OPINION: I AM increasingly asked if I think the Australian residential property market will follow overseas markets where values have fallen sharply (by over 20% in many European countries and parts of the United States) since the GFC.
According to Global Property Guide’s latest survey –see table 1below -house prices across the world continued falling, down another 2% in real terms (after allowing for inflation) during 2010. The rate of decline, however, is slowing, with world house values having fallen 3.5% during 2009. Australia’s house values, by way of comparison, rose, in real terms, by 11.6% during 2009 and 3.1% last calendar year.
Being out of step with other housing markets across the world is causing some to be quite nervous. The property bears believe it is only a matter of time before house values plummet here. But I wonder.
With a strong “all things being equal” caveat, here are my seven reasons why I believe we will not se major falls in home values across Australia any time soon.
1. Population growth.
Whilst it has slowed in recent years, we maintain strong population growth. Our domestic population is aging, but our migrant intake is largely in the 20s to late-30s cohort, which means increasing household formation and greater demand for dwellings down the line.
2. Tight lending practices.
Our interest rates have room to fall –in many countries they don’t. We have full recourse loans, giving lenders the right to take any assets of the borrowers if repayment is not made. Many overseas markets which experienced a housing crash have non-recourse loans, which essentially allow borrowers to walk away from debt if things get too tough.
3. High equity.
According to mortgage broker AFG, current loan-to-value ratios are around 53%, reflecting our current conservative position towards debt. The long-term average is around 65%. According to the latest official statistics, Australia’s housing debt to housing assets is 29%, and our debt to overall assets is just 19%. So in other words, we, as a nation, own around 70% of our homes –a far cry from the “jingle” loans that typified the US housing market collapse. In addition, household balance sheets are being strengthened by additional savings. We are currently saving 10% of our disposable income, which amounted to a staggering $74 billion last year alone. This improved state of our personal finances further reduces the risk of house prices collapsing.
4. Undersupply.
Not for every dwelling type, but at the bottom third of the market. This helps place a floorboard under property values. Due to a range of reasons, mostly political, there is an undersupply of basic, affordable housing across our capital cities and now in our major regional centres too.
5. Economy growth.
Whilst many of us would like to earn more money, and some feel poorer today than a few years back, nearly all of us can find work. Housing markets usually crash in concert with large falls in employment.
6. Low unemployment.
As long as our unemployment rate stays below 8%, then wholesale falls in property values are unlikely. It is currently 5.1%.
7. Few mortgage defaults.
Whilst recent headlines screamed, “Rising mortgage arrears”, latest figures show just 1.37% of home loans across Australia are 30-days in arrears and 0.54% are three months behind in mortgage payments. The trend is upward, from 1.30% and 0.48% respectively on the previous quarter, but the number of home loans technically in default across Australia is very low.
It pays to take a long-term view. Residential property values –when looking at resale performance rather than simplistic medians – have risen across Queensland by just over 10% each year over the last decade. Over the last five years this has dropped to about a 6% annual gain and during the last 12 months, values have declined slightly by about 1%. There is little doubt that values are now falling. How far they will continue to fall is unknown but I don’t think it will be anywhere near as far as most property bears believe.
By Michael Matusik, director Matusik Property Insights.*
Property Reviewer on Property Review
