SOMETIMES I feel like a voice in the wilderness, trying to be heard above the rising hysteria about house prices to inject some sanity into an increasingly irrational debate.
It’s not that no one agrees with me.
Most of Australia’s leading property analysts and, notably, Reserve Bank governor Glenn Stevens, agree we don’t have a price bubble, nor an affordability crisis, nor exceptional price levels by world standards.
It’s just that media tends to favour the views of those who cry “crisis”.
It’s ironic this all comes after a year in which Australia had one of its slowest years for price growth in the past decade, around 3 per cent, after adjustment for inflation.
It’s also odd to claim our homes are unaffordable when we have, still, one of the highest home ownership rates on the planet.
As is so often the case with media, it’s the noisy minority who attract the most attention.
Against that background, it was refreshing to read a report on house prices from Brisbane-based analyst Michael Matusik. One of Australia’s smartest and most experienced property researchers, he is seldom read in our newspapers. Matusik has been tracking real estate longer than I have, which means at least 30 years, and while I don’t agree with everything he says his views deserve respect, and a wide audience.
Matusik, like me, is increasingly asked whether Australia’s residential markets will follow parts of the US and Europe where values fell sharply.
The question reflects simplistic thinking, the notion that our values must fall because it happened elsewhere, without considering the reasons prices fell in those places.
Matusik presents seven reasons why he believes “we will not see major falls in homes values across Australia any time soon”. The first is population growth, which continues to be strong, albeit a little slower than before.
“Our domestic population is ageing, but our migrant intake is largely in the 20s to late 30s cohort, which means increasing household formation and greater demand for dwellings down the line,” Matusik says.
A key reason which differentiates Australia — from the US in particular — is our tight lending practices. Australia has full-recourse loans, which means lenders have the right to take borrowers’ assets if repayment obligations aren’t met.
“Many overseas markets which experienced a housing crash have non-recourse loans which essentially allow borrowers to walk away from debt if things get too tough,” Matusik says.
This factor was the single biggest reason why prices crashed in the US, where reckless lending practices and poor regulation created the recipe for a bust. Australians have high equity in property and a conservative debt position. Mortgage broker AFG says the present loan-to-value ratios average 53 per cent, much lower than the long-term average of 65 per cent.
Overall, our debt to overall assets ratio is just 19 per cent.
Household balance sheets are being strengthened by savings, with households currently saving 10 per cent of disposable income, which amounted to $74 billion last year. “This improved state of our personal finances further reduces the risk of house prices collapsing,” Matusik says.
He says that not every market segment or dwelling type is under-supplied in Australia, but generally the bottom third of the market has a shortage, which “helps place a floorboard under property values”.
Price levels are also underpinned by economic growth and low unemployment, whereas housing markets usually crash in concert with large falls in employment.
“As long as our unemployment rate stays below 8 per cent (it’s currently around 5 per cent and steady), then falls in property values are unlikely,” he says.
The US market was over-supplied, the economy struggling and unemployment rising when their prices collapsed.
Finally, Matusik points to a low rate of mortgage defaults.
Just 1.37 per cent of home loans across Australia are 30 days in arrears and only 0.54 per cent are three months behind. This low rate of mortgage defaults is inconsistent with the notion that our homes are too costly.
Terry Ryder is the founder of hotspotting.com.au
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