A crash in property prices? Don't bet on it
October 6, 2011
Comments 64
Illustration: John Shakespeare
Could this be a real estate salesman's fantasy come true? If financial armageddon is what you crave, there's plenty to feed your habit right now; a rout on global sharemarkets, commodity prices crashing, the dollar under attack and panic on debt markets.
But then there's good old Aussie bricks and mortar. It has held up well during a time of almost unprecedented economic uncertainty.
Despite a veritable army of doomsayers - as evidenced by the number of websites and chat rooms - salivating at the prospect of a crash in property prices, so far it has stubbornly failed to materialise.
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There is no doubt residential real estate prices are on the slide. And if the economy stalls and unemployment rises, they will continue to edge lower. But don't count on a crash.
Latest numbers by RP Data-Rismark show capital city residential prices are down just 3.2 per cent on a national basis compared with this time last year.
Most of that decline has been borne by houses -a 3.9 per cent decline in the past one year with most pain concentrated in the top end of the market - while there has been hardly any movement in home unit prices.
Look back two years, and in almost every capital except for Perth, home values are steady or slightly below 2009 levels.
Sydney, however, has bucked the trend. Prices have risen strongly over that two-year period, and in the past year they have remained barely changed against drops of between 4 per cent and 7 per cent in the other capital cities.
The fearmongers love to compare Australian real estate with America. They manipulate graphs and data to make it appear the local market is in as much trouble as the US one.
But American real estate still hasn't recovered. In case you missed it, an advertisement on the front page of the Asian edition of the Financial Times a fortnight ago had the real estate equivalent of the BOGOF (Buy One Get One Free) sale. The deal was, buy five American houses for $US200,000 ($209,000) all up and get the sixth one for just $US25,000.
The logic goes, if it happened there, it is bound to happen here. But you may as well compare Australia with Mars.
Ignoring that America is in recession and we are not, and that our population is concentrated on a narrow strip of coastal fringe, there are a host of other reasons that point to a soft landing in real estate, even in the worst case of a serious downturn in the domestic economy.
The main difference is in the way our banks lend. Our mortgages are fully recourse whereas in the US, they are non-recourse. Default on a home loan here, and the bank will chase you for the outstanding cash and bankrupt you if need be. Not in America. If you owe double the value of your home, you can simply walk out, leave the keys in the door and let the bank take the pain.
The result is that Australians are less likely to default than Americans, even under extreme duress. That means fewer houses on the market during a recession, which means less pressure on prices. When the housing bubble burst in the US, an already soft market was flooded, causing home prices to slump by more than 50 per cent.
A Reserve Bank paper on our property market delivered this week says supply side constraints have conspired to keep home prices high.
The growth in available housing has not kept pace with population growth, particularly in the past decade when population increases oustripped housing growth for the first time in more than half a century.
This is partly because we have been slow to embrace high-rise and high-density living, even as urban sprawl has reached a critical point.
If home ownership is a national obsession, the flipside is that it is the Achilles heel of our banking system.
The big four banks are hugely exposed to residential real estate. So those predicting a crash in housing prices, by association are predicting a crisis in the banking system.
Right now, our banks are having a devil of a time trying to convince anyone to borrow money. Lending growth for housing has shrunk to just 5.8 per cent, its lowest in 27 years, forcing banks to actually start competing with one another.
At least it's positive. In fact, housing loans are about the only growth area for banks.
Corporate lending has been shrinking with the latest figures showing a 0.9 per cent decline from the same period last year.
That spendthrift attitude we had back in the boom has long gone. We've now become a nation of savers, and deposit growth has surged to record levels. In August alone, we slapped another $28 billion into bank vaults. That was a 2.1 per cent rise for the month, and 10 per cent more than the same period last year.
That trend is evident across the developed world. Debt has become a dirty word and deleveraging is in.
In Europe and the US, a few economists have begun arguing that cutting interest rates when nobody wants to borrow is a futile exercise if you are trying to kickstart your economy.
It's a valid point. But we aren't trying to kickstart our economy. Until a couple of months ago, we were choofing along at full speed. And we don't have vast numbers of empty dwellings up for sale. Most of ours are occupied.
So, unlike the rest of the developed world, a cut in interest rates would put a floor under the housing market as it would make repayments easier.
If worse comes to worst, our central bank has a great deal more ammunition than its European and American counterparts, ordnance that's a great deal more effective.
The chances of an Aussie property crash? As rare as hen's teeth.
Read more:
http://www.smh.com.au/business/a-cr...t-bet-on-it-20111005-1l9nz.html#ixzz1Zx00I09c
