Liquidity in the Housing Market
In reading a good article from ‘Michael Janda’ (ABC business reporter) today (29/5/17), he noted the growing concerns around Australia’s property market ‘bubble’ . The ‘’b’’ word is being used more frequently in a wider circle of economists , according to ’Janda’. What he is referring to in this article is the issue of ‘’Liquidity Risk’’ . How easy is it to buy & sell something . He points out that liquidity in the ‘Share Market’ is generally stronger because the costs of trading are lower & the ease of the transaction also supports this position. However the property market is less liquid :-
there is a more limited number of buyers & sellers
it can be impacted by finance
there is a legal process to deal with
the costs associated with the transaction are higher
Liquidity is obviously not of major concern when the property market is rising because the pool of buyers is getting bigger, the seller pool not as big, & finance is readily accessible. This places upward pressure on prices & this is the position we have seen in the Australian property market in recent times.
In looking at the above if you consider where the current property market is price wise, & knowing that wages growth is at its lowest level since the last recession ,underemployment is relatively high, household debt represents 189% of incomes & 123% of GDP (according to Janda’s article), & consumer spending is sluggish, what happens if property prices stagnate? This is where the ‘’Liquidity Risk’’ becomes an issue, particularly in relation to investment properties. The seller & buyer ‘pools’ become more balanced , financiers tighten credit lending policy (already occurring), which makes it difficult for borrowers to refinance or purchase, & investors begin to question whether to purchase properties knowing that in the medium term no capital growth will be evident. If the stagnation in property prices remains for an extended period investors may want or need to sell. Selling into a stagnant market where the pool of ‘’sellers’’ is getting larger means a protraction or lengthening in ‘selling days’. That can then lead to property prices falling.
Now the above also has an impact on the view of the Australian economy by world ratings agencies & they are already closely watching the Australian property market. If they see a downturn in this sector & as a result decided to downgrade the Australian economy’s AAA rating, then this would push up the cost of borrowing for the commercial banks , resulting in upward pressure on lending rates. If I were an investor holding property at present with an attached mortgage I would be considering an option to fix the interest rate. There are some lenders out there at present that will offer (3) year fixed rates (with principal & interest repayment terms) on or around 4%. If said investors had no intention to sell in the short term, it does at least offer some reasonable interest rate risk protection.
Contact Michael 6583 2211 should you wish to discuss this further.