Business Spectator - Analysis of Australian Property Market - Part 1

http://www.businessspectator.com.au/bs.nsf/Article/The-mercurial-Shadow-LP-blogs-pd20090430-RL9CN

An analysis of the Australian Property Market

Part 1: Why it really is ‘different here’

With both Residex and RPData statistics currently indicating that Australian house prices are on the rise again (or at least that they have stabilised, after a total peak to trough fall of only 3%), now is a good time to review the state of the property market in Australia, and especially the important differences between Australia and some other countries that have experienced a more significant decline in property values.

The doom & gloom crowd frequently state that we are 'just like the USA' or 'just like Japan' or ‘just like the UK’ etc. They do this in order to convince each other that house prices in Australia must inevitably follow the same path. However what they fail to recognise are the many significant points of difference between the housing markets in each country.

First of all, consider population growth. The Australian population is currently growing at 1.84% per annum, while the UK growth rate is only 0.4% per annum, less than a quarter of our growth rate. The USA growth rate is only 0.9% (half of our growth rate), and finally the growth rate in Japan is negative. The Japanese population is actually in decline. Japan is a great example of a country where supply of housing really does exceed demand. Since Japan's population is shrinking, over time this must inevitably lead to an oversupply of housing.

Australia’s population expanded by a record amount last year, due to an increased birth rate and an influx of migrants. The population grew by 390,000 to 21.5 million. This 1.84 percent growth rate was the highest since 1970. Sixty percent of the increase was due to migration.

Even though the Rudd government has recently indicated that overseas migration will be cut by 18,500 people, this means that Australia’s growth rate will still be around 1.7%, which is still one of the highest growth rates in the developed world (in fact, even higher than many developing countries).

Another important factor is the quality of our overseas migrants. Australia has always had quite a restrictive policy of encouraging 'skilled' migrants, while the UK has instead been bringing in a very large share of poorly educated and low paid migrants from Eastern Europe, who tend to send a large portion of their wages back home to family instead of spending it in the UK economy, unlike our own skilled overseas migrants who contribute towards the Australian economy to a much greater extent and can better afford to buy/rent houses. Many of those UK migrants simply packed their bags and went home when the UK economy started to weaken.

In addition, Australia has never had the oversupply of housing that exists in the USA. The US built far more new houses than required to meet their underlying demand, whereas in Australia the reverse occurred. We do not have enough dwellings to meet underlying demand. Australia does not have the massive oversupply of foreclosed dwellings that is the primary cause of downward pressure on US house prices. Rental vacancy rates in the USA are running at well over 10%, compared to less than 2% across most of Australia.

The recent Australian property boom, which ended in 2003, was characterised primarily by the exchange of existing stock, rather than the development of new stock. In other words, it was not a construction-led boom (unlike the recent boom in the USA). This means we now have a shortage of stock in many high-demand locations as we move into the next growth cycle during a period of record population growth, record low vacancy rates, and rising rents.

Another critical factor is interest rates. The UK and US banks have generally retained a large slice of the official rate cuts for themselves, rather than passing it on to the consumer as happened in Australia. Furthermore, the UK and USA only started slashing official rates after their house prices were falling sharply and their economies were in serious trouble. The RBA on the other hand has been much more proactive, cutting rates well in advance, ensuring that the rate cuts are passed on, and since they were starting from a higher official rate position to begin with, they have plenty more ammo left in the rate cut gun as well.

The chart below compares the reduction in official rates and mortgage rates across the UK, USA and Australia. It is clear that despite our official rate having fallen by the least amount (meaning we have much more scope for further official cuts), our fixed and variable mortgage rates have fallen by the greatest amount. The key difference here is that a much greater share of the cuts has been passed on to the borrower in Australia.

Shadow_PolicyvsMortgageRates.jpg


The UK and US economic problems began well in advance of their housing market downturn, and their banks had much more significant exposures to the sub-prime assets that triggered the current crisis. Many large UK and US lenders are heavily reliant on securitisation markets for funding (much more so than Australian banks). When those markets closed, these lenders no longer had access to funds. The Northern Rock collapse removed a very significant UK housing finance provider (estimate 10% mortgage market share, 110-120% LVRs common). After the Northern Rock collapse, credit was severely tightened by all UK lenders, maximum LVRs were slashed, and finance was no longer made available to 'higher-risk' borrowers.

Lending standards in Australia have always been much stricter than in the UK and USA. Non-conforming loans (our equivalent to sub-prime) represent only 1% of all mortgages in Australia, compared to 15% in the USA. Low-doc and no-doc loans (our equivalent to Alt-A) represent only 7% of all mortgages in Australia, compared to 20% in the USA.

Non-conforming loans in Australia (like most sub-prime loans in the USA) generally have the following characteristics...

1. No deposit required (i.e. loans for 100%+ of the property value).
2. No proof or statement of income required.
3. No LMI (Lenders Mortgage Insurance) payable.
4. In some cases, the loan begins with a very low ‘teaser rate’ that jumps substantially later.

However with regular low-doc and no-doc loans, even though the borrower is not required to prove income levels, they are required to contribute a large deposit, and possibly pay LMI. This is a key difference between low-doc /no-doc loans and sub-prime/non-conforming loans - with low-doc/no-doc loans, the borrower already has a large equity buffer in place.

Furthermore, the RBA did not make the US mistake of keeping interest rates too low for too long in the first half of this decade. This is why far fewer Australians were enticed into taking out mortgages that they would never be able to service when rates returned to normal levels. Also, mortgage lending in the USA is frequently ‘non-recourse’, meaning that in the event of default, the lender may repossess only the property against which the mortgage is secured, but may not make claim against other assets belonging to the defaulting borrower. As a result, homeowners in the USA are more likely to hand back the keys and walk away, which further exacerbates their oversupply of housing. In the end, these significant differences in lending have meant that default rates on Australian loans have remained vastly lower than on US loans.

It is also important to consider the government debt position. Australia entered this global downturn from a much stronger position since we had a strong budget surplus and no public debt. We also have the Future Fund and the Infrastructure Fund, which together still contain around $80 billion that can be made available for further stimulus. On the other hand, governments in the UK and USA were saddled with mountains of debt to begin with.

Additionally, the UK (and especially London) economy is very much based around the financial services sector and is therefore more severely impacted by the current global financial crisis. The UK and US economies are in a much worse position than the Australian economy.

And finally, as the chart below demonstrates, the recent UK property boom was considerably larger than ours in the first place. In fact, the IMF has acknowledged that there is no evidence of any significant overvaluation of Australian house prices beyond what would result from the fundamental balance of supply and demand.

GlobalBooms.jpg


Source: http://www.globalpropertyguide.com/

Link to part 2: http://www.somersoft.com/forums/showthread.php?t=52061
Link to part 3: http://www.somersoft.com/forums/showthread.php?t=52062
 
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I was given the link to your post this morning not a bad read,maybe Rupert Murdoch will read it and offer you a job..willair..
 
And finally, as the chart below demonstrates, the recent UK property boom was considerably larger than ours in the first place. In fact, the IMF has acknowledged that there is no evidence of any significant overvaluation of Australian house prices beyond what would result from the fundamental balance of supply and demand.

i've been saying this for 10 years.

kudos for the series of threads Shadow. It's nice to have everything laid out to evaluate for myself.
 
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