This is one of the main data trends I watch, and it’s started telling a very interesting story.
I don’t mean to get all Grinchy here, but the last of my tells has just turned, and it’s pretty clear to me that the first half of 2016 is looking like it’s going to be pretty soft.
No cookies for Santa this year. Just sugar-free, gluten-free soy snaps.
And look, I don’t want to panic any new readers here. Remember, it’s possible to make money in any market. You’ve got to live by that rule. You’re the one writing your own pay-check. Not the market.
And some time these little soft patches can be a great chance to pick up some extra sweet deals. People start to panic.
Be greedy when others are fearful, and fearful when others are greedy, as Gandalf said.
Anyway, back to my tells.
So the first tell to watch is wages. Wages feed directly into purchasing power and straight into prices.
And for some time now wages have been soft. The RBA has noted that these are particularly soft times for income growth.
Unit labour costs (which tries to adjust wages for how productive employees are) is growing just a smidgen above 2% – the lowest growth level on record.
At the same time, average earnings per hour have started falling – something they’ve never done before – even in the 90s recession.
(That’s the official data anyway – I could tell some stories…)
And looking at different industries, wages are all growing well below decadal averages. I’m sure in some industries, especially mining, wages are clearly heading south.
But this has all been a slow-burner trend for a while now, and a lot of it is driven by secular factors, independent on the market – the terms of trade, falling inflation etc. In that sense, it hasn’t really fazed me.
And it didn’t stop my predicting the recent boom we’ve just had.
And the disconnect between wages growth and asset price growth, especially houses, has surprised a lot of ‘economists’.
How can wages be falling and prices still rising. It just didn’t make sense.
Well, the reason for that is while wages are important, they’re not the only factor.
One counter-force has been the surge in Chinese buying. Chinese money has no relationship to Australian wages growth at all. It’s totally independent.
But the other thing we’ve got to remember is that the bridge between wages and house prices is credit.
Because people don’t buy houses out of income. They buy houses with mortgages, paying interest.
And what we’ve had up until recently is falling interest rates, making credit cheaper. Each rate cut jacked up the multiplier on wages.
And it goes to show how big a factor interest rates are: even though wages can be stagnating, house prices can rise on cheaper credit.
And so that’s what we’ve had… until recently.
Official rates haven’t risen, but APRA restrictions have put a serious brake on bank lending. As existing investors you’ve probably seen a little sting in your mortgage rates. Maybe only 10-20bps, but hey, every bit counts.
But banks are making it especially tricky for new investments. The freeze is making for an especially frosty Christmas.
Take maximum loan amounts. Deustche Bank did some interesting analysis that showed that post-APRA, banks had taken big hacks out of how much they were willing to lend someone on $100K p.a.
Westpac – who has the largest mortgage book in the country – dropped their maximum over $100K, from $600 to $493 thousand!
That’s a big difference.
And so now we’re in to my second tell – credit growth. And the truth is that credit growth is slowing.
With tighter bank lending standards, and a market that seems to be approaching a cyclical peak, credit growth has turned a corner.
And I’m afraid to say, that at a broad level, that means house price growth will slow as well.
It doesn’t mean it will fall. I’m not saying that. We’re a ways off that. But credit growth is pointing to softer market conditions, that seems clear.
Michael Matusik produced this interesting chart the other day. He takes growth in housing finance and compares it with house prices. He rolls housing finance forward by six months so it lines up better.
And it does line up pretty well.
And right now it’s pointing to slower times ahead. Eye-balling this chart, you think we’d be looking at growth of around 5-6% by the middle of next year.
In my books, I have to think that would you be your base-case scenario, with risks on either side.
But in case I get accused of stealing the sparkle out of Christmas, I’d remind folks that in a lot of countries 6% would be a boom!
Anyway, the point is that the market, over all, is stepping down a gear. 2016 is going to be a lot less hectic than 2014. Time is such a thing.
Of course that doesn’t mean there’s no opportunities to be found, as I said. In fact, by March there could be even more awesome opportunities available than there are now.
This is a market for keeping your eyes open, and to push your deals harder. It’s a buyer’s market, and that’s always the best time to buy.
Get skilled up, stay focused, and watch this space in 2016.
What is your prediction for the 2016 real estate market?