Economists like to remind you that a weak Australian dollar is good for the economy.
Its constantly drilled into you that a weak dollar is good for exports. And whats good for exports is good for the economy. The Reserve Bank is particularly guilty of promoting this view. It reminds us of this at every given opportunity.
But as it spruiks this line, it overlooks the effects a weaker dollar has on property prices. Rather, it ignores the downside this has on house prices, incomes, and the broader economy.
Ill touch on all these shortly. But I want to begin by looking at property prices first.
Truth is, a weak dollar impacts negatively on housing affordability. Why? Because it makes Australian property cheaper to foreign buyers.
The value of the dollar influences the cost of entry. It can make buying real estate from overseas more, or less, affordable. It depends on whether it trends higher or lower.
If the value of the dollar falls, it can lead to increasing foreign demand. If demand rises, then property prices surge too.
If youre an existing owner, or investor, youll no doubt see few downsides to this. No one begrudges you for wanting higher property prices. But there are also clear downsides to rising prices. And these disadvantages can affect you in equal measure. Let me explain.
Rising propertyprices and the economy
As weve seen, rising property prices affect housing affordability. First time home buyers find it particularly tough. Property price growth is putting affordability out of reach for many first buyers.
Yet just as important is the effect rising prices have on disposable incomes.
As prices rise, a larger percentage of household incomes go towards mortgage repayments. Thats not an issue in an economy where wages are growing. But in Australia, wage growth is at its worst level in two decades. Incomes grew by meagre 2% in the past year.
So at present there is a major disconnect between wages and propertyprices. And you cant underestimate the effect of that on the economy.
The economy needs consumer spending to offset declining export revenues. We saw the urgency of this just yesterday. Falling mining revenues left economic growth at just 0.2% in Q2.
That puts the onus back on consumers to spend. But if consumers hold back on spending, where will growth come from? Nowhere.
Whats more, consumers are clearly feeling hamstrung. This was highlighted in yesterdays retail figures. Retail trade declined 0.1% in July, the first drop in 14 months.
Yet a recovery in consumer spending hinges on rising disposable incomes. But the likelihood of that happening is slim. Disposable incomes rose 3.3% in the year to June. Thats half the 6.2% long term annual average.
Households not only have less money, but more of its going towards mortgage repayments.
All this leads us back to a weaker dollar. As the Aussie falls further, itll make investing in Australia more attractive. That threatens to put upward pressure on house prices.
Now, if property prices keep rising, itll divert more disposable income to mortgages. That, more than anything, will weigh on consumer spending.
The outcome of this domino effect is twofold. On the one hand, housing affordability will worsen. As it does, it puts the entire economy on shakier ground.
Chinese investment into Australian property to rise
Weve briefly looked at how rising property prices impact the economy. But how do we know that prices will continue rising? And how can we be sure that foreign investors are any threat at all?
Truth is, the effect of Chinese investors on the Aussie property market is overblown. The scare campaign foreshadowing a Chinese invasion is incorrect.
A recent study found Chinese investments amounted to just $5.4 billion. Thats not much in the context of Australias $270 billion residential market.
Equally, there are signs that house prices are cooling. Median dwelling prices in Sydney grew just 1.1% in August. In Melbourne, prices remained flat for the month.
In light of this, do Chinese investors pose any real concerns? Not yet, but they could.
House prices rose rapidly over the last year. Growth may be slowing, but its in the backdrop of record growth. Both Sydney and Melbourne had growth rates of over 10%.
At the same time, Chinese investments levels reflect a strong dollar. The $5.4 billion figure is in the context of a dollar trading well above $0.70.
For how much longer will that stay true?
If Deutsche Bank is correct, the dollar is set for a steep decline. It predicts the Aussie dollar bottoming out at $0.50 by the end of 2016. That should make investing in Australia much more attractive. That $5.4billion figure could grow much larger as the dollar weakens.
Secondly, concentrated price growth may be an even bigger problem. Foreign investors are geographically sensitive. In other words, theyre targeting inner-core suburbs in Sydney and Melbourne. We know this because domestic buyers are losing out foreign competition.
But thats not the worst of it.
Developers are building projects aimed squarely at foreign investors. But consider what would happen in the event of a market crash.
Foreign buyers would be first to dump their investments onto the market. Prices would crash even quicker as supply went up. Aussie households would find mortgage repayments a nightmare. And thats to say nothing of what that would do to consumer spending.
At least, thats one potential outcome of a weakening dollar.
But foreign investors may find a $0.50 dollar too tempting to resist. In the long run, that poses challenges for housing affordability. And weve seen how that might snowball into other areas of the economy. With disposable incomes strained, consumer spending and growth would drag on the economy.
All of a sudden, a weaker dollar looks less like a saviour, and more like a noose. Lets not pin all our hopes on a $0.50 dollar just yet.
Contributor, The Daily Reckoning
PS: The Aussie property is still growing. Median property prices in Sydney rose almost 18% over the past year. Meanwhile, Melbourne saw prices rise 10% on average. Elsewhere, price growth was much weaker.
We may be living in a two-speed property market. But its still enough to keep the national market growing. The Daily Reckonings property expert, Phillip J. Anderson, remains bullish on the markets future.
Phil says that the national housing market is only set to continue growing. He says that Aussie real estate will boom for the next decade.
Phils 20 years of experience as a property analyst and advisor has given him a keen sense for where the property market is, and where its going. He correctly predicted the 2008 housing market crash. He also went against the trend in 2009, saying that house prices would go on to boom this decade.
He was right on both accounts.
In his latest free report Why Australian Property is on the Verge of a Decade Long Boom, Phil guides you through this coming decade. Hell show you the right time to buy property at its cheapest, and how you can use this to time your investments. To find out how to download his free report, click here.