A housing price "crash" is unlikely in Australia

[Mofra]

Howdy all,

There have obviously been many threads regarding property prices crashing in the US due to the subprime mortgage meltdown & the coming interest rate resets still not at their peak.

As few interesting tidbits I have gleaned from various presentations at work & from various information outlets on the net (leaning towards differences between the Australian & US housing markets):

- Subprime resets are due to peak in October 07. The is a steady decline in rest activity after this.
- The US construction activity in 06 was massive; enough to house almost 50% of the then population of the US. This is also due to the massive difference in demographic population diversity in the US, where close to 80% of the population live in towns rather than cities.
(Australia houses alomost 80% of its population in cities, rather than towns, making location a greater factor). There is also a greater tolerance for travel in the US; 2 hours each way is not considered overly excessive in some areas of the US.
- Ease of credit: The US market is much more mature, with a wider variety of products on the markets. 40 & 50 year mortgages are difficult to find in Australia, they are much more common in the US. The subprime/Low Doc to impared credit history sector in the US is massive; in Australia, non-existant
- Securitisation of mortgage debt. The US securitisation industry is much larger, yet a greater "blanket approach" appears to be applied. The bond gradings are completed on an order of priority of default liability basis rather than quality of securitised debt basis. In addition, MI is not a non-negotiable for many US lenders.
- Rental squeeze; again, not an issue for many areas in the US. The more popular areas of Australia represent a greater slice of teh Australian housing market, menaing the current rent squeeze appears unlikely to abate for some time.

I am not advocating a great property bull market in the short term, however many of the property bears seem to be applying US market conditions to predict an outsome for the domestic market. A pullback/stangnant market may be likely, but a sudden sustained drop in prices in most areas of Australia appears to be way off the mark at this stage.

Rant over

 

[Harris]

Howdy all,

- The US construction activity in 06 was massive; enough to house almost 50% of the then population of the US.

I dont think it can be right..! In other words, you mean that 50 million new dwellings were built in US in 2006..? (with the ratio of about 3 people per house with a total population of over 300 mill)

This is also due to the massive difference in demographic population diversity in the US, where close to 80% of the population live in towns rather than cities.

I am sure that US is one of the most urbanised countries in the world ... though behind Australia. It must be close to 80% living in cities rather than the other way around.

Harris

 

[Mofra]

I dont think it can be right..! In other words, you mean that 50 million new dwellings were built in US in 2006..? (with the ratio of about 3 people per house with a total population of over 300 mill)

The figures include all developments which could be classed as a residence, so I can only assume shared accomodation is included (the US also has agrowing grey army). There are videos available of entire suburbs with almost every house having a sale sign.

I am sure that US is one of the most urbanised countries in the world ... though behind Australia. It must be close to 80% living in cities rather than the other way around.

The US does not have the same large uninhabited areas as Australia; I was as surprised as you when I read this. I would assume their "town" cutoff figures would be relatively high/

 

[alexlee]

In many ways American 'towns' are like our suburbs. e.g. a 'town' can have tens of thousands of people and be less than an hour's drive from a major city centre (e.g. Boston). In Australian cities that would just be considered a suburb. (e.g. you don't exactly consider Blacktown a separate 'town').

This is partly because of how their tax system works. I remember my uncle saying his 'town' (about an hours drive from Boston) voted NOT to become a 'city' because it would involve higher taxes. Something about 'cities' being taxed higher than 'towns' because of how much federal funding they would get, etc.
Alex

 

[alexlee]

- Subprime resets are due to peak in October 07. The is a steady decline in rest activity after this.

True, but as we know it takes time for increased payments to work through the system. Higher payments force people to spend less. This leads to slower economic activity, and therefore layoffs. That's when people really get into trouble. This whole process may take months, if not longer.

- Ease of credit: The US market is much more mature, with a wider variety of products on the markets. 40 & 50 year mortgages are difficult to find in Australia, they are much more common in the US. The subprime/Low Doc to impared credit history sector in the US is massive; in Australia, non-existant

True, but the size of the subprime market is partly because of the reliance on the FICO score. Many people are forced to take subprime loans, regardless of steady employment, for example, that would qualify a person for 'full doc' loans in Oz, because of issues in the past about their credit. I don't know the full details but apparently even how you use your credit card can affect your FICO score.

- Securitisation of mortgage debt. The US securitisation industry is much larger, yet a greater "blanket approach" appears to be applied. The bond gradings are completed on an order of priority of default liability basis rather than quality of securitised debt basis. In addition, MI is not a non-negotiable for many US lenders.

That's exactly the problem with subprime, no? The bond ratings ended up to be a lot more optimistic than reality. The order of priority is just from slicing and dicing the loans. The problem is that the supposedly 'top' safe layers were rated AAA by agencies, but in reality they ended up to be a lot riskier than that. Just because other tranches of the CDO get killed first doesn't mean yours is totally safe. Not to mention the problem is the mark to market on such securities for hedge funds and banks. Funds will still take losses if the CDO tranche they thought was AAA (and paid over face value) is in reality just a single A (which might sell for 90 in the dollar). They're still going to have to take a 10% loss on it even if nothing defaults. Add in leverage used by hedge funds and you're still talking big losses.

I personally don't expect a free fall market (not nationally, anyway) either in Oz or in the US. However, I think a few years of negative growth is likely. For example, if you have prices falling 5% a year for 4 years, that's over 20% from top to bottom. Add to that the 'expected' gains that didn't happen: i.e. people buy property expecting to make gains of, say, 7%. Instead of making 30% over 4 years they lose 20%.

I'm not expecting a rebound soon, but am planning to buy during the next couple of years.
Alex

 

[Twitch]

Alex, are you just talking of the Sydney market when you say it is likely to slide backwards for another 4 years? It seems inconceivable to me, let alone likely, that Melbourne is going to fall 5% a year for the next 4 years. I can't see any cities going backwards by that amount to be honest, and I can see Adel, Bris, Mel, Canberra contining their rise.

 

[alexlee]

Alex, are you just talking of the Sydney market when you say it is likely to slide backwards for another 4 years? It seems inconceivable to me, let alone likely, that Melbourne is going to fall 5% a year for the next 4 years. I can't see any cities going backwards by that amount to be honest, and I can see Adel, Bris, Mel, Canberra contining their rise.

I think a US recession is a likely outcome of the subprime mess. This will trigger issues in China. At that point, everything else falls. When liquidity falls EVERY market will suffer. If you also have a recession......... I'm just looking at the early 90s median prices as an indication.

In that instance, Perth might cop the worst of it because it's had such a huge run-up from the mining boom. Sydney will also slide because it's still the most over-priced. The other cities may not suffer as much but I don't see strongly rising prices in the next couple of years.

Having said that, I certainly haven't expected Brisbane to perform as strongly as it has for the last year or two.

However, I think it's a mistake to think housing prices won't go down in a recession + liquidity pullback. We may not have a 'crash' in terms of prices cratering by 20% a year or something, but you can certainly have a flat to falling market. Given most people assume growth of 7-10%, that's enough to drive a lot of them away from the market.

On the other hand, I think rents will keep going strong.
Alex

 

[VYBerlinaV8]

On the other hand, I think rents will keep going strong.
Alex

I agree, and this one of the reasons I have been buying yield oriented properties.

In time, I will switch to growth oriented.

 

[TJamesX]

While I agree with the title of the thread... I don't agree with the contents

The US won't have a price crash either (although it may stagnate for a long time).

The basis for the worldwide boom in assets has been debt and debt growth... sure real incomes have supported it for a while, but we are way beyond that now... and just as much in Aus than in the US.

There are real reasons why we may have better price support (due to the lack of actually building new housing)... but the long term effects will be very real to the economy

The latest trend (in the US and Aus) seems to be rapidly increasing credit card debt as households service expenses and lifestyle from short term debt rather than income... ie keep paying mortgage payments at all cost... and don't change lifestyle

http://biz.yahoo.com/ibd/070824/general.html?.v=1

http://www.debtdeflation.com/blogs/wp-content/uploads/2007/09/KeenDebtWatchNo11September2007.pdf

Deserves a serious read for anyone who thinks we are totally different to the US

TJ

 

[steveadl]

I think a US recession is a likely outcome of the subprime mess. This will trigger issues in China. At that point, everything else falls. When liquidity falls EVERY market will suffer. If you also have a recession......... I'm just looking at the early 90s median prices as an indication.

Alex, can I ask why if the US enters recession, China will have issues? Is this because a lot of the demand for products produced by China is coming from the US?

 

[alexlee]

Alex, can I ask why if the US enters recession, China will have issues? Is this because a lot of the demand for products produced by China is coming from the US?

Yes. I also think there is a social element to China's problems. It needs growth in export markets to support jobs growth. If job growth slows down (it doesn't have to fall to zero: I remember reading some Chinese govt minister saying they need 7% growth or something just to find jobs for all the peasants streaming into the cities) then you're going to see a lot of civil unrest.

I see a lot of similarities between views of China and Japan in the 80s. Everyone thought Japan was going to take over, but ignored all the structural problems that it had. I also think a fall in economic growth will reveal all the bad loans, corruption and useless projects that the local party cadres have been building. I also don't think China will be able to respond to something like that with the decisiveness of the US during the S&L crisis. They'll react more like Japan in the early 90s: protect the status quo, dole out some government money, and generally avoid the social unrest that in a democratic country would mean a change in government, but in China would mean life and death for the Communist party.

I don't believe the subprime thing is done. Resets will peak in the next month or two. Give it a few months for increased payments to affect consumer spending, especially for the all-important Christmas season...... I just don't believe flat or negative housing prices won't affect the economy via consumer spending.

Long term, though, I still believe in Australia, a country with a stable democratic government, resources, rule of law, independent courts and generally a pretty good financial system. In a way I'm reminding myself of the worst case so that if it hits the fan, I'm not panicking but slowly buying quality assets. I took a trip to Blacktown last weekend, and see a LOT of potential.
Alex

 

[steveadl]

Thanks for that Alex. Quick follow up question - how would you see India fairing if this did happen? Since they have started their economic expansion relatively later than China, and have still a while to go I would have thought, unlike China which has been powering on for decades?

 

[alexlee]

Thanks for that Alex. Quick follow up question - how would you see India fairing if this did happen? Since they have started their economic expansion relatively later than China, and have still a while to go I would have thought, unlike China which has been powering on for decades?

I don't think China has been powering on for decades. It had its share of recessions, most recently in the late 90s during the Asian crisis. The ironic thing is the Yuan peg which frustrates Americans so much was created during the Asian crisis to prevent the Yuan from FALLING, not rising.

I don't know as much about India as I do China, but I also question their structural weaknesses. The high-tech services for which India is famous is actually not as good for developing countries as China's manufacturing. Simply because high-end services needs more educated / skilled people so it doesn't develop into as big a middle class as a manufacturing based boom. (You can teach an unskilled person how to work in a factory more easily than you can train an unskilled person to write software code or work at a call centre). When you look at the US after the war, it was manufacturing that gave rise to the middle class.

I don't think any country would escape unscathed in the event of a US recession. An interesting question would be what happens to oil prices, and the wealth of the middle east and South American countries (not to mention Russia) as a result. Of course oil has more geo-political risk (in that prices would rise for political reasons even if the US was in recession).
Alex