The last 6 months have been a real roller coaster ride for pretty much everyone financially, even more so for the people like myself who have tried to buck the trend and continue investing during these times. Whilst the majority of the hyperbole has died down over the past couple months there’s still a strong feeling of doom and gloom from a lot of people. This is despite signs that the property market, which was everyone’s favourite punching bag, is on the mend and the unemployment rates whilst increasing are not as bad as was predicted. This then begs the question: is there still potential for Australia to suffer a major hit to it’s property markets?

Ever since this crisis was thrust upon us by the collapse of the sub-prime market in America the outlook has been that Australia would soon follow suit with our property prices plummeting anywhere from a reasonable amount of 5% all the way up to 50%. The gap in speculation should show that no one really has a definitive idea of where the Australian property market will be going and depending on what data you use you will get a different story. The first problem that most of these predictions make is translating the problems that the American sub-prime market had and translating them to Australia. It’s really not that simple.

Let’s step back from the current crisis for a moment to study what lead to the economic crisis over in America. The straw that broke the camel’s back was the fallout from the sub-prime mortgage market. In essence this refers to the practice of lending to individuals who do not meet prime lending criteria and as such have a much high chance of defaulting on their loans. With the helping of insurance companies like AIG banks were able to repackage these liabilities as mortgage backed securities which then allowed them to put these high risk loans back on their books as assets. Banks are typically allowed to lend out more money than they have, and the repackaging of these loans means that they could then re-lend that money out to someone else. You can now see that when one of these loans went belly up it would have a much bigger effect than it would previously. Due to the way the loans were written at the time most of the home owners were on honeymoon rates for the first 2~5 years. After that they reverted to a much higher rate, of which most of them could not afford. What you then had was a lot of loans all defaulting at the same time, which brought the banks and insurance giants to their knees.

I can not stress enough how different this is to Australia. What the American banks were suffering from was a lack of capitalization, I.E. they didn’t have enough real assets under them to back up the money they were lending out. Banks in Australia do not suffer from this and can not perform the kind of magic accounting that the American banks did due to the much more strict regulation they have to comply with. Lending criteria in Australia is also much more strict than what America had prior to its collapse and was tightened significantly after the crisis hit (I got loans before and after the crisis hit, and the second time around was far more stressful than the first).

The next couple facts I generally see is that house prices are unaffordable and the current increases are merely due to a boost in the first home owner’s grant. Whilst I’m not going to argue that Australian property is cheap it’s definitely not as bad as some and with interest rates so low now renters are usually better off buying a house if they have the savings for it. The next 12 months will show us how the market is going as I will admit the figures are somewhat distorted by the FHOG extension.

At the heart of the doom and gloomers is a desire for more affordable housing for everyone and their idea of reducing house prices is for the market to crash so that everyone can jump in. With 70% of the houses in Australia being owned by the people that occupy them (with 50% of those having no mortgage) there’s not really a lot of pressure on the market to sell. The only sector of the market that stands to make a great loss, and as such would have motive to sell quickly and below market, are the investors. With only 30% of the market at real financial risk it stands to reason that the property market won’t be suffering too much price wise, but there are some other factors to consider.

When people can’t sell a property for what they want/need there’s few options left for them: refinance or rent it out. With the tight lending market currently you’re not going to see many banks offering favourable deals so many will choose to rent it out. What you will then see is a glut of rental properties which will put a downward pressure on rents, which we have already seen. This will continue for a few years until America and the worst hit countries find their feet again which, in my view, will lead to a short to medium term stagnation in property prices. In real terms this means a decrease in property prices in line with inflation over the same period, or about 3% annually. There will be no crash but housing will become more affordable.

The government on the other hand could easily make housing more affordable by releasing more land and pumping more cash into base infrastructure to get the new land releases fully serviced. One of my good friends just recently finished building a house in a new suburb in Canberra for which he purchased the land almost 3 years ago. This kind of delay in new housing puts an upward pressure on established buildings and is one of the many causes of the affordability problem. Right now would be the perfect time to speed up development of new areas as the market is primed for a influx of affordable properties.

So overall I don’t believe that the markets will suffer as much as the doom and gloomers believe. Whilst the potential is there for properties to come down in value there’s several key factors that are missing and without them a decrease in real value is all that aspiring home owners can hope for. As I’ve said previously though property is a long term investment and any hit that it might take now will be recovered in the years to come.

Times are tough, but not as tough as some would have you believe.

About the Author

David Klemke

David is an avid gamer and technology enthusiast in Australia. He got his first taste for both of those passions when his father, a radio engineer from the University of Melbourne, gave him an old DOS box to play games on.

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