One of the difficult things to grasp about 2016 is that while Australians risk losing some of their net worth this year, such a development would help transition to new areas of economic growth.
As explained yesterday, we are facing a falling tide of over-valued assets – the legacy of the resources and mortgage lending booms, which reinforced each other during the good times.
In harder times, national disposable income is falling and banks are finding themselves able to lend less to each household.
So on a stock exchange which is 50 per cent miners and banks, it’s not hard to see 2015’s total return of 2.8 per cent falling further, or even turning negative.
Over their lifetimes, Australians salt money away in two core assets – their super fund and their homes.
A slide in the stock market would obviously hit super funds, but what’s likely to happen to home values?
Well again, a big structural adjustment is underway. We have been through such an extended period of house price growth, that many Australians have come to believe that prices always go up.
That long house-price boom was a function of two main factors – an undersupply of homes, and an over-supply of cheap credit.
In 2016 these trends are rapidly reversing.
On the housing supply issue, things really have changed. When John Howard lost office at the end of 2007, Australia was building around 150,000 homes a year.
That slumped to 135,000 after the GFC, but the Rudd government – for better or worse – pumped up the market with its generous first-home-owners grants, and dwelling constructions spiked to 180,000 before declining again (this is what happens when government policy artificially brings forward demand).
In mid-2012, dwelling approvals began rising again and for the past two years have run well above 200,000 a year. At the end of the 2015 this figure hit 230,000.
Former ANZ and Bank of America economist Saul Eslake told me this week that even if that number weakened a bit, we’re on track for supply outstripping demand within the next few years – the inflection point at which prices would turn.
But house prices are never simply a matter of housing stock supply and demand – the availability of credit is key.
And this week there have been reports of a sharp drop in the amount banks are willing to lend to borrowers – a function of lending curbs put in place by the Australian Prudential Regulatory Authority, and the possibility of higher interest rates a few years out.
A report in the Sydney Morning Herald estimated that a couple earning $120,000 a year, with two children, could borrow substantially less this year than last.
For example, the maximum loan offered by Westpac fell from $645,000 to $580,000 for an owner-occupied home, and the fall was larger still for an investment property.
That means bidders turning up to auctions with, potentially, 10 per cent less in their home loan approval.
That does not translate into a 10 per cent fall in house prices, however. Many bidders have larger deposits, for instance, or have not borrowed right up to the serviceability limit imposed by their bank.
In aggregate, though, a decrease in the amount of available credit must flow through to domestic house prices – with the one offsetting factor being overseas investors.
This, for Eslake, is where things get interesting.
Eslake puts to one side the issue of illegal foreign buyers distorting the housing market. If it ever was a problem, it is now being stamped out by a special team set up within the Australian Tax Office. Moreover, even if it was a problem, it was apparent in relatively small pockets of the Australian property market.
More interesting, says Eslake, is the continuing demand from legal overseas buyers.
As domestic buyers vacate this space due to new lending caps imposed by APRA, foreign buyer demand is not easing.
So Eslake sees dwelling approvals – mostly off-the-plan apartments – staying close to or above the 200,000 mark for the next few years.
That, he says, is good news on two fronts – it will improve supply and ease affordability problems, but also continue to provide work for hundreds of thousand of tradies in the years ahead.
If rising supply and reduced available credit end up lowering house prices, those same factors reduce the drain on the economy of servicing ever-larger debts, and also keep Australians employed.
It’s an adjustment that begs the paraphrasing of a quote from John F Kennedy: Ask not what your country can do for your house price, but what your house price can do for your country.