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September 21, 2010

Will our property market crash?


There have been some remarkable world events on the back of the global recession, among them unprecedented regulatory changes to major banking systems and presidential world firsts. But what does the future hold for the Australian property market?

BY CATHERINE CASHMORE

If we take our eyes off other parts of the world and zoom in on Australia, we can see a country outshining its rivals in wealth, growth and resources. Even the recent election dramas did little to affect us on a national or global scale. Our concerns must look rather piddling to countries still facing dark clouded forecasts of laboured recovery after the 2008 recession. Yet it doesn’t stop ‘experts’ wagging their finger and cautioning ‘it’s only a matter of time’ before we suffer the same fate.

It’s somewhat redundant to make these assertions; historically all great economies run the cycle of expansion and contraction. Crudely put, what goes up can also come down and a lot of time and money is invested in future forecasting to buffer the catastrophic effects which can result. Becoming ‘Wayne the worrier’, gathering our possessions and locking the door until the storm passes isn’t an option we’re gifted unfortunately. Life goes on.

There are a great many economists trying to answer the question of “where is the market going?” Those endorsing residential investment underpin their arguments with the great population debate focusing on supply and demand. Australia’s predicted surge of 35 million by 2050 – eight million in Melbourne alone – suggest at the current level of growth, Australia is falling short of 40,000 homes a year. In truth it’s not the amount of homes constructed that’s the issue, but the areas they’re located in. New housing is largely concentrated in outer lying suburbs – classic ‘mortgage belt’ neighbourhoods. These areas are subject to affordability attracting first homebuyers and low-income families. As such, demand fluctuates depending on economic factors such as the first homebuyer’s grant which is geared towards regional development and new home projects. Demand for new homes is low not just because of the costs involved in building, but because of the negative aspects of living in suburbs with poor infrastructure and limited employment opportunities.

However inner-city demand for housing is significant and rising, as anyone working at the coalface will tell you. Earlier this year 50 lots of rezoned residential land were auctioned in Melbourne’s Bentleigh East. Demand exceeded supply and all 50 blocks – hotly contested – sold under the hammer. Similar scenarios have played out in Sydney and Canberra, as our cities struggle to adapt to a never-ending stream of expansion.

Recently two well-known economists entered the fray and declared our real estate market is akin to a ticking time bomb. Co-founder of global investment management firm GMO, Jeremy Grantham, stated that ‘it’s only a matter of time’ before the UK and Australian markets collapse.

More recently Gerard Minack, head of global developed market strategy at Morgan Stanley, used a list of rather long-winded facts and figures to hypostasize that houses are ‘unsustainably’ priced. He asserts that Australian real estate is among the most expensive in the world.

However, when pondering ‘what will prick the bubble’ he can produce only two scenarios. One is broad-based job losses which – as he freely admits – look unlikely, at least in the short term. The second – an exodus of middle-class landlords selling en masse; something I can only envisage as a roll-on effect from the first. His arguments touch upon negative gearing – the tax incentives offered by the government which have enabled mum and dad investors to purchase. If the current policy were to be withdrawn or degraded it could have significant effects on house price and demand, as the Hawke/Keating Government found out in 1985. However, despite the Henry Tax Review suggesting an alteration in the system, both major political parties have vehemently stated – more than once – there are no future plans for change.

So as we walk the rocky road into 2011 what should we expect? Short term, things look set to continue on a gradual upward trend and I can’t see anything significant ‘looming’ to reverse the wheel. The steep rise in the market during the first quarter of 2010 was corrected mid-year due to rate rises and increased stock.

The big banks are borrowing large amounts of cash from offshore markets to fund a growing demand for credit. As the cost of borrowing increases, the probability of interest rate rises independent of the Reserve Bank look likely. Other factors to consider are the large number of high-rise inner-city developments planned over the next two years. Any increase in supply reduces demand and multiple smaller sales will produce a drop in median house price data.

All in all the path ahead may be a cautious one, but there’s nothing to suggest substantial drops any time soon.

Will we crash? Not in the foreseeable future and not if you follow a few basic rules. The key in 2011 will be knowing what to invest in and where. Not all locations and not all properties will perform the same or have the same growth potential. However concentrating on suburbs with limited supply and choosing properties that will stand up in soft and hot markets will reduce risk exposure and ensure capital growth.

Catherine Cashmore is a senior property adviser and buyer advocate for JPP Buyer Advocates – the largest dedicated buyer advocacy in Melbourne. With extensive experience in all matters regarding real estate, JPP successfully purchases and negotiates over $100m worth of property each year for clients. http://www.jpp.com.au

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20 Comments

  1. Californians were told there was a large housing shortage before the bubble burst. Americans were also told a housing market burst was not possible due to the very strong economy. Needles to say the bubble burst.

    There come a tipping point when simply put “average” Australians cannot afford the high mortgages no matter what “Spin” you put on it.

    Its not possible for property to keep increasing at the rate of the last 5+ years, its a burst or a consolidation of prices at beast.

    Comment by Battleneter — September 21, 2010 @ 12:44 pm

  2. Thanks for sharing, one of the analytic marketing reports is http://www.piaa.asn.au/reports/HIA_New_Home_Sales_Slide

    Let me give some conclusion from the report.

    In the month of June 2010 detached new home sales fell by 10 per cent in Victoria, 5.2 per cent in
    Western Australia, 5.1 per cent in Queensland, 4.2 per cent in South Australia, and 2.2 per cent in
    New South Wales.

    Comment by Lifesbox.com — September 21, 2010 @ 2:37 pm

  3. All future analysis is to some extent speculation and although I can ‘envisage’ temporary drops in the market – 5/10% in some areas, I honestly don’t feel we’re heading for a 40% drop or more which has been suggested.

    In the US borrowers with little income, no equity, and poor credit were allowed to take on mortgages they simply could not service. The system was unregulated and therefore even with a shortage of homes in areas such as California, a crash could not be avoided.

    In Australia our lending rules are different. We don’t have sub-prime lending – high LVR loans are subject to mortgage insurance which protects the lender against the loss. In the US this wasn’t the case. They gave ‘non-recourse’ loans allowing home owners to ‘foreclose’ and walk away from the debt This resulted in a large number of properties suddenly hitting the market creating a huge surplus in stock.

    I take on board your point regarding affordability. It is a huge issue for anyone who hasn’t yet entered the market and wants to invest in real estate close to cities and jobs where the shortage is. The pledge of $800 Million into a regional infrastructure fund along with the already planned NBN could well have a positive ripple effect on price in this regard.

    Growth in smaller mid-sized cities may well encourage buyers to migrate into regional areas such as Melbourne’s Geelong and Ballarat for example – This could ease inner and middle city demand and subsequently slow price inflation.

    Development of infrastructure ‘outwards’ (not ‘upwards’) is how other countries and cities – such as the UK, or Dallas-Fort Worth in the US for example – successfully managed to cope with rising house prices during population boom periods.

    All investment – stock market, or property market – is based on speculation using long term historical data and analysing current market trends. I can’t offer guarantees our market won’t crash, I can only draw upon the data as I see it, and leave investors to come to their own conclusions.

    Comment by Catherine Cashmore — September 22, 2010 @ 10:26 am

  4. I also don’t forsee a property crash as has happened overseas unless something very unusual happens (for example,China going down). However, I have invested in property and still do, and frankly, I have read 100′s of property reports from both sides of the fence in the last few months but it is clear to me that the rental returns versus the holding costs of current property are so poor, that just to break even there has to be considerable capital growth. I don’t see that happening soon. I think what may occur is a no or very low capital growth happening for a long time, as has occurred in the past. The losses of holding property will mount and investors who have little equity in their investments will head for the door when it dawns upon them they have invested in an over priced market with precious little up movement available. The reward/risk ratio is appalling right now in Australian property. This doubling of growth every 7 to 10 years mantra is what we call a logarithmic growth pattern and logarithmic growth does NOT occur forever and cannot occur forever. You don’t see it in nature anywhere LONG term. Good luck to everyone but property in my mind is a dud investment right now unless you are neutrally geared or nearly so.

    Comment by Sean Budge — September 29, 2010 @ 12:31 pm

  5. All markets run through cycles and property is no exception. Interest rates are rising from record lows &; it’s likely some vendors who bought under favourable conditions, or with the help of government grants, may find it difficult to meet repayments. Others may be discouraged from entering the market and as a consequence it’s not at all inconceivable that we’ll see prices stagnate for a period of time as we have done in previously years after rapid growth, or some vendors/investors forced to sell.

    However it’s very hard to draw a blanket analysis over our entire geographical area and expect it to apply equally everywhere. Our economy is doing well and population growth remains strong. Normally in a boom economy property prices rise strongly with rising stock markets. However, money is not as cheap to borrow as it was twelve months ago, stock levels are anecdotally lower than normal for this time of year, and there is a tenuous feeling of caution in the air.

    Some properties in well located zones, with good infrastructure, popular with owner occupiers are likely to remain good investments in demand with rising prices. Those in new estates located in suburbs traditionally marketed towards first home buyers and therefore more subject to affordability pressures may stagnant.

    It’s likely we’ll see capital growth in some areas and very little in others and this is not outside the norm when we review the historical landscape of our property market. Not every property doubles in 7-10 years ‘on average’ – (figures that are smoothed out and don’t reflect the peeks and troughs of the cycle.) But since records began good properties have been doing so for long term periods in excess of 30yrs. Not all real estate can be considered a valuable asset or worthy of investment. It is all about knowing the market, understanding the cycles, and purchasing the right property in the right location. Similar rules of education apply to any investment whether it be purchasing an antique or stocks &; shares.

    Unlike other investments however property is a fundamental asset essential for our accommodation needs – a critical requirement for our growing population.

    Comment by Catherine Cashmore — September 29, 2010 @ 2:00 pm

  6. Sometime i really dont understand all the property analyst and data that i study and read.
    Faith and personal experience give me more understanding of property than those paper works come from sales data. Property data show that PErth home price has drop 2.5% on August and the market has cooled. I have gain equity from the place i invested , 1 in Parkwood and 1 in Thornlie all start from 6% rental yeild. I have more confident in these 2 suburb and hope to invest more but price is keep on climbing and I have watse my precious time for half year when i waited for the price to DROP ……….
    Australia is a good , pretty and clean country. More and more people are coming . if you think australia house is unaffordable…in Singapore , i dont think you can buy a house for 1 million.
    in malaysia …a normal double storey house will cost 1 million ringgit that is 50 times average
    workers 1 year salary. Do i mention Hong Kong , Swizerland , Finland ?
    Dont wait till someone else find out it is cheap.

    Comment by Jonathan — October 2, 2010 @ 12:09 am

  7. Stats can be very deluding and it’s important to understand the influences that underlie the data before jumping to conclusions. A drop in the median can be due to a higher number of lower end sales – such as a large number of units being purchased over houses, or changes in the composition of buyers in the market. We only have so much land to build on, and properties in well located sort after suburbs are consistently in demand. You’re correct when you assess compared to other international capital cities our prices are not extreme. There are always risks involved in investment – however risks can be minimised with good education.

    Comment by Catherine Cashmore — October 2, 2010 @ 6:34 pm

  8. “since records began good properties have been doing so for long term periods in excess of 30yrs” Yes, and all of that time the unaffordability index has been rising steadily also. Assuming that because something rise in the past it must in the future is what lead to the GFC and pretty much every other asset bubble in history. The fact that Catherine is a buyer advocate and therefore has a vested interest in talking the market up may be more relevant than the statistics presented.

    Comment by Simon — January 11, 2011 @ 8:50 pm

  9. Probably a bit late to to comment now, however in response to comment 9 regarding second home buyers – these buyers often require first home buyers to purchase their properties so they can move on, any affordability issues with first home buyers also affects up-graders.

    Comment by Paul — January 25, 2011 @ 2:05 pm

  10. I firmly believe that Australia is not facing a house price bubble but affordability is an issue due to undersupply of housing in the market. The US Property market faced a burst bubble due to many factors including borrowers defaulting on their loans due to a dip in unemployment and a decade of overbuilding which caused millions of houses being built with no demand for housing……..For property investors thinking of opportunity, it often sounds better to hear that the USA Property Market dropped by 35% and still hasn’t recovered (therefore refrain from investing out of fear) rather than do due diligence within the Australian Property Market. Like in the USA, some areas in Australia are full of opportunity with bargain buys and the need for recovery – however unlike the USA, we can research markets and look at data/ infrastructure and do our due diligence to invest in growth HOTSPOTS that will make for a secure investment.

    There are absolutely cyclical patterns in the Australian market through extensive market research you can purchase in these area’s well before they are due to grow. There are still markets within the county that have been affected by deflated values. Those markets are absolute opportunist markets. There are risk markets for those who are novice to the property game but absolute gold markets for more experienced campaigners.

    The key reasons why investing in property right now in Australia is prime is for a number of key reasons:-

    1) Rental vacancy rates are the lowest we have had in about 30 years

    2) Interest rates are quite low – below the actual 20 year average which is 7.5%;

    3) The population is growing and expanding fast with a huge undersupply of housing

    4) Jobs are solid; with the unemployment at its lowest in two years of approx 5%

    5) There is a massive undersupply of residential real estate and financing for developments is very difficult and that means that there is not going to be an oversupply anytime soon in the key markets we are targeting

    6) There is no cheap labour anywhere near Australia at all for construction

    Comment by Jason Whitton — March 6, 2011 @ 11:36 pm

  11. Just to repeat my comments from another blog post on a similar topic -

    Almost since records began, Australia’s house prices have followed a similar pattern – long periods of price growth interrupted by periods of flat prices, or even modest falls. Then the growth resumes again.

    We’re in a flat phase at the moment, while affordability catches up a bit. Average wages are rising, interest rates are stable, the economy is doing well and house prices are flat (or recording modest falls in some areas, and modest growth in others).

    Therefore, housing affordability is improving… which is a good thing. It needed to.

    Once housing affordability catches up a bit, house price growth will resume – like it always has, and always will.

    I think all the silly “house price crash” nonsense is creating a large class of very unfortunate, sadly misled Australians who think they’re being clever by vowing to keep renting until some imaginary, huge “house price crash” occurs in Australia. Some even call this “strategy” a “buyer’s strike.” These people may become the pool of long-term renters that will make the next generation of property investors wealthy by paying their mortgages off for them, while the landlords enjoy the capital gains.

    If you’re waiting for the Great House Price Crash to occur in Australia, you might as well be waiting for the Easter Bunny.

    Comment by Nick B — April 7, 2011 @ 2:37 pm

  12. But where will the capital for growth come from? Bank mortgage books are strained and appetite from foreign bond investors is unlikely to grow, and may in fact wain given the tremendous increase in sovereign issuance particularly from the US and peripheral Europe.

    That leaves us with income growth, which at a first glance looks positive given the strength of our labour market. A closer look however, reveals that out side the mining sector, growth in income has been weak and doesn’t appear likely to face pressure in the near future, especially given the tightening monetary conditions set by short rates and the prevailing (high) A$ cross rates.

    I believe the demand/supply supprt for Aussie property, but given the amount of private sector debt, and limited scope for income growth, find it hard to make a case for continued real growth in residential property.

    Cheers.

    Comment by Ben — April 12, 2011 @ 12:30 pm

  13. Thanks for the comment Ben,

    Firstly as you correctly understand we’re suffering a shortage of ‘useable’ housing in our inner a middle ring suburbs. Unlike America and the UK, Most people in Australia live in capital city locations – in Melbourne alone we have 1800 people entering the city each week. Whether renting, or buying, they need shelter. For each person that enters the country our total GDP increases – as our population grows, so does our GDP. The majority of immigrants actually bring wealth and income into the country – they are not all coming in poverty stricken on boats even if it is the popular perception. All of these people (including our growing generic population) need somewhere to live. Whether they purchase or rent is immaterial, because we have a shortage of property in the places people need and ‘want’ to live (the city!); As the demand for rental accommodation increases, we need more investors a to ease the supply of rental accommodation – as property prices rise, existing owners have increasing equity to borrow and move up the property ladder.

    In short, whilst we have a supply issue, a booming population, increasing GDP, strong credit growth, job shortages, a strong mining sector, low unemployment and an economy which is faring better than most other developing countries, we suffer the consequences.

    There may be a good proportion of our population who are suffering the strain of affordability, but equally so are a large proportion of our population reaping the rewards of a booming economy. These doesn’t mean by any stretch that you can’t lose money through property investment, it simply means that the right property, in the right location, for the right price, will continue to grow as demand grows.

    What I do believe however is that we’ll see a greater split between those who can afford to purchase and those who can’t. As a consequence of poor development, and the ever increasing push to move upwards rather than investing in adequate infrastructure to expand outwards, we’ll see a growing number of young adults moving into the rental market, or waiting until their late 30’s and 40’s before they purchase. I also suspect we’ll see a change in demographics, with more joint purchases and a greater number of people sharing property as family’s pool funds to afford the dream.

    Comment by Catherine Cashmore — April 12, 2011 @ 2:17 pm

  14. I wouldn’t compare the Australian Market to the US. Their market crashed purely because those people who took out loans at ridiculous interest rates all got caught when the interest rate increased drastically after their 5 year honeymoon period. Then they could not make their repayments.

    I believe it is highlighted in the article that if there is mass exodus from the market would make the market fall, as it would anywhere. In the case of the US, people gave their houses back to the banks…the banks were and are stuck with too much debt with no cash coming in for it. They have to get rid of their product (the house in question) at drastically reduced prices to clear their balance sheets. Therefore it the burst bubble…

    Australians enjoy a good income and banks do great assessments on the public before authorizing a loan. Australian banks did not get caught up in the crash too much loaning from the right banks internationally, as they are far more conservative…like Canadian banks. Which is one of the reasons both these country’s economies are doing well.

    I believe we have gone through a blip in pricing right now due to the fact that the public is scared of this bursting bubble, which has not happened.

    To my understanding, the Australian public has reduced it’s credit card debt which means to me that they are saving their cash. Unfortunately, the economy needs the public to spend their cash to keep the economy strong. Everything in moderation…

    For (an extreme) example…if everyone in Australia decide that they were not going to dine out for the month of December, we would see restaurants go out of business…yet the economy might be in good health. It is just that everyone decided not to go out that month. This can cause a chain reaction which is not what you want.

    We need to be careful of fear proper gander…this can cause a slow in the economy when there is nothing wrong at all (and the vice-versa).

    The Australian Reserve Bank monitors this in a very crude way (if you will) and then adjust interest rates to tighten and loosen the purse strings of the Australian public. They hope the public will follow suit and spend when they reduce rates and stop spending when they raise them. Obviously this method is used for inflation as well.

    I do agree with the article above, the market may have stalled a little or even gone backwards a little…as they always do…however with the low unemployment, higher than average wages and a growing population…then I feel you will always have a growing market…the price will be dictated by location, location, location!

    Comment by Stavros Kotsireas — September 22, 2011 @ 10:14 am

  15. I would appreciate the your comment stavros as people are very fearful at the moment. This includes both sellers who are selling cheap and though cheap it not being realised by the buyers due to the coming fear that they are made to foresee.
    If you see things at a positive side, the capital growth will be slow for next couple of months or maybe 1-2 years but because the rent is good and economy being booming up as well you can still make your repayments and take advantage of negative gearing for tax purposes.
    Please keep in mind that the Australian property market is highly controlled by Asian countries that hold a majority of share. Also the main cities like Sydney, Melbourne, Gold Coast, Brisbane, Perth will not be affected that much. On the other hand cities like Gladstone that have property prices vastly inflated due to shortage of house and presence of mining companies will take a hit at any stage sooner or later.
    Be aware that this is the right time as no one is buying and if everybody knew about it you will definitely not get the same deal.

    Catherine Cashmore a comment by you would be much appreciated as to the property market as of yet.

    Comment by Gupta — September 26, 2011 @ 8:26 pm

  16. Fundamentally, it’s about supply and demand. Whilst people cite the immigration / population growth in Australia as an underpinning factor, this could fall off quickly or reverse when the ‘lucky country’ isn’t as lucky as it was during the 1995 – 2008 boom. I watched the expats flee during the GFC and sense similar rumblings now as the economy is clearly cooling off. With LAFHA expiring, productivity shocking (which, BTW is nothing new) and aggregate price averages exceeding 6+ times the average wage, it’s quite possible that an external shock could trigger a run for the exits. Carpe Diem.

    Comment by Jeff — April 14, 2012 @ 11:29 am

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