Puzzle Finance Blog


Don't bet on a property crash


Once again, the Apocalypse has been averted and the four horsemen have ridden off to create havoc elsewhere.

Rather than the much-heralded assault on the Australian residential housing market, as has been predicted for the past five years by an ever-increasing host of international and domestic doomsayers, we are instead witnessing an orderly retreat.

There's little doubt that Australian property is likely to be subdued for at least the next few years and that values here are likely to decline.

As in previous times, the property market appears to be settling in for a prolonged hibernation after a debt-fuelled run-up.

But those gleefully predicting a US-style crash in the Australian property market are so far wide of the mark it beggars belief that anyone bothers to listen.

In fact, about the only place there has been a US-style property market crash in the past few years is in the United States of America, a catastrophe sparked by reckless lending and a total failure of regulatory oversight that ricocheted around the globe in 2007, sparking round one of the global financial crisis.

Those US-style excesses (loans to borrowers with no ability to repay) were almost universally repelled in this market. As a result, we've largely avoided the after-effects.

That hasn't stopped the hyperbole by an ever-increasing mob of normally reputable commentators.

But the facts are far more sobering.

The official figures released this week by the Bureau of Statistics clearly show a downward trend in the domestic housing market.

Overall, we experienced a 4.8 per cent national decline in the year to the end of December. But the manner in which the declines were carved out provides the most interest.

Australia may be a nation in the throes of a once-in-a-generation economic transformation, with resources squeezing out traditional industries, but there has been little evidence of that in housing demand.

Among the biggest surprises was that Brisbane, one of the beneficiaries of the resources boom, led the housing market price declines with a 6.7 per cent drop in the year to the end of December.

Adelaide and Melbourne were next in line. But the biggest surprise was the pullback in Perth residential real estate, shedding a whisker under 5 per cent.

Unlikely as it may seem, Sydney was the best performer of all with a decline of just 2.7 per cent over the year. (OK, Canberra outdid Sydney with a 2.6 per cent drop but no one ever pretended it was a normal city.)

Australian residential real estate is expensive on just about any measure you care to nominate.

And it is clear that it has reached a tipping point. For it has outgrown the capacity of Australians to service the debt required to buy a property. Not only that, the stronger dollar has made our property more expensive for foreign investors.

But to employ that argument as the exclusive rationale for a domestic property market collapse is naive in the extreme and ignores the fundamentals of market operations - supply and demand.

Given the tighter lending criteria imposed upon our banks during the boom years until 2008, the only way that we will experience a US-style property crash here is if there is a serious rise in unemployment - a change that would spark loan defaults and flood of distressed property on to the market.

That's not impossible. But it is highly unlikely given our historically low unemployment right now and our place in the global economy as a resources supplier plugged into the only growth region in the world right now.

For a US-style property collapse to occur here, we would need sovereign debt defaults across Europe, the disintegration of the European Union and a banking crisis that would cripple even China. And if that happens, we'll have bigger concerns than the price of our homes.

As with any market, there is a delicate balance between supply, demand and price. For those pining for ''the good old days'' when we had ''affordable housing'', it is time for a reality check.

The truth is that housing was never affordable. All that's changed in recent decades has been a shifting of the equation surrounding supply, demand and price.

In the good old days, the only reason housing was far cheaper - on an average earnings basis - was that credit was restricted.

Up until financial deregulation in 1983, our banks had to labour under the yoke of federal regulations that prohibited them from offering home loans to customers above 13.5 per cent. Credit was in such short supply, few were offered enough cash to buy a home.

It wasn't until our banks discovered cheap offshore credit in the mid-1990s and brought the cash onshore that we suddenly had ''affordable'' home loans. But the cheaper credit simply shifted the price of real estate higher.

It was a windfall for the banks. For the real estate boom resulted in ever larger loans. And those larger loans bloated the earnings of our major banks, a financial perpetual motion machine that came to an end more than two years ago.

As a nation, it's left us with a serious but not insurmountable foreign debt problem. (That's right, it's a private not a government debt that is the problem).

It also is the reason global ratings agencies are seriously considering downgrading our banks, particularly given the threat to international finance from the ructions in Europe. And it goes a long way to explaining why our banks have aggressively switched back to domestic funding, to raising their cash at home.

The adjustments are in place. A crash? Don't bet the house on it

Posted by Ian Verrender - The Age on 2nd February, 2012 | Comments | Trackbacks
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