Property data and analytics business CoreLogic today reported that Australian house prices remain under serious pressure on the back of tighter home loan lending restrictions, falling rents, and sagging confidence amongst buyers.
According to CoreLogic the December 2018 quarter average house price fall of 2.3% was the worst since the December 2008 quarter that covered the near depths of the Great Financial Crisis that whacked the U.S. and Europe for six.
This time though the world economy has been doing just fine and Australia has low lending rates, which makes the quarterly result even more ominous for Australia's economic outlook for 2019.
It's Sydney and Melbourne that continue to bear the brunt of the falls, with Sydney's property prices now down 11.1% from their July 2017 peak and down 3.9% for the quarter alone.
On an annualised basis and adjusting for the compounding effect that would mean falls of more than 16% in the year ahead if the rate of decline doesn't decelerate or reverse.
Melbourne prices were down 3.2% for the quarter and are down 7% for the year, with the only bright spot being the flat quarterly performance of all the other major capital cities. It's worth remembering though that Sydney and Melbourne are only giving back a small part of the 50%-80%+ gains made in the period 2012-2017.
Still it's the future that counts and the prospect of more price falls, an RBA interest rate cut, or both, seem realistic in 2019 which means share market investors have some thinking to do.
Many SMSF or 'mum and dad' investors will own bank shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), or ANZ Bank (ASX: ANZ), with all of their share prices sinking over 2018 (and today) in response to falling house prices and the fallout from the Royal Commission.
Falling house prices hurt the home loan lenders in many ways.
In a worst case scenario falling asset prices and rising bad debts can translate into a liquidity problem (as seen during the GFC) for banks that are reliant on the confidence-infused flow of retail and wholesale depositor funding more than shareholder equity in financing their operations.
It's also evident that the 2012-2017 Goldilocks period of lending with little verification of what borrowers reported as their monthly income or expenses is over as regulation tightens. While the tailwind of falling inter-bank and central bank lending rates disappears to add to the the limiting of borrowers' capacity.
Elsewhere, in NSW for example the state government introduced an additional 8% stamp duty tax on overseas buyers from July 1 2017 (the peak of the market) which priced out a lot of overseas buyers from the market. Moreover, the rush of foreigners attempting to beat the deadline artificially inflated prices up to July 1 2017, before the bubble burst as buyers disappeared.
The only hope for house prices in 2019 is either monetary stimulus (via a rate cut) or more winding back of the rules (such as APRA's investor lending cap or the overseas buyers' tax) that have hurt house prices.
So what should an investor do?
While falling house prices in 2019 could mean bank shares falling further, on the flip side a rate cut could also send the Australian dollar significantly lower as a cut is not currently priced in by currency traders.
Aside from the unpredictability of the US Fed's next rate move, I'm about as bearish on the Aussie dollar as I've been since 2015, with it today hitting a multi-year low of US70.1 cents and the possibility it keeps falling out to 2021.
As such a good way to profit remains by buying high-quality companies earning profits and revenues offshore. Some I continue to like on current valuations include CSL Limited (ASX: CSL), Macquarie Group Ltd (ASX: MQG) and Amcor Limited (ASX: AMC).
While mining stocks like BHP Billiton Limited (ASX: BHP) or Northern Star Resources Ltd (ASX: NST) are not my cup of tea, they could also receive investor support out to 2021 due to the weak Aussie dollar.
