Why Australia's housing market is ahead of Britain's

Christopher Joye, 12 August 2011 in SmartCompany.com.au

You often hear that Australian housing is more expensive than, say, UK or US housing, if not the dearest in the world...So today I wanted to address two simple questions. First, have Australian housing costs risen more rapidly than their UK equivalents during the last couple of decades? And, second, how far did UK house prices fall during the GFC, given the near complete disintegration of its banking system....

US economist predicts housing prices to fall 60% but local analysts say market resilient

Patrick Stafford, 15 August 2011 in SmartCompany.com.au

The poor performance of the local property sector has been dealt another blow by an economist who says that Australian property is as much as 60% overvalued and could see the same type of crash that occurred in Japan over 20 years ago. Those comments come alongside predictions from bankers and analysts that the Reserve Bank will hold off from raising interest rates when it meets again next month....
 

A property market downswing is normal and presents good investment opportunities

Michael Yardney, 03 August 2011 in PropertyObserver.com.au

Residential property is going through a crisis of confidence at present. The market has been stalled by a continual conveyor belt of concerns. We’re worrying about the rising cost of living, the threat of a housing bubble, the direction of interest rates, the state of our economy, an overseas sovereign default, the carbon tax and a whole lot more....
 

Market soft but still together

Michael Matusik, 02 May 2011 in The Courier-Mail

I RECENTLY wrote about housing in Australia and the unlikelihood that we will see major falls in home values any time soon, due, among other things, to our high rates of home equity ownership and our history of low mortgage defaults....
 
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Why Australia's housing market is ahead of Britain's

Christopher Joye, 12 August 2011 in SmartCompany.com.au
 
You often hear that Australian housing is more expensive than, say, UK or US housing, if not the dearest in the world.

Wild fluctuations in currencies make international comparisons hard, to say nothing of profound differences in house price data, household formation and population growth rates, the availability of new housing supply, the urban structure of nations, interest rates, and the legal, tax and institutional features of housing markets around the world.

By way of example, the rate of home ownership in Germany is about 40%, compared with circa 70% in Australia, the UK, Canada, and New Zealand.

In the US there is capital gains tax levied on the owner-occupied home while mortgage repayments are tax-deductible. In contrast, the owner-occupied home is CGT-exempt in Australia, the UK, Canada, and New Zealand, but this comes with a cost: mortgage repayments are not tax-deductible.

One country Australia does share strong commonalities with is, naturally, the UK. The UK also has the benefit of very good housing data that is not plagued by “sample selection biases” (i.e., when you only get a fraction of the total population of home sales, as you do with US house price indices).

So today I wanted to address two simple questions.

First, have Australian housing costs risen more rapidly than their UK equivalents during the last couple of decades?

And, second, how far did UK house prices fall during the GFC, given the near complete disintegration of its banking system, with the whole or partial nationalisation of many of its largest lenders? (UK taxpayers ended up owning 100% of Northern Rock, 83% of RBS, and 41% of Lloyds.)

I ask this question because the correspondence between the Aussie and UK banking systems, which are both dominated by a small number of big institutions, and their housing markets (both have near-identical approaches to tax and similar demand and supply fundamentals) makes a study of the UK downturn a credible guide in the event that something – god forbid – catastrophic were to happen here.

That is, it gives us a reasonable indication as to how far Australian house prices might decline if our banking system imploded, the economy careened into an acute recession with soaring unemployment and default rates.

For the purposes of this analysis we have taken the broadest possible UK house price measure, which is produced by a group called Academetrics. We then compare this with our standard RP Data-Rismark Hedonic Combined Capital Cities Index.

The results, which are illustrated in the two charts below (click to enlarge), are fascinating.

First, in the 15 or so years before the GFC, UK housing costs actually increased at a substantially greater rate than their Antipodean counterparts.

Of course, the cataclysmic economic and financial collapse subsequently experienced in the UK in 2007-08 resulted in a very significant contraction in UK dwelling prices.

Specifically, on a peak-to-trough basis, UK home values fell by 13.6%. This compares with a smaller 3.9% peak-to-trough decline in Australian dwelling values, which did not have to contend with big increases in unemployment (or arrears).

Monetary policy also works differently in Australia, with almost all borrowers on “adjustable rate” loans. In the UK, the split between variable and fixed-rate loans has historically been around 50:50. This makes it harder for the UK central bank to deliver cash-flow relief to borrowers in the event of a crisis.

The circa 14% drop in UK house prices is noteworthy, but perhaps not as big as some might have expected. For example, the Aussie share market (as measured by the ASX/S&P200) has fallen further in the last month or so.

And based on a far less-accurate benchmark for US housing costs, the S&P Case-Shiller Index, which unfortunately excludes about 40% of all US homes, the correction on the other side of the Atlantic was twice as steep. This might be partially explained by the fact that US default rates were nearly three times higher than comparable UK arrears (and about 10 times higher than Australian defaults).

A more interesting finding speaks to relative value. Because of the much stronger run-up in UK house prices prior to the GFC, the overall change in housing costs over the last 18 years has been virtually identical to Australia’s, notwithstanding the sharp recent correction. Read more...
 
 

US economist predicts housing prices to fall 60% but local analysts say market resilient

Patrick Stafford, 15 August 2011 in www.SmartCompany.com.au

The poor performance of the local property sector has been dealt another blow by an economist who says that Australian property is as much as 60% overvalued and could see the same type of crash that occurred in Japan over 20 years ago.
Those comments come alongside predictions from bankers and analysts that the Reserve Bank will hold off from raising interest rates when it meets again next month.

Economist Harry Dent has told the Herald Sun that the Australian market is looking much the same way the Japanese market did before its crash in the 1980s, when values fell by as much as 60%.

"That's what Australia could be looking at. I think prices will go back down to where they were in mid-2000, to where young families can start affording a house again - so that could prove a good thing," he said.

Such comparisons have been made before, with some analysts saying the Australian market is gearing itself up for a fall. Local economist Steve Keen has famously predicted that property prices could fall as much as 40% over the next 10-15 years. (That prediction was made in 2007).

However, many local economists have rejected such predictions, saying the markets cannot be compared. APM economist Andrew Wilson says the Australian market has remained one of the most resilient, and it would take a significant change for prices to plummet by that much.

"International investors last week showed a very significant leap of faith in the Australian sharemarket, and by extension, the Australian economy. There is a sense that Australia provides a safe haven in terms of residential property."

Wilson says the comparisons between Japan and Australia are flawed given the widely different nature of incomes, the property market itself and the connection to the Chinese economy which is unlikely to see its growth rate plummet in the near future.

"What we've seen during the GFC is that China sort of switched from an externally driven type of economy to growth within the domestic economy which showed it can remain resistant to downturns in the domestic export market."

"That's a very comforting outcome for Australia."

Wilson also points to the weekend's auction results, which were "resilient" given the massive turmoil in sharemarkets worldwide and renewed discussion about whether the RBA would in fact raise rates next month. Read more ....

 

 

A property market downswing is normal and presents good investment opportunities

Michael Yardney, 03 August 2011 in PropertyObserver.com.au

Residential property is going through a crisis of confidence at present. The market has been stalled by a continual conveyor belt of concerns. We’re worrying about the rising cost of living, the threat of a housing bubble, the direction of interest rates, the state of our economy, an overseas sovereign default, the carbon tax and a whole lot more.

Currently the market remains balanced between positive forces (our strong fundamentals) and negative forces (poor consumer confidence), and until some of the uncertainty clears we’ll see many home buyers and investors sitting on the sidelines waiting to see how things pan out. They’re scared of making a mistake and either buying the wrong property or over-committing to something that could slide in value.

I recently read a good analogy: If a fortune teller told you that there was a 10% chance of dying in a car crash today, many would stay home or catch a train. It’s much the same with property at present. The chances of our markets crashing are small, but the average Aussie is playing it cautious.

So is this a new era for our property markets? 

Over the last couple of years our property markets were similar to all the other cycles I have invested through. Fear and greed got out of balance and the price of some properties went up by over 20% a year for a few years.

Many Australians stopped thinking of their homes primarily as shelter and a long-term investment, and had begun to think of their houses as a get-rich-quick scheme or a very large automatic teller machine. This was spurred on by rising property values and relatively easy credit. Banks were lending money at low interest rates and high loan-to-value ratios, but much of this has changed now.

More recently many of us have found a renewed enthusiasm for filling our financial coffers. We’ve entered an era where we’re saving rather than consuming.

The fact is we’re now saving 10% to 12% of what we earn, which is very different to a few years ago when we were spending more than we were earning by borrowing more and more.

This renewed thrift is a good thing. Higher household savings, lower credit card debt and paying off our mortgages sooner is a sign of strength (rather than weakness) that will protect us if our economy hits some speed bumps.

Where are we in the property cycle?

Today when I hear from investors who are concerned with the negative media about the property markets and the world financial markets, I try to reassure them that the property market is behaving normally.

Let’s be clear: the property cycle peaked over a year ago now, but that doesn’t mean growth in values has stopped forever. It means the markets in our major cities are taking a breather allowing fundamentals to catch up. Some properties will continue to fall in value, others will hold their prices and yet others will creep up in value.

If you’ve owned real estate for a while you would realised that property markets have always moved in cycles of rapid upward movements, followed by periods of flat or even negative growth, followed by another move upwards.

I have often suggested that the sooner an investor has traded or invested through a cycle or two, the better investor he or she will be. He or she will then understand that slower phases in the property cycle, such as the one we are currently experiencing, are normal and they will know how to take advantage of it.

And the good news for property investors is that while prices remain flat, rents keep rising and investment yields are moving up.

The market is correcting, not collapsing

Last week both RPData and Australian Property Monitors released their latest property stats, and they showed that across Australia some markets have stalled while others are correcting, but other than the Gold Coast, our markets are not collapsing like many doomsayers were predicting.   Read more ...

 

 

Market soft but still together

Michael Matusik, 02 May 2011 in The Courier-Mail

I RECENTLY wrote about housing in Australia and the unlikelihood that we will see major falls in home values any time soon, due, among other things, to our high rates of home equity ownership and our history of low mortgage defaults.

Another confidence booster for our residential property market comes from a recent HILDA survey on household borrowing behaviour, which suggests that our levels of economic wellbeing, in terms of debt repayment, have improved.

Throughout the 1990s and into the first half of the 2000s, our household debt grew strongly, due in part to lower interest rates, which subsequently raised the borrowing potential of many households.

At that time, the expanded availability of mortgage finance meant increased numbers of borrowers and a high turnover in the housing market.

Interest rates then began to rise and households found themselves with less disposable income with which to pay debts. The result was a steady decline in the numbers of households ahead on their home loan repayments. Borrowing slowed across all age groups. Ultimately, things got to where they are today - tough. But the encouraging news from HILDA is we have begun to pay more on our loans.

Even more encouraging, CommSec states that wealth held by Australians in property, shares and others assets hit record highs at the end of last year. ABS figures confirm that private sector wealth rose by 1.3 per cent to a record $6 trillion at the end of December, while private sector debt fell by 6.2 per cent in the December quarter - the biggest fall in nine years.

Recent figures indicate a sharp increase in the numbers of people paying off their credit cards in full, and the numbers of households ahead of schedule on their home loan repayments - which last year jumped to their highest rate since 2003 across all age groups. Simply, there are now more of us trying to pay off more of our debt in shorter periods of time.

This, of course, is a far cry from the situation in the United States where the housing market collapse was exacerbated by borrowers simply being able to walk away from debt.

One thing that we need more of, however, is confidence. The April Westpac/Melbourne Institute "time to buy a dwelling" index shows a 5 per cent fall in home buyer confidence in spite of Australia's relatively strong economic performance.

The primary driver behind the index fall was the recent disaster in Queensland, without which the home buyer confidence index would have risen by 2 per cent.

Contrary to what some have been suggesting, I believe the market is not falling to pieces. While it remains soft for now - even dismal in some areas - and locally the conditions are as weak as the mid-1980s, the cycle will improve. It always does.  Read more ...