In this final update for the year we look back on what has happened, snapshot the present and make a few predictions for 2019.
Looking back in the rear-view mirror
We have been living, or more accurately, borrowing, beyond our means over this year and the few that preceded it.
The key drivers for the 2013 – 2018 property boom were cheap credit, domestic and foreign investor activity and relaxed lending standards from banks.
Over 2018 things changed quite a bit.
Credit is still relatively cheap but accessing it is harder. Investment into Australian property from both domestic and foreign investors has dropped off due to slow price growth and access to credit and lending standards have been lifted as a focus of the Royal Commission which has shown how interest only loans, reliance on the ‘HEM’ benchmark and customer expense validation all lead to poor lending decisions.
All of this and more has led to the biggest property boom in a generation, and unfortunately it could lead to the biggest collapse in prices in a generation as so far in 2018 prices in Sydney have dropped around 10% from official figures and there have been calls that it could be 20% or more.
The largest driver of the decline in property prices so far has been the tightening of credit. We have been talking for a long time about how credit drives property prices and now that credit has slowed property prices are down. This is not a coincidence.
We expect credit to continue to be harder to access from big banks and market share of “shadow lenders” to continue to grow while property prices try to find the bottom.
The lucky country already had the recession we had to have
At this present moment the Australian economy is arguably in a very strong place, but can our 28-year run of economic growth continue or will we hit a recession?
Australia has not had a recession for almost three decades. We are the lucky country, especially when you compare this track record to that of other developed counties who since the “GFC” in 2008 have all had downturns.
When, not if, Australia experiences a recession because we have not had one for such a long time it could be quite severe.
For example, many people will not be able or willing to repay their loans, and the banks will take a huge hit, potentially even big enough for the government to classify them as too big to fail and have to bail them out like the US government did in the GFC.
Further, during a recession the central banks usually lower the cash rate to boost inflation and spending within the economy, but the banks have effectively been doing the RBA’s job, as we wrote about in September, by self-regulating.
That is to say they have been slowing the amount of approved loans and raising their rates when the country cash rate has been held at 1.5% for 27 months now, the longest period ever in our history it has gone unchanged. So when the RBA reacts by lowering the rate the impact will not stimulate the economy as much as needed, this means it might make getting out of a recession much more challenging.
It is worth noting that the US federal reserve has been consistently lifting rates which has effectively signalled the end of cheap money. That is to say the trillions of dollars they, and other central banks pumped into their economies as stimulus, will start to scale back and that will make money more expensive.
That is to say the funding costs for Australia banks will continue to go up along with interest rates.
2019 will be a pivotal year
Here are 3 big things that could make 2019 a year to remember.
1. Royal Commission responses
Banks could react badly to the final report due in February by making it even harder to get a home loan, further depressing house prices.
2. Recession starts, but might not kick in till 2020
Ray Dalio, the founder of the largest hedge fund in the world Bridgewater Associates said that he thinks a US recession will happen by 2020, and Australia will not be immune if that happens.
3. Property prices find the bottom
After all is said and done during 2019 property prices will hit their lowest point.
Thank you for a great year
To all of our clients, subscribers, partners and supporters – thank you for an amazing year.
We hope that these updates have been useful and insightful for you all, as they are intended to give you content and information which helps you make better decisions with finance and to discuss with your clients and other people. They will continue in 2019.
Skyward Financial will be back in 2019 with a few exciting new developments which we look forward to show casing.