EbeneMagazine – CA – The world’s worst housing economy is facing the ultimate stress test

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Australia’s A $ 7. 1 trillion ($ 5). The real estate market (2 trillion) is facing the ultimate stress test – the first recession in almost three decades – and will be passed with flying colors for the time being.

Economists had predicted that house prices would fall 10% or more as Covid-19 invaded Australia. Now they are trying to reverse those projections to gains of 5 to 15% over the next few years. Policymakers have shifted from concerns about falling prices to concerns about excessive exuberance.

A recent Saturday auction in the suburb of Forest Lodge in Sydney – around 2am. 5 miles from downtown – captured the bullish sentiment. About 30 people gathered in front of a four-bedroom Victorian terrace and were auctioned off. The bidders – from younger professionals to middle-aged people – started at $ 2. 4 million and increased in increments of 10. 000 AUD, then 5. A $ 000 until the hammer dropped to A $ 2. 74 million.

There is a dynamic emerging in other countries as low interest rates fuel asset prices. While property strength is good news for the economy to recover, property bears, who have been proven wrong time and again for a generation in Australia, run another risk of fueling the bubble that will one day burst and leave a trail of bad debt losses.

The Australian banks’ loan books are among the hardest hit by mortgages in the world. The four major banks’ home loans account for about 75% of the country’s gross domestic product of about A $ 2 trillion. The Bureau of Statistics estimates the value of the country’s houses at 7 AUD. 1 trillion in the June quarter when weighted average prices in capitals rose 6. 2% compared to the previous year.

Behind the bonanza are interest rates at levels not seen before in Australia. Three of the four major banks in the country offer fixed rate mortgages under 2%, and HSBC Holdings Plc. offers 1. 88% according to data from Mortgage Choice Ltd. . . a broker. This was made easier by the Reserve Bank of Australia, which lowered its interest rate to 0. 10%, as well as its bond purchase and bank lending programs, which aim to lower the cost of borrowing across the economy.

« It’s not a place I think anyone thought we were, » said Susan Mitchell, chief executive officer of Mortgage Choice. « There are a lot of suggestions. I’m a little worried that prices will go up. ”

The RBA modeling found that even in a scenario where the economy contracted 20% and unemployment rose to 20%, banks would still not breach regulatory minimum capital requirements. « The probability of a major bank failure is very low, » it says.

The RBA has made it clear that reducing unemployment is a priority for now, rather than worrying about asset prices. Governor Philip Lowe said the lack of population growth – with international borders still closed – is changing the dynamics of the real estate market and believes unsustainable increases in real estate prices are unlikely.

“We know from experience over the past few years that macroprudential instruments can put a stabilizing brake on debt growth. So it’s an issue we’re closely monitoring, but I’m not particularly concerned about it right now, ”Lowe said during a panel at Australia’s 2020 Strategic Forum on Wednesday.

In contrast, economists in New Zealand, where some regions have seen double-digit increases in house prices despite the worst recession in a century, expect restrictions on the credit-to-valuation ratio early next year.

Fiona Guthrie, General Manager of Financial Counseling Australia, fears that more people will be under financial strain due to simpler financial rules.

« Weaker lending standards mean that people are burdened with as much debt as possible, » she said. “It is a significant win to marginalize borrowers. ”

Similar to the uneven recovery of the economy, however, the strength of the real estate market is not uniform. Many people who live in inner-city apartments in Sydney and Melbourne are looking for more space.

« The virus has become a catalyst for change as we remodel our homes and rethink where we want to live, » said John McGrath, CEO of real estate agent McGrath Ltd. .

Many people who live in inner city apartments in Sydney and Melbourne are looking for more space.

The result was a slump in rents and flat-rate prices – more will follow as the apartment blocks are still under construction. This is unlikely to hurt Australian banks, which have stayed away from developers after a period of overbuilding. But it does affect mom and pop investors.

In addition, there are households whose mortgage repayment is still being postponed because they have lost their jobs in the Covid lockdown. If those are scaled back and the credit vacation ends sometime next year, they could be forced to sell.

The world champion kite surfer Ewan Jaspan is one of the Sea Changer. It wasn’t ideal to be in a trendy St. Being a Kilda apartment with limited outdoor space in Melbourne, so he and his girlfriend moved to tropical Queensland. The original plan was to stay for two or three weeks. That was a few months ago.

“A lot of people work remotely anyway. Then why should I be in a tiny apartment in town when I could have a garden and an outdoor area and be on the beach? « 

Living, World, Economy

EbeneMagazine – CA – The economy in the world that has been hardest hit by living space is facing the ultimate stress test

Ref: https://www.bloomberg.com

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