The Australian home prices debate Part 2: Why prices may not collapse.
March 21st, 2009 · Greg Atkinson · 171 Comments
In Part 1 of the Australian home prices debate I looked at some of the factors that could drive home prices down in Australia. Now in Part 2, I shall outline the other side of the debate and consider the arguments that support the view that the Australian residential property market will generally withstand the fallout from the global financial crisis and not follow prices down in a similar way to the U.S. and U.K.
The case for why property prices will not collapse in Australia.
There is housing shortage in many parts of Australia.
Often you will see figures or graphs that show that the demand for housing in Australian is currently outstripping supply. Whenever I hear and see this I always wonder where the tent cities are of people who cannot find a place to live? What does it mean exactly when people say there is a shortage of homes or there is a pent up demand for new homes? To be honest I treat this statement warily as it is usually tossed around by real estate groups or home builders etc. I am sure there is a demand for new homes but in times of economic downturn people can stay at home with their parents, immigration levels be cut (and have been) and extended families can live together etc….so this demand can be reduced. In any case what would be more useful to know is the number of buyers active in the market as opposed to some statistical exercise looking at theoretical pent up demand. (does anyone have that sort of data?)
Interest rates have tumbled, now is the best time in years to buy a home.
There is no doubt that the recent cut in interest rates means that less income is needed to service a mortgage and so in theory housing should be more affordable. But it may not exactly be the best time to buy a property as home buyers are faced with the possibility of losing their jobs or if the doomsayers are correct, a significant fall in property prices. However generally I think most people would admit that lower interest rates helps support the property market just as it did back in the recession of the early 1990′s.
Housing demand in Australia is fuelled by relatively high levels of immigration.
Immigration (along with a natural increase in population) certainly increases demand for housing. However as we have seen just recently immigration levels can be cut and also people leave Australia every year to work overseas for a period or time, or permanently to live in another country (although I guess these numbers will be down as well). Therefore it would seem a little risky to rely on immigration to support house prices especially if there were to be a severe recession and unemployment crept up to say around 10%.
Buying property has always been a safe bet over the long term.
It is hard to argue against the fact that most people feel that buying their own home and owning “bricks and mortar” is the safest place to park their wealth. There have of course been times when property prices have fallen in Australia and they will fall again, but over the life of average mortgage (20-30 years) it would be hard to find a significant number of people who were left with negative equity in their homes. I would expect the same could be said for long term property investors as the majority would have have seen capital gains in addition to benefiting from some favourable tax incentives. (such a negative gearing) Of course as the saying goes, past returns are no guarantee of future performance so all this could change. If the confidence in property being a safe investment fell then this could lead to a decline in prices. I would say that some confidence in property as investment has already been lost due to the stock prices declines in listed property trusts, the collapse of a number of property developers and plenty of negative coverage in the media. The question is how much has confidence been eroded?
The median home prices quoted in the media are misleading, there are still plenty of affordable areas in Australia including in the major cities.
Looking a median home prices and then saying housing is too expensive simply indicates some people in the media etc. do not understand the term “median”. It does not matter if the median home prices in Sydney are high as long as their are plenty of homes available below this median level. Also many people for example simply live outside Sydney and commute from the mountains or central coast etc. and this does not seem to be taken into account when people want to promote a property bubble. Are there areas of very expensive property prices in Australia? Yes. Will these prices correct downwards? Probably (and some areas are sliding downwards at the moment). Will this translate into a nationwide property collapse? Why should it? Just remember if the top end homes in any city or town take a beating then this will drive down the median home price, but it does not mean property prices across the nation are collapsing.
Home prices did not fall significantly during the recession in the early 1990′s, so why should they now?
The simple answer to this question is that no two recessions are alike. Perhaps in theory there is no logical reason why home prices should fall across the nation, but they still could. If people start to feel property is no longer safe then there could be a flow of money out of property (into cash, commodities or even stocks) and prices would fall. Just as good stocks get sold at crazy prices when the stock market crashes, good properties could also be sold off at lower prices if people decide to exit this asset class. The true value of any property is what someone is willing to pay for it, so today’s valuations could mean very little if there is a lack of buyers. (just look at the write-downs in the infrastructure trusts to see how nasty this downwards correction can be)
The government will support home prices.
It would probably be political suicide for the government to go to an election with home prices tumbling and people seeing the value of their family home slashed. We have already seen the government increase the First Home Buyer’s Grant (FHBG) and I am guessing more support will follow to prop up the market if needed. These measures may not save the day but I think it is pretty safe to assume the government will try and stop any rot in home prices. We also have “RuddBank” in the pipeline and let’s not forget that both sides of politics get plenty of political donations from property developers. However you could also argue that the government may simply not have the money to help home owners if the economy deteriorates further so perhaps further government support is not a certainty?
There are of course other arguments that support the view that home prices in Australia will not tumble but I hope I have caught the most common issues being debated at the moment. As always please feel free to add your comments as I am not property expert, although I do have have an interest in an investment property in Sydney.
My own feeling is that both side of the debate have valid arguments and we will only find out later this year which view turns out to be correct. I hate to be a fence sitter, but I genuinely feel that nothing is within Australia’s control at the moment; if the global financial crisis starts to resolve itself within 2009 then the Australian housing market should hold up, however if things take another turn for the worse then who knows what will happen? My crystal ball is simply not working very well.