Sydney is the brightest star on the property front, but veteran Residex forecaster John Edwards envisages there are the makings of a perfect storm that could decimate the national property market.
The Melbourne market is Australia’s most at-risk market at the moment, Edwards says, and poor management of the economy by the Federal Government could easily bring about a “one in a 100-year” national property collapse.
Edwards believes that a similar catastrophe was only avoided during the global financial crisis due to quick initiatives on the economic front.
He suggests any further reduced consumer confidence – combined with a carbon tax after debilitating debate – will put more downward pressure on the Australian housing market at the same point in time as it is naturally in decline and is most at risk.
“Significant reductions in these markets could quickly change our economic fortunes,” he says.
“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,” he says.
“The June quarter numbers in some states are the worst recorded for more than 30 years. In the whole time I have been studying the market I have not seen the makings of such a perfect storm.”
At the moment he sees the market as 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.”
“The worst-performing capital city, Brisbane, is in trend terms indicating that the worst of its corrections are probably over,” Edwards says.
Brisbane’s 5.66% fall is the highest Residex has recorded in any 12-month period for the city.
“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% 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,” Edwards says.
“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,” he warns.
“Our housing markets are usually a lead indicator to what is happening on the domestic economic front.”
“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.”
He says the Reserve Bank narrowly averted a “one in 100-year event” leading into the global financial crisis by dramatically cutting interest rates.
“Poor management of our economy at this point in time could easily bring about that one in a 100-year event that was previously avoided,” Edwards says.
“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,” he says.
Late last year Edwards suggested the next interest rate movement would be downwards.
“I remain of this view,” he says, “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,” Edwards says.
“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.”
This article first appeared on Property Observer, Australia’s top site for property investment news.
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