Housing heads for a soft landing
Ross Gittins
http://business.smh.com.au/business/housing-heads-for-a-soft-landing-20081125-6hf0.html
One of the odd things about the economy is we tend to explain whatever happens in purely local terms - Howard did this, Rudd did that, this caused that - but then we look up and discover what's happening here is remarkably similar to what's happening in the other English-speaking countries.
That's often the case in housing. Over the past 10 years house prices have roughly doubled in real terms, not just in Australia but also in New Zealand and Britain. And in the United States prices have risen by about half.
But here's a disturbing thought. Across the US, house prices have fallen 20 per cent since their peak in 2006. They're down 15 per in Britain. In Australia they're down about 3 per cent in the past six months. So does that mean they've got a lot further to fall?
A few economists - some more respected than others - have predicted that house prices will fall 30 per cent or more.
Were that to happen, it would be good news for first-home buyers but bad news for established home owners and disastrous for anyone obliged to sell up. If it happened over just a year or two it would scare the pants off most of us, prompting people to clamp their purses shut.
Fortunately, one of the sharpest of our business economists, Saul Eslake, chief economist of the ANZ Bank, is confident house prices won't fall very far, and he has some good arguments.
His main point is that, unlike the US and Britain, Australia doesn't have an excess supply of housing.
Every year a country with a growing population needs to build more houses. Young people leave home and form new households and immigrating families need somewhere to live.
But the Americans were building more new homes than required to meet this "underlying demand", while the Brits have had a lot of their recent immigrants from Eastern Europe - the so-called Polish plumbers - pack up and go home. When the supply of homes exceeds the demand for them, it's not surprising to see prices fall.
By contrast, in recent years in Australia we've been building fewer houses than needed to keep up with the formation of new households. That's partly because we've had such high levels of immigration.
It's because we've been getting more new households than there are units and houses to accommodate them that rents have been rising so strongly.
Last year people were trying to tell us rents were rising because landlords were passing on higher interest rates.
I never believed that. Rents rise when landlords can get away with raising them. If I'm right, rents will continue rising, even though interest rates have fallen sharply in the past two months and have further to fall.
But back to house prices. The Americans have had a lot of foreclosures arising from their subprime loans. That means they've had a lot of homes for sale at any price, so it's not surprising to see prices falling. Australia, so far, has had few mortgage defaults and we're not likely to get all that many.
The Americans have "non-recourse" home loans, which means if you're sold up by the bank but the sale price doesn't cover your mortgage, the bank can't come after you for the remainder.
This gives people with "negative equity" in their homes - the market value has fallen below the amount you owe - a great temptation to walk away from their home.
In Australia, if you give up your home simply because you have negative equity, you're out on the street with nothing and still in debt to the bank.
That's why most people's reaction to negative equity would be to grin and bear it. There's nothing to be gained by giving up, so you put your head down and do all you can to pay the mortgage, hoping property prices will go back up.
Of course, to keep paying your mortgage you do need to keep your job. That's why the main thing this prediction of only a small fall in house prices turns on is that unemployment, while rising from its present lows, doesn't get too high.
Not all of us stand the same chance of losing our jobs. In general, the less skilled you are the greater the risk. So it's likely that, unless unemployment gets very high, most people who lose their jobs wouldn't have been able to afford to buy a home in the first place.
When you're sold up by your bank or non-bank lender, all they care about is a quick sale. They'll sell your place "at any price". But most home owners, unless they're in financial distress, aren't prepared to sell at any price. If they can't get what they think their home is worth, most people withdraw it from sale. That's why, although prices did fall a bit in the recession of the early 1990s, Australia does not have a history of big falls in house prices. In the past, the main way we've adjusted to the collapse of a housing boom is for house prices to mark time for several years while wages - and the prices of ordinary goods and services - catch up.
However, Eslake warns there's likely to be three exceptions to this general rule. House prices are more likely to fall in areas where many loans have come from non-bank lenders (who are much quicker to foreclose than banks) and have gone to people who are poor credit risks with little or no deposit. That's the story of western Sydney.
Paradoxically, the prices of premium properties in the most expensive suburbs are more likely to fall because they're heavily affected by the varying fortunes of business high-flyers.
And there could be price falls in areas where negatively geared property investors have a large share of the market as investors give up hope of capital gains and become unwilling or unable to continue renting at a loss.
Ross Gittins
http://business.smh.com.au/business/housing-heads-for-a-soft-landing-20081125-6hf0.html
One of the odd things about the economy is we tend to explain whatever happens in purely local terms - Howard did this, Rudd did that, this caused that - but then we look up and discover what's happening here is remarkably similar to what's happening in the other English-speaking countries.
That's often the case in housing. Over the past 10 years house prices have roughly doubled in real terms, not just in Australia but also in New Zealand and Britain. And in the United States prices have risen by about half.
But here's a disturbing thought. Across the US, house prices have fallen 20 per cent since their peak in 2006. They're down 15 per in Britain. In Australia they're down about 3 per cent in the past six months. So does that mean they've got a lot further to fall?
A few economists - some more respected than others - have predicted that house prices will fall 30 per cent or more.
Were that to happen, it would be good news for first-home buyers but bad news for established home owners and disastrous for anyone obliged to sell up. If it happened over just a year or two it would scare the pants off most of us, prompting people to clamp their purses shut.
Fortunately, one of the sharpest of our business economists, Saul Eslake, chief economist of the ANZ Bank, is confident house prices won't fall very far, and he has some good arguments.
His main point is that, unlike the US and Britain, Australia doesn't have an excess supply of housing.
Every year a country with a growing population needs to build more houses. Young people leave home and form new households and immigrating families need somewhere to live.
But the Americans were building more new homes than required to meet this "underlying demand", while the Brits have had a lot of their recent immigrants from Eastern Europe - the so-called Polish plumbers - pack up and go home. When the supply of homes exceeds the demand for them, it's not surprising to see prices fall.
By contrast, in recent years in Australia we've been building fewer houses than needed to keep up with the formation of new households. That's partly because we've had such high levels of immigration.
It's because we've been getting more new households than there are units and houses to accommodate them that rents have been rising so strongly.
Last year people were trying to tell us rents were rising because landlords were passing on higher interest rates.
I never believed that. Rents rise when landlords can get away with raising them. If I'm right, rents will continue rising, even though interest rates have fallen sharply in the past two months and have further to fall.
But back to house prices. The Americans have had a lot of foreclosures arising from their subprime loans. That means they've had a lot of homes for sale at any price, so it's not surprising to see prices falling. Australia, so far, has had few mortgage defaults and we're not likely to get all that many.
The Americans have "non-recourse" home loans, which means if you're sold up by the bank but the sale price doesn't cover your mortgage, the bank can't come after you for the remainder.
This gives people with "negative equity" in their homes - the market value has fallen below the amount you owe - a great temptation to walk away from their home.
In Australia, if you give up your home simply because you have negative equity, you're out on the street with nothing and still in debt to the bank.
That's why most people's reaction to negative equity would be to grin and bear it. There's nothing to be gained by giving up, so you put your head down and do all you can to pay the mortgage, hoping property prices will go back up.
Of course, to keep paying your mortgage you do need to keep your job. That's why the main thing this prediction of only a small fall in house prices turns on is that unemployment, while rising from its present lows, doesn't get too high.
Not all of us stand the same chance of losing our jobs. In general, the less skilled you are the greater the risk. So it's likely that, unless unemployment gets very high, most people who lose their jobs wouldn't have been able to afford to buy a home in the first place.
When you're sold up by your bank or non-bank lender, all they care about is a quick sale. They'll sell your place "at any price". But most home owners, unless they're in financial distress, aren't prepared to sell at any price. If they can't get what they think their home is worth, most people withdraw it from sale. That's why, although prices did fall a bit in the recession of the early 1990s, Australia does not have a history of big falls in house prices. In the past, the main way we've adjusted to the collapse of a housing boom is for house prices to mark time for several years while wages - and the prices of ordinary goods and services - catch up.
However, Eslake warns there's likely to be three exceptions to this general rule. House prices are more likely to fall in areas where many loans have come from non-bank lenders (who are much quicker to foreclose than banks) and have gone to people who are poor credit risks with little or no deposit. That's the story of western Sydney.
Paradoxically, the prices of premium properties in the most expensive suburbs are more likely to fall because they're heavily affected by the varying fortunes of business high-flyers.
And there could be price falls in areas where negatively geared property investors have a large share of the market as investors give up hope of capital gains and become unwilling or unable to continue renting at a loss.
