One of the most discussed economic topics at the moment in Australia is regarding whether real estate prices are about to plunge across the nation or if Australian residential property will generally be spared from the savage price falls seen in the U.S. and the U.K. Rather than take sides in this debate, I will merely outline some of the arguments being tossed around in newspapers, online forums and blogs etc. and see how well they hold up to scrutiny.
Firstly we need to appreciate that with a lot of investment related discussions that people or groups often skew data to suit their own arguments, or they conveniently forget to highlight the shortcomings of the data they present. Therefore rather than reproduce data that I cannot confirm is correct, I will merely refer to its existence without taking any particular stance. I will simply highlight the strengths and weakness of the various statistics being quoted and let readers draw their own conclusions.
So let’s look in Part 1 of this blog at some of the arguments being bandied around that suggest home prices may fall in Australia and then next in Part 2, we will look at other side of the debate . I would like to say at this point thanks to Pete and the other readers at the Daily Reckoning for many of the good pints they have raised there and I have borrowed some of these to put together my discussion regarding Australian home prices.
The case for why property prices will fall in Australia.
Australia is in the midst of a real estate bubble.
There are plenty of graphs and charts out there that seem to indicate that we are indeed in the middle of a property bubble in Australia. But of course you can always stretch out the time axis with these charts and flatten the bubble out, so the extent of the bubble is in the eye of the beholder. At the moment any mention of the word “bubble” grasps a reader’s attention and the term is thrown around like confetti at a wedding. But remember, not all periods of rising prices mean a bubble is forming, sometimes this simply indicates a shift up to a higher long term range or value.
Home prices are expensive by historical standards.
Over at the Daily Reckoning there is a lively forum debate regarding Australian house prices and to illustrate how high prices are in Australia, some research data is shown where Median Incomes vs Median Home Prices is used to determine if housing is affordable or not. Certainly if you look at the data prices in Australian do look expensive, however there are some problems with the data presented. For example the data set compares prices for a large city like Sydney to small towns like Launceston in Tasmania and this should raise alarm bells for anyone who understands how median values are calculated. Did they use for example the same sample size for calculating the values for both locations and how did they take into account that Sydney house prices vary significantly from suburbs where movie starts live to true battler areas out west? Also how was income calculated and isn’t it better to measure wealth instead? (many top earners keep their taxable income very low) Perhaps home prices are high by historical standards at the moment, but then again maybe we are simply being fed a lot of data based on flawed reasoning and assumptions?
If unemployment rises then homes prices will be driven down.
If a large number of people lose their jobs then this is of course unlikely to help the property market. However if the Australian economy can avoid shedding a massive amount of jobs then prices will not necessarily collapse. Home prices in Australian held up relatively well back in the recession of the early 1990’s (our last recession) so perhaps prices will hold up okay again? Also remember that not everyone that loses their job has a mortgage and many will be able to hang on for some time thanks to termination payments, savings, government welfare payments and some flexibility from the banks.
Home prices in Australia are very expensive compared to places like the U.S. and U.K.
I have seen this statement a number of times in various articles and it might be true, but I have no idea how this has any impact on prices in Australia? Prices for homes in rural Thailand are fairly cheap I hear, so what?
Property prices are tumbling in the U.S. and U.K…. Australia will be next.
It is true that property prices in the U.S. and the U.K. have been hit hard and this in ominous sign. However falling property prices is not a virus, so it is quite possible Australia will buck the trend.
Home prices cannot keep rising forever.
Well actually they can and have been in Australia over the long term (20+ years). Of course there is a rate at which prices rises can be sustained over the longer term and many people argue that at the moment prices in Australia have overshot this mark.
Home prices are being artificially supported by the first home buyers grant.
Up to a certain level this statement is true. I have read where experts say that first home buyers generally come into the market for homes up to $400k so I assume that the government grant probably gives new home prices up to this level a bit of a kick upwards. But the grant in some form is likely to be around for a long time so does it really matter if prices are being pushed a little higher?
For every house transaction there needs to be a buyer and a seller. With so much money having been wiped off the stock market surely there are less buyers now, thus prices will fall.
This is quite true and in some areas property prices have already fallen as owners need to downsize, or investment properties and holidays homes etc. are sold off. Also people who had a nest egg sitting in stocks and were waiting to buy a home will have had their purchasing power slashed, so this also means there is less money swirling around to support prices. On the flip side however, some people have probably been scared away from the stock market and may start looking at property as their investment class of choice.
Households have taken on too much debt and mortgages are too large, there needs to be a downwards adjustment.
Australian households have indeed taken on a lot of debt and much of this was used to fund stock market portfolios via margin loans etc. A lot of this wealth has been wiped out and thus there will be some sort of downward debt adjustment, but traditionally Australian’s tend to hang onto their homes as loans are non-recourse in nature. (unlike the U.S. for example where you can hand back the keys and walk away, the debt does not follow you) It would seem reasonable however to expect prices for luxury homes to see a correction as many high fliers come crashing back to earth, but how much this impacts overall residential home prices remains to be seen (it might push down the median home prices say in Sydney for example, but the pain may actually be very localized and focused in certain suburbs).
So there is the case for a fall in property prices in a nutshell. I have not included every possible factor that may drive Australian residential property prices lower but I hope you can get a good overview of the debate ongoing at the moment. Please feel free to let me know if I have missed anything or if you simply have a comment. In a few days I will post the arguments from the other side of the home prices debate.