By Daniel Arbon
A housing market slowdown brought on by the government’s property tax changes is making home owners feel poorer, and less willing to spend on new household appliances.
Taking a call from sun-drenched Athens, Euro Appliances’ managing director Mario Boffa says he is dealing with a very different climate back home: an Australian housing market that has suddenly gone cold.
The business – which sells Italian-inspired whitegoods, outdoor appliances and stone products – has been on an investment drive, hiring staff, training managers and buying machinery to cut and polish the benchtops for new and renovated kitchens, laundries and backyard entertaining areas.
But after the budget’s property tax changes and a turn in house prices, Boffa is less focused on the next phase of growth than on protecting the people already on his payroll.
“We invested big time,” said Boffa from the Greek capital. “All forecasts were absolutely positive. Now all forecasts are negative.”
The chill has been showing up at auctions. Last week, Sydney recorded its lowest clearance rate in six years, while Melbourne fell to its weakest result in five years.
Price declines in those cities have also deepened, while growth elsewhere has eased.
That is clearly bad news for real estate agents, but a frozen property market will also ripple through the rest of the economy.
The first channel is the wealth effect – a psychological phenomenon where, as asset prices fall, consumers feel poorer and so spend less freely (and vice versa).
For housing-linked businesses such as Euro Appliances, the squeeze is also mechanical.
When home values fall, households have less equity to borrow against and so banks make smaller loans. Renovations are delayed, upgrades are scaled back, and the pipeline of work that follows a sale, refinance or new build thins.
“If they go to get an additional loan, the bank is going to look at the house,” says Boffa. “If it was worth $1 million and now it’s worth $900,000, they’ll put things on hold. It will definitely slow things down.”
Euro Appliances has not yet seen a fall in orders, but Boffa expects the effects of the budget to become clearer over the next two months as builders, which account for 75 per cent of the business’ sales, reassess demand.
While the wealth effect is important, JPMorgan chief economist Ben Jarman says the bigger economic hit from the housing downturn may come from fewer homes changing hands rather than from falling house prices.
In a research note, Jarman shows dwelling turnover moves in the same direction as house prices, only with greater force. A demand shock in housing tends to produce a drop in turnover, in percentage terms, that is three times the fall in prices.
Home sales are a big driver of household spending. A buyer who moves house often needs a mortgage broker, conveyancer, removalist, cleaner, furniture, whitegoods, hardware, repairs and, in many cases, a new kitchen, bathroom or outdoor entertaining area.
State governments also lose out from a drop-off in housing market activity, collecting less stamp duty.
Negative gearing changes
The budget’s change to negative gearing could make a standstill worse, thanks to grandfathering. Existing investors will keep their favourable tax treatment while future buyers of established investment properties will be subject to the new regime.
This creates a gap or bid-ask spread between what a property is worth to the seller and what a buyer is willing to pay.
“So potential buyers and sellers struggle to agree on price as they have fundamentally different valuations,” Jarman says. “This means fewer transactions happen.”
JPMorgan estimates the changes to negative gearing could cut house prices by 1 per cent to 3 per cent, but reduce turnover by more than 10 percentage points.
The consumer spending categories most exposed to weaker turnover are furniture, household equipment and recreational services, according to Jarman’s analysis.
Oscar Oberg, lead portfolio manager at Wilson Asset Management, said housing-exposed retailers were likely to face negative trading updates in the short term as weaker property turnover, higher interest rates and lower consumer confidence flowed through to sales.
Oberg said some retailers’ share prices already reflected the difficult outlook and, in some cases, real assets held by these companies offered a buffer to downside risk.
“Harvey Norman has about $4.95 billion of net assets and a market [capitalisation] of about $6 billion, meaning investors are paying only a modest premium to the value of its property holdings for the retail business,” said Oberg.
He said WAM was “positioned for the long term” in the sector.
For Boffa, the immediate concern – once his mixed European work trip and holiday is over – is meeting with his accountants to understand how Euro Appliances is positioned.
“I’m a very positive guy,” said Boffa. “But we also need to be realistic as to what’s happened. This was a really disappointing month.”
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