In most states, it was a dismal Saturday for auction clearances. In NSW, Queensland and WA, fear crept into the market.
Against that background, part of an email from the Commonwealth Bank to private clients crossed my desk at the weekend, issuing a danger warning that recent low clearance rates are a possible signal of a significant change in the economy.
The CBA private client email makes the case that the Australian economy has been held up because mining exuberance has been replaced by housing exuberance. But now, not only is mining investment set to fall further, but the contribution of housing is likely to fall.
At the moment all looks well because the rate of dwelling investment ahead is high, with last week’s building approvals for new dwellings robust.
“Although we are pretty sure we’ve seen the peak, the numbers for new supply remain significant,” CBA says.
By contrast, auction clearance rates are down from the near 90 per cent level into the 50 per cent range.
“That’s a big fall, and fast. Big falls, occurring quickly, send a pretty powerful signal to us from the market,” the CBA says.
Dwelling prices are also starting to fall. CBA argues that those falls over the past month strongly suggest the beginning of a new cycle. The strong supply via building approvals is meeting a market in which prices are cooling, and sales volumes illustrated by the clearance rates are falling.
This weekend the NSW clearance rate was 56 per cent, Queensland 47 per cent, WA 36 per cent. Tasmania 25 per cent and NT 9 per cent. Only Victoria, the ACT, and South Australia recorded above 60 per cent.
The clear indication is that we are ending the housing boom. Housing has been the driver of the Australian economy, replacing mining investment, which has further to fall. There is no sign of a revival in non-mining corporate investment.
Treasury says that Australia’s potential GDP has been revised downwards due to the weakest population growth in 14 years, driven largely by New Zealanders returning home.
In this context, Harry Triguboff’s warning of a possible housing glut if migration stays low and dwelling construction booms, confirms the CBA alert (Triguboff’s housing warning must be heeded, December 1).
CBA concludes: “And thus we wonder, when was the last time we grew without a market that is, by definition, devoid of over-exuberance? What would GDP growth have looked like without an unsustainable mining boom? What would growth have looked like without the over exuberant housing market? How do we engineer a broad-based recovery, rather than an economy that fires for a period of time on just one or two cylinders?
“We really don’t know if the housing market will cause a significant disruption to the Australian economy. But we can certainly see it’s a possibility, even if the overall probability is low.
“To protect the portfolio from this form of left-tail risk (meaning a low probability, high impact outcome) we are moving to a more substantial underweight to property, across both direct property (commercial real estate) and REITs (real estate investment trusts), and allocating that capital towards fixed income (defensive assets).
“We are also further reducing our exposures to Australian equities. This of course doesn’t mean selling completely out of Aussie equities. It just means owning less of them than we might on a ‘through the economic cycle’ basis.
“Put most simply, the distribution of possible outcomes for the market and for the economy has widened as we look to enter 2016. Any time the risk profile materially changes, try to ensure you don’t have all the eggs in one basket.”