How Far Will This Contagion Spread?

Thursday, 9 May 2019
Albert Park, Melbourne
By Bernd Struben

The ripple effects of Australia’s property downturn continue to spread.

The question now is, will they peter out into calm waters…or magnify into tsunamis?

Average dwelling prices in Sydney fell 11% over the past year, according to CoreLogic. Melbourne prices fell 10%. And the slide continues…

Now you could argue that the falls come from greatly inflated heights. And you’d be right.

A number of factors combined to drive house price growth to an unsustainable rate, sending prices in the major cities to unsustainable levels.

Think cheap, easy credit; foreign buyers; rapid population growth; and the burning angst of FOMO (fear of missing out).

I lived in Melbourne from 2013 to early 2019. And I managed to avoid giving in to FOMO. Though my wife came down with a good case of it as she watched property prices rocket.

Had we bought our rental property (a three bedroom home in the Bayside suburbs) in 2013 and sold in 2017 we would have done quite well. Going by the value of neighbouring homes that sold during that time, we could likely have bought the house for $900,000 in 2013 and sold for $1.3 million in 2017.

A tidy $400,000 in capital gains.

If instead we’d bought near the end of 2017, when the missus’ FOMO was really ratcheting up, it would be a very different story. I estimate that house would ‘only’ sell for $1.1 million today.

A stomach dropping $200,000 loss.

These are the buyers who are most likely to find themselves in trouble. The ones who bought near the height of the hype. Near the peak of the bubble. Regardless of how the market now values their homes, they still need to repay their full, outsized mortgages.

That’s going to create a ripple effect in itself. These homeowners will likely cut back on other expenditures. Purchases they would have felt comfortable making if their properties hadn’t shed tens or even hundreds of thousands of dollars. With some 58% of Australia’s GDP reliant on consumption, that has the potential to drag down growth.

More after a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 2.24 points, or 0.01%.

The S&P 500 closed down 4.63 points, or 0.16%.

In Europe, the Euro Stoxx 50 index finished up 16.10 points, or 0.47%. Meanwhile, the FTSE 100 gained 0.15%, and Germany’s DAX closed up 87.19 points, or 0.72%.

In Asian markets Japan’s Nikkei 225 is down 211.52 points, or 0.98%. China’s CSI 300 is down 2.01%.

In Australia, the S&P/ASX 200 is up 25.75 points, or 0.41%.

On the commodities markets, West Texas Intermediate crude oil is US$61.61 per barrel. Brent crude is US$69.84 per barrel.

Turning to gold, the yellow metal is trading for US$1,282.51 (AU$1,836.36) per troy ounce. Silver is US$14.83 (AU$21.23) per troy ounce.

One bitcoin is worth US$5,933.90.

The Aussie dollar is worth 69.84 US cents.

The canaries are swooning

The slumping property market is already having direct negative impacts on the sectors you’d expect. Like construction.

Citing the Ai Group and the Housing Industry Association, The Australian Financial Review reports:

Construction industry employment fell at its fastest rate in six years in April, as declines in house- and apartment-building, along with weaker commercial work more than offset modest growth in infrastructure work…

“There are now strong signs that adverse conditions in the broader construction industry are flowing through to sections of the services and manufacturing sectors,” Ai Group Head of Policy Peter Burn said…

The latest figures from recruiter Seek show construction job ads fell 19.8 per cent in March from a year earlier. The biggest declines were in design and architecture (down 26.4 per cent) and real estate and property (down 20.5 per cent).

This ripple effect doesn’t look like it’s going to peter out any time soon. These kinds of trends, once in motion, tend to feed on themselves.

You may have read that the housing slump has seen Purplebricks Group PLC [LON:PURP] exit Australia.

When the company launched its Australian operations in September 2016, the property market was red hot. And Purplebricks’ budget online real estate services had high hopes.

Explaining the company’s departure, The Australian offers this quote from the company’s chief operating officer Vic Darvey:

This is not a decision we have taken lightly, but with market conditions becoming increasingly challenging, we do not believe that the prospective returns in Australia are enough to justify continued investment.

Purplebricks’ share price closed down 10.08% yesterday. That puts it down 68.68% over the last 12 months.

Purplebricks is far from the only company feeling the pain. Also from The Australian:

Australian cement maker Adelaide Brighton says its annual net profit will fall by up to 15 per cent due to softening residential demand for construction materials and higher raw material costs.

Adding up today’s ripples, do you think the Aussie property and stock markets are in for calm waters…or a tsunami?

Drop us an email at letters@portphillipinsider.com.au to share your thoughts.

And be sure to tune in next Tuesday, 14 May at 4:00pm AEST to hear what forecasting gurus Phil Anderson and Harry Dent have to say on the matter.

You can watch their entire debate for free. But we can only include you if you sign up first. As I said, that won’t cost you anything, except two minutes of your time.

You can register to watch the great debate now, by clicking here.

Don’t wait too long though. Registration closes at midnight tomorrow.

Take the edge off

Moving on from a declining sector to a booming one…did you hear the latest news from across the Ditch?

No, not that the Kiwis are legislating for 10% less flatulence from their cattle to meet their ambitious emissions targets. The other latest news.

New Zealand may soon join Canada, the Netherlands, numerous US states and a growing list of other nations in legalising the recreational use of marijuana.

In tacit recognition that the global drug war has been a disastrous failure, New Zealand voters will be able decide if they want cannabis use legalised.

The government announced that a referendum on legal recreational use will be held during the next general election in 2020.

Now with only 4.8 million people, New Zealand won’t have a massive impact on the legal global cannabis market. But if the referendum passes — as polls suggest it will — New Zealand will make one more domino giving way to the inevitable.

Australia is probably still some years away from legalising recreational use. Though the federal government has given the green light for medicinal use. Globally, the medicinal market is already booming.

And not just for people.

From The Wall Street Journal:

Barbara Hightower has found a solution to her nine-year-old dog Moose’s panic attacks — treats made from cannabis.

Hightower, 63, from Madison, New Jersey, says the biscuits have helped calm Moose’s sudden shaking and hiding under furniture. “It takes the edge off his anxiety,” she says.

The supplements contain a hemp extract called cannabidiol, or CBD, which has garnered a flurry of interest among people in the US who take it for everything from sleep to stress reduction…

In all, the CBD food and supplements business is expected to snowball to $US5.69 billion ($8.14bn) this year, according to cannabis market research firm Brightfield Group, which anticipates even more store chains stocking CBD in the coming months. In the pet world, CBD-infused products are an already estimated $US199 million business and expected to grow to $US1.16bn by 2022, according to Brightfield.’

If you’re unfamiliar with CBD, it’s short for cannabidiol. While it’s derived from hemp, part of the cannabis family, CBD doesn’t get you — or your pets — high. That would be THC, which is short for tetrahydrocannabinol.

What I find remarkable is that, according to Brightfield Group’s numbers, CBD pet products could be worth over AU$1.7 billion per year by 2022 in the US alone.

That’s a 483% increase in market size in just three years. Exactly the kind of growth sector where nimble companies and savvy investors can make a mint.

Best of all, some of these companies are listed right here on the ASX.

You can find out pot stock expert Sam Volkering’s favourite ASX-listed cannabis company here.

Finally, here’s the latest on the Kiwi climate hysteria I mentioned above from The Australian Tribune:

‘New Zealand’s Climate Bill Targets Cattle’

Better them than us.

That’s the thought passing through most Aussie ranchers’ minds — not to mention most anyone who enjoys a good steak or glass of milk — on hearing the latest brain bubble from New Zealand’s climate obsessed government.

The government’s new climate change legislation will...’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

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You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd