interest rate increase, then later made some dramatic interest rate reductions. Today, all markets are not correcting but some have done very poorly. Poor management of our economy at this point in time could easily bring about that 1 in a 100 year event that was previously avoided. The worst performing market in Australia was a region in the Gold Coast area ? Southport. In the below graph the trend is presented.
For the year, Southport houses adjusted by 8.05 per cent and has now fallen in value by $51,000. Brisbane has also fallen in value and, as previously mentioned, the fall of 5.66 per cent is the highest we have recorded in any 12 month period.
The unit market trend indicates that further increased adjustments are likely while the housing market appears to have bottomed out. This is likely, given the probable improving situation and an economy that will be strengthening following the natural disasters. Now for the brightest star, Sydney.
Moving down the eastern coast to Melbourne, the picture is better than Queensland but the market is early in its correction phase with houses dropping 1.1 per cent in value in the last month and down $6,800 over the last 12 months. The unit market is correcting more strongly, however when we look at the supply of stock of properties in Victoria it is clear that this market could have a considerable amount of adjustment in it. Our numbers indicate that Victoria could have a significant stock surplus of something in the order of 24,000 dwellings, mainly in the medium density market. The net outcome, without careful economic management, could see reductions in value in this market that are considerable higher than those recently seen in Brisbane (where there is more than likely no shortage of stock). Overall I view the Melbourne market as our most at risk market at this time.
The current stock surpluses that are evident in all states other than in New South Wales and Queensland are a consequence of reductions in immigration in recent times. For example, in Victoria the reduction in population growth due to reduced immigration is about 6,000 people per quarter when compared to the five year median. The above, and the information provided in ?Australia as a Whole? and ?Regional Australia?, demonstrate the fragile nature of our housing markets. I?m not against a carbon tax or how it encourages us to be ?greener? and work toward reducing the excessive amount of carbon dioxide we are producing. However, I do believe there is a sensible process and time to introduce this tax and that time does not seem to be now when we are most vulnerable. We know consumer sentiment is low; if there is any doubt then we simply need to look at the retail sales numbers and the public downgrading of David Jones? profit forecast. We don?t need issues that will reduce consumer confidence even further at this point in our economic cycle. Frankly, I would have thought that the RBA has a tough enough task in managing a two-speed economy as Australia goes through a period of structural change, moving to be more of a resource based economy with a portion of our population relocating and finding employment within that industry. Reduced consumer confidence will put more downward pressure on our housing markets at the same point in time when it is naturally in decline and is most at risk. Significant reductions in these markets could quickly change our economic fortunes. The impact of significant reductions in housing values on an economy has been well and truly demonstrated in the world events of the last five years. Late last year I suggested the next interest rate movement would be down and reiterated this just before Easter as it became clear that consumer confidence was turning down and our housing markets started to produced some negative numbers. I remain of this view and think that a rate cut will be sooner rather than later ? I expect this to take place in September, however if the carbon dioxide tax does not come to pass then I predict the rate cut will be later. I acknowledge that one should never criticise an approach or policy as that is easy to do unless you can suggest an alternative. In the Residex Report for this quarter, I set out an approach that I believe would work more effectively. It would allow the management of our currency by using interest rates and at the same time encourage a change in the way we as a population use energy. The months ahead are going to be very interesting. The markets for opportunity are in New South Wales (lowest risk), Queensland and Perth. The latter two should be used to find bargains as these markets do have a little more correction in them. Until next month Best regards, John E Edwards, Founder and CEO, Residex
