The real danger for property is not falling prices – it's falling confidence

Median house prices are sliding – not crashing – all over the country. This has led to some predictable hyperventilating by the usual media suspects in their quest for the most outrageous headlines and clickbait.

Prices may continue to slide, and the total peak to trough could get to 10 per cent, maybe more, before this is all over.

That’s not great if you bought a home trusting the PM on his word that ‘for the fiftieth time’ they would not touch negative gearing or the capital gains tax (CGT) discount, and you bought on the same government’s 5 per cent deposit scheme.

By the same token, it’s not the end of the world: prices were clearly out of control: at around 10 times incomes, we have some of the most expensive housing in the world. Some sort of pause in prices may not be a bad thing.

But there could be a greater problem than sliding prices: an erosion of confidence. Much harder to measure than price movements, but confidence – what the great John Maynard Keynes termed “animal spirits” in his 1936 treatise “The General Theory of Employment, Interest and Money” – has a lot to do with how markets behave.

A shame more politicians and treasury officials haven’t read it. If they did, they clearly don’t get it. Keynes argued that investment in economies is much influenced by spontaneous, emotive reactions, either on the positive or negative side.

The changes to CGT and negative gearing were ruled out prior to the last Federal Election by the very party that 12 months later reversed their position. Those changes will have rattled the confidence not just of investors – who I am told have all but disappeared from the market at present – but also people buying their own homes as owner occupiers.

Staying put and watching and waiting may seem a better option when confidence about future directions is not strong.

It has spread further too, including into the development sector, which has lost confidence because investor buyers of their product have retreated. That’s not just impacted housing development, but I suspect you will also see the collateral impact in non-residential developments and investment.

This will also be felt at the small end of town as much as the big end. I know someone who has spent many years as an ‘angel investor’ matching investors with start-ups.

His business has changed quickly since the budget to something that more closely resembles an emigration agency; he now spends much of his time helping start-ups leave the country for places like the USA, Singapore or other destinations.

How terribly sad for Australia, and how unnecessary.

Development credit squeeze

A market lacking confidence will be harder to raise debt, the risk of equity will be appraised differently, and non-bank lending will retreat. The collapse of the Bathla Group, which was heavily exposed to private credit, will impact across the entire industry. Some private lenders like CVS Lane have temporarily halted lending. So between the traditional bank lenders and private credit, we are looking at a potential credit squeeze.

A general slowdown in development activity due to a lack of confidence could also impact trades and subcontractor businesses. Work should not slowdown when demand is continually being pumped through high rates of immigration, but no one is going to be building things if it also means losing money or going broke.

Add to this uncertainty and loss of confidence is the prospect of further increases in interest rates, to combat inflation which remains stubbornly high.

This is largely due to a combination of housing shortages, the withdrawal of electricity rebates and high energy costs, sticky services costs, weak productivity and renewed global energy/input pressures. Apart from the latter, many of the influences on inflation can be related to government policy. 

Another increase in interest rates might be needed to tame inflation, but it will also further sap market confidence.

Restoring confidence will not be easy.

For the Federal Government, this could be the main focus for political and economic messaging in the months ahead. At the very least, be able to describe a road map for the next few years which will restore productivity, constrain costs, and assure capital that it is not the enemy.

The current Treasurer did his doctorate on Paul Keating. It might be time for him to ask: “What would Keating do?”

For the rest of us, it may be becoming more a question of how we feel about the investment landscape and housing outlook, rather than what the numbers are telling us. The animal spirits are on the loose.