Australian residential property sales drying up

MacroBusiness, an Australian economics blog, alerted me to the fact that the Australian property market is seeing transaction volume fall. They quote preliminary sales data for 2012 from the Real Estate Institute of Victoria saying that 69,000 home sales were registered last year. While that is a fall of only 3,000 from the 2011, MacroBusiness notes that it is the lowest home sales level since 1996. The dropoff in home sales is consistent with the drop of home prices nationwide. Steve Keen says prices peaked in June 2010 and are off 4.1 in nominal and 9.8% in real terms since then. The housing-bullish crowd predicts price rises for 2013 though.

My understanding of the Australian property market is that it is similar to the UK and Spanish markets in that local governments benefit from high transaction volume via stamp duties that are taxes collected each time a sale is made. So any further drop in transactions would have a fiscal negative impact for local government tax revenue.

Australia is already going through a rough patch economically as the commodities boom has come off the boil. The manufacturing PMI in Australia has been slumping, with the latest reading I have seen from November showing a 43.6 reading, the ninth in a row below 50. That means the Australian manufacturing sector is in a deep recession.So the Reserve Bank of Australia has been cutting interest rates to keep things in check. The cuts started in May when the cash rate was 4.25%. The cash rate now stands at 3.00%, a record low.  And the low interest rates have pushed up consumer spending.

All of this has also led the federal government to back off its plans for budget surpluses. However, it should be noted that the Australian government still wants to turn toward a fiscal surplus by 2014. It has just delayed the timetable for getting to surplus. In the context of a slumping housing market and a recessionary manufacturing sector, this would mean pro-cyclical fiscal policy, which makes recession more likely.

Late in December, Bloomberg wrote:

Australia’s budget should return to surplus in 2014 even as a drop in tax revenue forced the government to give up a pledge to balance its books in the current fiscal year, the country’s trade minister said.

The original target of a surplus in the fiscal year ending June 2013 could be achieved if positive signs around household spending continue through the rest of the year, Craig Emerson said in an interview on Sky News television yesterday. The country’s Treasurer Wayne Swan said Dec. 20 the government was unlikely to have a surplus because of a fall in tax revenues.

“There are good things going on in the economy,” Emerson said, citing prospects of improving performance for car sales, the housing market and the retail industry. “So long as the economy continues to improve we would get a surplus next year.”

With an election due in 2013, Australia’s Labor government has staked its economic credibility in part on delivering the first surplus since the 2009 global recession. Threatening that commitment is a weaker international outlook, lower prices of commodity exports and a high local dollar that’s hurting non- resource industries such as tourism and manufacturing.

The government is “spending like a drunken sailor” and dropping the surplus commitment was a breach of trust, opposition leader Tony Abbott said in a Dec. 21 interview with Seven Network television.

“This mob don’t get it when it comes to the economy,” he said, according to a transcript.

The bottom line here is that Australia’s housing market is now decelerating. House prices are down, transaction volumes are evidently coming down too. The manufacturing is in a recession and the government, despite fiscal target shortfalls wants to move to a net surplus position by 2014. All of this speaks to economic underperformance. However, if the Chinese-led commodities resurgence reignites Australia’s manufacturing sector, then the worst can be mitigated. If not, we should expect even rougher sledding.