Income recession one of four reasons 2015 might not be celebratory

Income recession one of four reasons 2015 might not be celebratory
Income recession one of four reasons 2015 might not be celebratory

Guest observation

I’m not happy about it, but Australia's housing market has a potentially tough year ahead of it.

There are no guarantees in forecasting, but when half-trillon-dollar investment managers start throwing around phrases like "looming housing correction," you know there could be a problem.

In its recent report on Australia's economy, Alliance Bernstein used just that phrase. The report concluded, "There's a clear risk that falling house prices may be the next phase in the post-commodity–adjustment story."

(Jessie Richardson covered this report. Get your own PDF copy here.)

I'm certainly not one of those who think investment bankers are always right. Perhaps only investment bankers themselves fall for that fallacy.

There is strong evidence, however, that residential prices in the capital cities will either stall or fall in the coming 12 months. Here are four of the key points:

  1. Australia is facing an income recession and weak GDP growth. In trend terms, GDP increased only 0.5 percent in the September quarter 2014.

    Australia's income recession is mostly due to lower prices for our biggest exports, resources. Gross domestic income fell 0.3% and 0.4% in the second and third quarters of 2014, respectively. As a result, real wages are falling for the first time since 1992.

  2. Conditions in the labour market, as the Reserve Bank points out in its November statement, remain subdued.

    Weak employment and weak housing markets tend to reinforce each other. This was shown most clearly in the wake of the GFC in the US. Many studies found increased “doubling up” of families sharing homes, and more young adults remained in their parents' homes instead of starting their own households.

    As one newspaper put it, “Love isn’t all that’s keeping family together today. The bruising housing market is too.”

  3. Bloomberg news concluded recently that Australia may well have a recession this year, unless the government "acts decisively to stimulate the economy."

    One of the government's roles is to help balance out the business cycle. The Abbott government promised to do this with big investments in infrastructure. Unfortunately, even today that is still more an aspiration than a reality.

  4. Investors are likely to play a smaller part in the housing market this year, as the Australian Prudential Regulation Authority has begun discouraging banks from engaging in higher-risk lending.

    Risky interest-only loans (popular with onshore investors) accounted for 42.5% –almost half– of new housing loan approvals in the September quarter.

    That's such an outsized role that any significant drop in investor transactions will take real heat out of the housing market.

 All things considered, housing could indeed have a tough year in 2015. It will certainly be poor by comparison to last year's performance.

ANDREW TAYLOR is the co-CEO of, Chinas No. 1 international property portal and recent winner of the "most influential international property site in China 2014" award from the countrys peak e-commerce body. 

Forbes calls China's biggest real estate source for those looking to buy overseas.




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