Want Cheaper Housing? Hope For Global Turmoil.

One thing that always gets me riled up is when people bitch to me about the housing prices in Australia. I’ve said in the past that yes, for an average single income earner, the median is unaffordable but I’ve long been of the stance that that situation is far from typical. What I feel is that Australians looking at the property market today are suffering more from a crisis of desire more than anything else, wanting to stay in the same level of housing that their parents had without the decades of living in the mortgage belt that preceded it. For the whiners out there however there might be a saving grace that’ll let them get into the house that they want, so long as they can keep their jobs through it.

So the reserve bank decided to drop rates by 25 basis points on Tuesday, confusing a lot of people as inflation was hovering around the Reserve Banks target rate of around 3%. It was the first time that the rates had dropped since April 2009 back when the fallout from the GFC was still causing problems. The decision seemed t0 be based around the fact that despite good economic figures Australian families were still struggling with mortgage payments and as such a drop in rates was seen as being more beneficial than keeping them on hold again. Taking a step back however I believe that they’re attempting to soften the blow of a potential upcoming crisis.

I am, of course, talking about Greece and the potential for a repeat of the events we saw with the GFC.

Rewind back a month or so and everything was starting to look better for Europe with Germany approving the rescue package albeit with some rather harsh provisions in order to make sure Greece didn’t do the same thing again. However just recently Greece has decided to put the rescue package measures to a referendum putting the future of the financial situation in Europe in the hands of the Greek people. Since there’s been rather hot and heavy opposition to the austerity measures that they’ve tried to implement in the past it’s understandable why everyone in the Eurozone is concerned about what might happen. Indeed with the way the markets reacted it’s seems like everyone thinks it’ll fall flat on its face.

But how, pray tell, does this affect property prices in Australia?

Well for the past year or so prices for Australian property have been declining slowly, on the order of single figure percentage points. Primarily this is because of many people coming out of the honeymoon period they had when they secured a massive mortgage during the GFC at spectacularly low rates, many below 5%. Once the pressure was back on with more sane interest rates many chose to sell up and this has lead to a downward pressure on the Australian housing market. It’s still not enough on its own to make property affordable though, for that we also need cheaper mortgages.

Markets are fun little beasts and are, for the most part, driven by irrational thought processes and fear. You’ll notice that during the GFC Australia remained relatively unscathed yet we still had as much panic as if we were going to go down with the rest of them. Indeed there was supposed to be a tightening of credit during this as well but many banks aggressively dropped their rates in order to draw people in. The fallout from the Greece’s financial problems is a very similar trigger to that of the GFC, enough so that if those measures don’t pass you can almost guarantee that interest rates will fall through the floor again as everyone tries to withdraw from the markets and the desire for credit dries up. Of course this will also mean that companies will use this as an excuse (both legitimately and illegitimately) to start downsizing again, pushing the unemployment rate back up.

For a financial sociopath like myself it’s like being a kind in a candy store as I’ll have my pick of the loans and properties available. However it’s not a situation that everyone can take advantage of, indeed only a select few (although not just the 1%) will be able to. However if you’ve got a decent deposit up and have been waiting for “just the right time” to get into the market then holding off for another couple months or so whilst this disaster unfolds could prove beneficial for you, especially if you take the banks current fixed term mortgage rates as any indication of where the market is heading.

2 Comments

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  1. I think you’ll have to wait more than a few months for the market to bottom out. I’d expect if Greece goes wobbly, another rate cut early next year.
    Australia has only small risks from the European market. See here (http://www.lowyinterpreter.org/post/2011/08/11/Engagement-with-Asia-pays-off.aspx)

    Most of our exports go to the Asia-Pacific, (in order China, Japan, Korea, India, US, UK).
    We are slightly more exposed for imports (China, US, Japan, Singapore, Thailand, Germany), but most of those imports can probably be sourced from other places, or even made cheaper as the Aussie dollar rises as a safe currency & EU drops.

    While this pattern of trade isn’t too different from 2008, the GFC was expected to go global. Instead it was largely a North-Atlantic crisis, which though Australia wasn’t practically at risk from, we were emotionally. The fact Australia weathered that crisis so well, means that this time, with Australia even less physically and now less emotionally dependent upon the EU (and to a degree US), means we should be O.K.

    Which is a long way of saying, if House prices are to really fall, it won’t be for a while, and will take a really big global economic disaster to occur. (Not even China collapsing would do it, we’re actually far less dependent upon them than is often discussed. Mining is only 8.4% of the economy. Finance & Manafacturing are bigger, though both are also indirectly tied to china.)

  2. The bottom is still a fair way off, I definitely agree with that sentiment. Australia’s close ties with Asia are arguably what kept us out of an economic slump last time and will definitely help us through any turmoil the Eurozone throws our way. However whilst Australian businesses are more than likely going to be fine I do believe that, just like the GFC, a tightening of the credit market will follow which is what will lead to further interest rate drops.

    Agree on the emotional aspect and should the Australian public remember how we weathered the storm then there’s every possibility that the crisis will have little to no impact on us. I may be erring on the side of pessimism here when I say that I don’t believe they will, but you’re right in saying that we’re far better prepared to respond to this crisis than we were for the GFC.

    I was more focusing on the idea that an Eurozone crisis would affect the credit markets more than the housing prices themselves. I agree with your points as there would have to be quite the disaster for housing prices to come crashing down. Instead the downward pressure on house prices coupled with cheaper credit means that housing would become more affordable for your average Australian.

    Maybe I should replace “cheaper” in the title with “more affordable” 😉

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