With falling house prices, Australia is entering an unknown territory
Narcoticity holds the nation. The housing finance data received on Friday will only add to that nervousness. And 3.8 percent decrease in housing lending in just one month? That's huge.
But we do not need to move on with eyes closed. There is a country that we can learn from across the Pacific.
The Canadian housing market is very similar to Australia. Like us, Canada did not have a significant reduction in house prices during the Global Financial Crisis. As in Australia, official interest rates dropped, making a very cheap lending. House prices and home debts increased with them.
Older and wealthy Canadians have been caught up in an investment frenzy while the younger share is worried about affordability. It could almost be Australia, right?
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The predation of prosperity was Toronto, the largest Canadian city and Vancouver, on the Pacific Ocean Coast. Their boom continued a huge house price until 2017. Then, while Australia was still valued, Toronto stopped suddenly.
Toronto's house prices have dropped dramatically.
"The frenzy is over: Toronto's bubble is over," said the headlines.
He's sure he looks so. Toronto house prices fell rapidly. For two consecutive months at the end of 2017, houses lost 3 per cent of their value every month, as this next graph shows.
What happened next is the surprise. The drop stops promptly. Toronto was settled and prices were still up.
I do not want to say that will happen in Australia as well. I can not predict the future. But many people claim that they can predict the future because they predict the decline to date.
In pubs and in Ubers and in dark corners on the internet, you will find that a group of Australians argue that the fall we have seen so far is the first octopus tents of a great price crash that will cheat & Everything we love separately.
It can be. But let's sense-check that. I would suggest that the example of Toronto shows the dangers of extraction. Trends can turn.
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Remember – in a market where people expect price growth, even a short fall can make a big difference. The relatively scarce reduction in prices in Toronto was enough to make much cheaper than Vancouver, where prices were going to end up as the next graph show.
Toronto went fast to be 6 percent cheaper than Vancouver to 16 per cent cheaper.
VAN CITY BLUES
As mentioned, Canada and Australia are rich, rich, similar countries depending on resource exports. Secure, stable, English speaking democrats that have a similar desire for Asian investment. Investment that the two countries are managed with special taxes. Canada's interest rates are 1.75 per cent compared to 1.5 percent of Australia. The list goes on.
But there are also differences. Mainly, Canadian homeowners have fixed rate mortgages, making them less open to an increase in the mortgage rate. And Canada has already absorbed a few official interest rates increases, while Australia rates remain on the record.
We can not be sure all the factors that affect housing are the same. As long as Vancouver continues to increase as Melbourne and Sydney fall, Canada and Australia looked different.
So it's particularly interesting that Vancouver has shown the first few signs of price reduction in recent months. They are small so far, but there were other signs. Just as we follow auction clearance rates, Canada watches house selling volumes. The number of homes sold in Vancouver in October 2018 is more than 33 percent lower than October 2017.
Vancouver has enough weakness to ask if it could be about to march. I suspect that many eyes in Vancouver are focused on what has happened in Sydney and kicks off their seat belts. A fall in Vancouver could also take Toronto down on another.
If four large cities in Canada and Australia are all beginning to fall in a sense, it would be enough to begin to suspect that they were all on the mercy of the same forces – interest rates and liquidity. If you want a full picture of what will happen in the Australian housing market, add Vancouver and Toronto to the list of cities that you keep. Canada's spring sales season ends in five months and it will be very interesting.
Jason Murphy is an economist. He's writing the Thomas the Think Engine blog