Australia is becoming caught up in a property trap: Gottliebsen

The widespread fall in Australian house prices during the March quarter is healthy. The danger lies in what might happen next. The decline will make overseas investors in our sharemarket nervous because many analysts overseas regard the Australian housing market as simply way out of line with the rest of the world. Some say it is a bubble ready to burst.

The downturn was a clear response to two forces. The first was that during the March quarter banks started to tighten their lending criteria, partly to reflect higher interest rates. They have not gone overboard, but loans that would have been granted six months ago are harder to arrange.

Remember that the key factor forcing prices higher has been the combination of demand and the fact that free and easy credit was available from banks so people could bid up at auctions. Now with lending tightened, partly in response to higher interest rates, buyers have less money to spend so they are not as enthusiastic at auctions.

The great risk to the housing market is that when the banks see those March quarter declines – particularly the 2.5% fall in Melbourne and the 1.8% fall in Sydney – they will tighten their lending further. If they do react significantly it will drive prices down further and cause bank and housing insurance bad debts to rise.

Banks have to understand that they have been the biggest force driving up house prices and if they suddenly alter the rules substantially they, along with the home buyers, will be the biggest sufferers. In other words they are trapped by their past actions.

The second force driving prices down is the fear factor. Those with big mortgages and low equity are scared that they are not going to cope with looming higher interest rates and further rises in petrol, power, water and council charges. They see the carbon tax as a tax that will accelerate those trends and so it increases their fear.

Those who have bought a house close to the high point in the market are now locked in and will be keen to tighten their belts and save money. Retailers are the first to feel the impact of the fear factor. Meanwhile those going to auctions looking to upgrade have seen what happened to their friends and, with their banks tightening, they are also more cautious.

Australia is experiencing a boom based on mining, but the rest of the country is not finding it easy and the sharemarket is now reflecting that trend and understands that the idea of carbon taxing exports when China and the US have put climate change on the back burner shows that there is a screw or two lose in Canberra. They do not bid up our shares.

More importantly, investors realise that the high dollar is going to impact Australian employment in many areas and hit the profits of those with revenue in US dollars. Employees or contractors in non-mining or agriculture areas sense the nervousness of their bosses or clients and so are just that more careful in the housing market.

This article first appeared on Business Spectator.