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.
Related posts:
- The Australian home prices debate Part 1: Why prices may fall.
- Can Australian home prices keep rising?
- Australian home prices, spending trends and statistics.
- Australian stocks, house prices & the economy in September 2010
- Is deflation really such a bad thing?
172 responses so far ↓
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151 Pete // Sep 22, 2009 at 11:09 pm
Ouch, Adelaide would surely get hammered by this – being that their industry is suffering and its not really the best city to find a job in. Sounds like Perth and Adelaide are on opposite paths.
There are only a few ways that things can go from here:
Less affordability:
- Decrease in wages
- Increase in prices
More affordability
- Increase in wages
- Decrease in prices
Obviously there are unlimited shades of grey between those. But at the moment it doesn’t look like wages will be rising (except for perhaps WA in the short-term), so ‘affordability’ will probably be determined by whether house prices increase or decrease in price.
Affordability can decrease in real terms such as circumstances where house prices meet or exceed the rate of inflation, yet wages are not increasing at the rate of inflation.
So, essentially for house prices to become affordable (without crashing), we need wages to increase at a faster rate than property. That seems very unlikely.
To state the obvious, I think that in terms of affordability there will either be no respite unless there is a significant fall in house prices.
152 Pete // Sep 25, 2009 at 4:56 pm
One thing that I have not particularly considered in the past is the role of international investors propping up the housing market.
Eg this international article (marketing) is interesting:
Survey finds Australia number one for property investment
If the Government were to provide incentives for people overseas to invest in the Australian housing market, prices could be inflated without the Government having to spend much to do so. They could even provide incentives such as including Visa’s and the likes.
However…to do so would make it even harder for Australians to buy homes. I don’t know if that is something they’d care about. Inflating the property bubble even more seems kinda dangerous.
And this article is interesting:
Wave of confidence brings flood of mortgages
I find the attitude of the couple “we don’t want to do that forever” as interesting. Like property is a risk free ride to early retirement. Perhaps it has been…and perhaps it will be. But I think the risks are mounting, and the more prices rise, the more people will find it very hard to service their mortgage if events stress them financially.
And of course it is worth noting that fixed rate loans are in decline. 95% of FHB’s are on variable rates anyway.
153 Ned S // Sep 26, 2009 at 1:57 pm
There isn’t the incentive to go on a fixed rate that there was before the GFC Pete – Firstly people know that any sharp contraction in the economy will be responded to with aggressive lowering of interest rates and secondly we know that we are looking at a cycle where governments will try to keep interest rates low. It will be many years before the RBA willingly pushes rates back to pre-GFC levels. Even now it is only talking about wanting to get the official rate up to about 5% over the next two years.
And at lower interest rates at least some people (like the 26 yos in the link you give) are saying “Yippee – Buying houses is easy – It’s Party Time!” As opposed to at pre-GFC interest rate levels when things were more difficult – Perversely. So the RBA goes back to jawboning about “Please be careful or we might get a housing bubble.” Which they’ve been doing since 2002 that I know of.
As to the Oz government caring or not caring about whether Australians can afford houses – Well at the moment they reckon housing is quite affordable. And if interest rates only go back up to 5% without huge increases in house prices they’ll still reckon they are affordable.
Certainly the housing market hadn’t collapsed due to affordability issues even pre-GFC – Although it did seem (to me) to be cooling.
We are in a pretty strange situation now. But if I take the broadest possible view of it that I can, I tend to say No recession = No major housing price declines?
What would drive Oz into a recession? A recession in Asia. (And most particularly in China we are told.) Which doesn’t seem that likely anytime soon given the size of their reserves and committment to growth. Throw in our own government’s unwillingness to see any marked correction in the price of housing and there are some huge buffers against significant falls in Oz housing prices. As I see it anyway.
154 Pete // Sep 26, 2009 at 3:14 pm
Ned:
I pretty much agree with all you have to say there, except that I believe China/Asia is not particularly robust and that demand could fall easily. What China spends its reserves on could be resources from Australia…or could be anything. China buying up Australian companies doesn’t exactly give us the economic boom that we need (although it does provide a few jobs).
I agree about fixed rate loans – there is no incentive. And banks won’t give them to FHB’s anyway.
I guess my point is that Australia will be extremely sensitive to external shocks that affect interest rates, which are:
- drop in the exchange value of AUD
- increase in rates charged by overseas lenders
- changes in Australia’s ‘ratings’ by ratings agencies, eg from AAA to B, etc (will push rates up)
- increased borrowing by Government will make Australia seem more risky
- if Australia prints money, external rates will rise (and internal rates if the Gov tries to sell bonds)
My belief is that a lot of these factors tie in to each other. This means that we could have a compounding effect on interest rates (eg, increased external rates plus falling AUD).
And I think our current market will be very sensitive to changes in interest rates, as I have mentioned before. This is one reason that the lack of fixed interest rates is of (slight) significance.
155 Pete // Sep 26, 2009 at 3:37 pm
And as I was discussing before, another article on international investment:
Chinese buyers fuel top-end property boom
I think it says something about the property bubble when they need to go overseas to find buyers (although the article does specify it was top-end property)
Overseas buyers ‘may’ add to the rental market. Increasing interest rates isn’t good though.
Perhaps the latest Australian craze isn’t to sell our products, but rather to sell our assets.
156 Ned S // Sep 26, 2009 at 8:52 pm
Back in the 1980s it was the Japanese buying Oz property Pete. They had a special fondness for Queensland as I recall it:
http://www.time.com/time/magazine/article/0,9171,968024,00.html
One of the things that has come through clearly to me from the GFC is the lack of diversification in the Australian economy and its potential to hurt if (or commonsense really says when) a recession does eventually hit.
Forewarned is good I guess and people can at least be bearing it in mind as they consider things like their overall investment strategy, plans for retirement and such like. Balanced against the overall growth potential of being part of the Asian region.
157 Greg Atkinson // Nov 7, 2009 at 10:02 pm
Ned as you know I have been rambling on about the Oz economy being too focused on mining and farming for quite some time. Also Pete a while back posted some very interesting links about the Resource Disease/Dutch Disease which highlighted the risks that go along with being a nation blessed with abundant natural resources.
Now it seems even the RBA and Treasury are starting to worry about the same things. See: http://www.smh.com.au/opinion/time-has-come-for-rudd-to-face-the-big-test-20091106-i22k.html
158 Ned S // Nov 9, 2009 at 4:19 pm
What do we do Greg? I know we aren’t smarter or harder working or more frugal than most. So competing in “honest” trade isn’t going to maintain our lifestyle. It’s resources and be grateful I guess – While we try and find some sane pollies who are willing to build up a surplus as the article suggests. But where to long term?
159 Greg Atkinson // Nov 9, 2009 at 5:55 pm
Ned I see a lot of worrying trends developing in Australia because resources seems to have saved us once again and people like me talking about the need for the economy to be more broadly based look out of touch.
I see the real estate super bulls are now excited about talk of the Australian population reaching 60 million by 2050 (or thereabouts) and yet I wonder where the power or the water will come from to supply the extra millions? Sydney for example has chronic public transport problems already and is unable to maintain existing infrastructure in good order, goodness knows how the city will ever be able to take in a few more million people.
I wonder if the rising costs of energy, land, materials etc. will start to act as an automatic brake on future house prices rises? (i.e. start to eat into disposable incomes) In addition maybe the only way we will fit more people in is to increase the amount of medium and high density housing in our cities and if this happens, what impact will this have on residential real estate prices?
So many questions to try and find answers for
160 Ned S // Nov 9, 2009 at 6:34 pm
Gday Greg – As I said, no answers at all … But some facts – The migrants will keep coming. It’s “comparatively OK here!” And government wants/needs them – To generate growth and contribute tax dollars. So that’s a Fater complee (Apologies to all and any Frog listeners!
)
Water – Nuclear is good – Our major cities are all coastal – No problem! Public transport in Sydney – To get to the CBD when noone with any brains wants to be within cooee of the place? We’ll just have to see I guess … But one hardnosed premier for a term is all it would take to sort that out.
High density living – Has to happen. Cheers!
161 Greg Atkinson // Nov 10, 2009 at 7:17 am
Ned I have no answers either I am afraid. There seems to be so many reasons for house prices to keep rising it would appears a mugs game to even contemplate how they could fall. However I recall a similar situation developing in Ireland some years ago..GDP was on the rise, people were flooding into the country and it was labelled the “Celtic Tiger”. Nonetheless the economy did run into trouble and house prices did adjust downwards although who knows, this could just be a short term blip?
Let’s just hope nobody labels our economy the “Pacific Tiger”
162 Ned S // Nov 10, 2009 at 11:36 am
I was working with an Irishman at the time Greg and he was telling me what was happening there. It seemed crazy to me – Why Ireland? But they were heavily into the banking/finances type stuff I’ve since gathered? There’s a lesson in that I guess.
Oz house prices – I’ve given up making calls as I said. But the long term prospects would have to seem just fine regardless. That immigration is the biggy. I had no idea the projections were that high until quite recently. It’s a pretty sobering thought actually. Cheers eh!
163 Australian house prices in 2010 and beyond | SMSF Investment Strategies // Nov 24, 2009 at 4:58 am
[...] Australian home prices debate Part 1: Why prices may fall The Australian home prices debate Part 2: Why prices may not collapse If you look at residential mortgage lending, it has become more difficult for both the borrowers [...]
164 Ned S // Nov 25, 2009 at 9:16 am
What do you make of this Greg? : http://www.smh.com.au/business/high-home-prices-sustainable-rba-20091125-jp4z.html
In one way, it pretty much accords with my current view that “they” have figured out just what is the absolute maximum that we can pay for housing and are going to do everything that is necessary to preserve that in real terms. But at the end it says “”Census data show that the number of dwellings built has exceeded the increase in the number of households by a large margin.” The ratio of the number of dwellings to the number of households has been rising over time with 8 per cent more dwellings in Australia than households in 2006. “Presumably, most of this surplus reflects holiday houses and second houses,” Mr Battellino said.”
That just seems weird??? Are they really asking us to believe that there are heaps of Aussies who are so flash for cash that they build houses at todays prices and don’t bother renting them out? If so, it would seem that whatever “shortage” there may be could be addressed at a pretty fast clip – If it wasn’t for that factor? Strange – It isn’t gelling with me at all – Your thoughts please?
165 Greg Atkinson // Nov 25, 2009 at 6:27 pm
Ned I am not entirely sure the RBA is the best source of information regarding house price trends and it sort of worries me that they seem somewhat obsessed with home prices at present.
Maybe there are a lot of people out there with 2 or more homes, but does the RBA or anyone else really have enough reliable data to say this is a major reason behind any apparent oversupply? In any case I fail to see why holiday homes in Tasmania for example would have any bearing on home prices in other regions anyway.
I think we just have to wait until next year when the impact of higher interest rates and removal of some first home buyers money starts to bite before we will have a clear indication of where home prices may be heading.
166 Ned S // Nov 26, 2009 at 4:18 am
I think if I was the RBA, I’d be embarassed by coming out with a statement like “Presumably, ” blah blah blah … It would be more credible to say “It doesn’t make sense to us either – Maybe we’ve got our sums wrong – Or maybe there is a reason for it that does make sense – Hang on, we’ll go and check!” The word “numpties” comes to mind?
And we’ve also got Ken Henry sounding convinced Oz is about to enter its 40 year Golden Age – Could very well be true. But I’d like to see a bit of caution attached to a projection like that – As in “IF the world doesn’t collapse in a screaming heap because of all the bad debt that is out there which our central banker type mates are currently having a bit of an experimental fiddle with trying to inflate away!”
I also notice he made the statement “That, incidentally, does not necessarily mean abolishing the states. COAG can show real leadership.” – I’m sure Anna Bligh will be pleased to know Ken isn’t “necessarily” going to abolish her – Although I can see considerable potential merit in doing so!
Source: http://www.theaustralian.com.au/business/news/golden-age-will-stretch-to-2050-ken-henry/story-e6frg90f-1225790218893
167 Ned S // Nov 26, 2009 at 4:55 am
Where the heck do Rudd and co reckon they got the mandate for all of this stuff – “incidentally” “not necessarily” “abolishing the states” ??? Or is it just a matter of Oh dear, Yank house prices went down a bit so we can do whatever we want! If it wasn’t so obviously a case of big frogs in little puddles one could get the impression King Kong was going on a drunken rampage in a nunnery.
168 Greg Atkinson // Nov 30, 2009 at 2:28 pm
Ned – Ken Henry really scares me sometimes. He and Glenn Stevens perhaps need to work outside the public sector a little and live overseas for a while because to me they look out of touch.
I do wish they would ease up talking about house prices, it simply makes me nervous. However as of a few days ago I ceased to be a home owner in Australia as I parted with my apartment in Sydney.
I did not sell because of any unique insight into the property market, I simply sold because I am here in Japan and the apartment is back in Sydney
169 Ned S // Nov 30, 2009 at 6:56 pm
You can put Kev Rudd in the same boat I think Greg – A cradle to the grave beneficiary of welfare and government – Nevermind; (We let) These things happen.
As to your home ownership in Oz – I wouldn’t do what you’ve done – As in I’d always maintain my tie to the umbilical chord through at least one property.
But you have skills (and even opportunities I’d guess?) that I surely don’t.
So we each try to make the best of things in our own ways I guess? Cheers mate! Ned.
170 Senator13 // Dec 1, 2009 at 8:01 pm
We are in some very interesting times indeed. Many of the statements coming out of the RBA have been very concerning with their very narrow focus on housing along as their main justification for raising rates. I wonder what the small business community are thinking, specifically retailers, in the lead up to christmas with the latest increase to rates.
Coincidentally and very relevant to this blog topic I have been very busy over the last few months with the purchase of my first home. Specifically, an apartment, that I have now moved into and living in for the last month or so.
For me personally I believed that it was the right time for me. Obviously I’m going to have a biased in wanting prices not to plunge – and want them to rise – but I do believe that I have done a lot of research, done a lot of looking and am very happy with my purchase.
I still reckon that rates will continue to go up in the new year but think I have bought into a stable area that will be able to hold its price and been conservative with my estimates not to over extend myself… But like with all things time will tell.
Also, I did find this article the other day that I did find interesting in relation to the increasing size of Australian houses.
http://www.news.com.au/business/money/story/0,28323,26418362-5013951,00.html
171 Greg Atkinson // Dec 2, 2009 at 1:55 pm
A good reason why it does not make sense to compare house prices across countries or even over time. http://finance.yahoo.com/real-estate/article/108274/study-australians-have-the-worlds-biggest-homes
172 Ned S // Dec 2, 2009 at 2:41 pm
I’ve got to admit I’m tired of reading It’s a bubble so it’s gunna crash; Can’t tell you when; Or by how much – But trust me, it will!!!
Simple facts are Aussies dig holes in the ground and swap the dirt for overpriced houses. Not a real healthy basis for an economy perhaps – But what to do in a global world?
In truth it probably does beat trying to compete with Asia in manufacturing. And America in manipulating financial systems. Or Dubai in building ski slopes in the desert.
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