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Australian Property Market on a Knife-Edge
By property | November 3, 2008
Predicting the future of the property market is always fraught with risk, but the current global financial crisis is making the task virtually impossible.
The Australian media are full of conflicting opinions from property experts on where the market is headed, making it even harder for the average home owner or investor to plan for the future. Real estate markets in most parts of the USA have taken a hammering over the last two years, and the big question in Australia is: will the same thing happen here?
On the positive side, there are several crucial differences between the US and Australian property markets:
Housing Supply
Many areas of the US housing market such as Phoenix Arizona are significantly over-supplied with homes. In other words, many more homes were built than each area’s regular demand. The overhang of unsold new properties has been added to by the significant number of foreclosure properties on the market, leading to sometimes dramatic price reductions.
By contrast Australia has, according to property experts, been building fewer homes than the normal demand would dictate. This has primarily been a result of planning restrictions, escalating building costs, and the growing tendency of local government to meet budgetary demands through huge levies on developers rather than increased local taxes/rates for existing homeowners (read: voters).
The resulting shortage of homes is evidenced by the very low vacancy levels in the rental markets in all major cities, accompanied by rising rents. Together with the cost of new homes being significantly higher than the existing housing stock, these factors have underpinned the Australian property market.
Lending Rules
Jingle mail – where homeowners can no longer afford the repayments on their house and mail the keys back to the lender – has become common in the US in recent times. Most (but not all) US mortgages are non-recourse, in that the loan is secured solely against the property and there is no opportunity for the lender to get their hands on the borrower’s income or assets. Once the keys are handed back, the liability of the borrower is essentially over.
This mortgage structure has been at the heart of the sub-prime mortgage crisis – there has been no pressure on the lenders to verify the borrower’s ability to repay the mortgage, and no liability on the part of the borrower to continue repayments if the going gets tough, or a property market correction leads to the home being worth less than the mortgage.
In Australia, the loan liability rests with the borrower, and the lender can pursue the borrower’s income and assets should repayments not be kept up to date. This places much more responsibility on the borrower to organise their affairs to ensure that they can meet their repayments.
Additionally, Australian consumer legislation puts considerable onus on the lender to assess the borrower’s ability to meet their loan obligations prior to approving a mortgage. Over the last 5 or 6 years, low-documentation loans (where the level of loan servicing proof has been lower than for standard mortgages) have grown in popularity, but these are still significantly more secure than the sub-prime loans on the US.
As a result, the mortgage default rate in Australia is only around the 1% mark in 2008, which is about average for the last decade or so.
Other Factors
Other positives for the property market include strong immigration inflows, an economy growing at a significant (albeit slowing) pace, historically low unemployment, and a growing trade surplus.
The Downside
Despite the above positive factors, the outlook for real estate is far from rosy.
The elephant in the room of course is the current global financial crisis. Frozen credit markets and downward-spiralling stock markets do not bode well for any asset class in the near future. Property however, is particularly vulnerable in Australia, with massive mortgage debt a millstone around consumers’ necks. Home affordability is at a record low, as prices over recent years have been ratcheted up by a public which thought price appreciation would go on forever.
And if efforts to loosen up credit both here and overseas do not work – and work soon – it is difficult to see any other outcome than falling house prices. No matter what the demand side of the equation looks like, if you can’t borrow money then you can’t buy a house.
Anecdotal evidence from real estate agents suggests that prices have already started softening in many areas. Whether this softness gains momentum will depend on how the various factors above play out in the coming months.
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See more properties in: Australia Property | 1 Comment »
Tags: Australia properties, Australia property, Australia property for rent, Australia property for sale, Australia property investment, Australia real estate, Australia real estate for rent, Australia real estate for sale, Australian Property Market
November 4th, 2008 at 7:58 pm
The bottom line on property can be understood on three fundamentals:
1. If property around the world collapses by 20-40% – which is what is happening right now – there can be no reasons that hold water to say that Australia’s property prices won’t fall by these levels. Otherwise Australia will have the highest home prices in the world .. and this is just unsustainable.
2. Property values in this country have been to a large extent managed ( read: manipulated) as a result of State Governments dependance on property taxes. The NSW Government, for example, has not released anywhere near the land required in it’s attempts to keep revenues flowing into the budget. At some point the government will have to release more land at much lower prices (sub $150k per block), especially since urban consolidation has failed.
3. Home prices to compared incomes in Australia are off the radar compared to the rest of the world – hence the affordability crisis. In the US an average home costs 4 or 5 times average annual wages. In Sydney, for example, we are up to 6 and 7 times average annual wages and closer to the city, such as the inner west, this can be 12 to 15 times. This is totally unsustainable. In effect, people with a $500,000 mortgage will never pay these mortgages off – their children will inherit the debt.
Add the fact that 90% of loans are now going to the prime banks, and lo doc loans have become almost extinct … getting finance for above average homes will be extremely difficult.
First home buyers need to act with extreme caution and there is a very real possibility that they are being lured back into the market to prop up home sales, but they may find what they buy will be worth a lot less in 12 months time. The first home owners increased grants may be a loaded bullet! Already developers have increased the price of sutb-$500k properies by $20,000 and $30,000 dollars.
The federal government is attempting to keep property prices from falling, as a 15% decrease will be catasphopic for our banks who are already sitting on billions of dollars of home loans that are in negative equity. These are loans that have been madefor 95% and 100% and the current value of the hosue is less than the outstanding loan balance.
We need property prices to cool off dramatically. We need to get back to the trend line, which is currently tracking at about 25% over where it should be in cyclical terms.