Australia’s housing bubble is one of the largest in the world.
The bad news – for Australians – is that it looks as though it’s on the verge of popping.
That could spell disaster for the Australian economy. One pundit reckons that prices could fall by as much as 60%.
Of course, this wealth effect is in many ways illusory. For a start, upgrading to another, larger home also becomes pricier. And because rising house prices are just another form of inflation, it means that incomes, and cash savings, are worth less than before.
But you don’t notice the downside until the housing bubble bursts. And your average politician doesn’t think that far ahead. So it’s no surprise that Australia’s house price bubble was initially inflated by the government, starting in the late 1980s.
The 1987 stock market crash had hurt confidence in the economy and also the Australian property market. So in 1988, to perk up home prices, the Hawke government brought back a scheme that gave grants to first-time buyers if they loaded up on home loan debt.
Australians began piling into property. Over the next 12 years, mortgage rates halved from 14% to 7%. But Aussie households took on so much debt during that time that their interest payments doubled as a proportion of their disposable incomes (if their debt levels had stayed static, the proportion should have halved, which shows you how crazy things became).
After the dotcom bubble bust at the turn of the millennium, Australian politicians were worried about another recession. So what did they do? In 2001, the first-time buyer grant was doubled to give the domestic property market another boost. But it didn’t need it.
Lending secured on property as a percentage of GDP was already soaring: it had trebled to more than 40% since 1988. The government handing more money to property buyers made matters worse. Add in overly-low loan costs in the noughties, which spurred even higher borrowing, and Australia was soon inflating a huge housing bubble.
In nominal, ie actual price, terms, Australian house prices have soared about six-fold in the last 25 years. That’s extravagant even compared with the UK, where values rose just over four-fold between 1986 and 2007. Or the US, where the increase between 1986 and 2006 was about 3.5 times.
Australian mortgage debt has soared to more than 85% of GDP. The debt now equates to 130% of household income: five times the 1988 level.
That level of growth in both mortgage debt and house prices simply couldn’t continue. And home values have now topped out. Yet in the first 11 months of 2011 they only dropped 3.7%, says market watcher RP Data.
Whenever prices hold up in one market but fall elsewhere, there’s always talk that “this time it’s different”. Australia is no exception.
Several experts reckon the country’s property is still a good bet, as lower inflation and interest costs mean buyers can afford to pay higher prices than before.
Mmm… I’m not so sure about that. Here’s why Aussie property prices could be about to plunge.
This would be bad news for Australia. It’s one of the main providers of raw materials. It has the world’s largest known supplies of bauxite, iron ore, lead, zinc, silver, uranium, industrial diamonds and mineral sands. When the global economy is booming, Australia cashes in.
But the reverse is also true.
“The average Aussie may think the massive demand for Australia’s raw materials will bail the country out of any economic hole into which it risks sinking”, says Ron Fraser in The Trumpet. “That may appear so, as long as… strength in demand continues.” But the country’s problem is that all “its economic eggs [are] placed in one mineral resources basket, being marketed to one major customer – China”.
We also fear the Chinese economy will slow down fast.
But in short, if China’s demand for raw materials drops off, it could crush large parts of Australia’s economy. That will mean lower incomes, more job losses – and much lower demand for houses. Meanwhile, many over-indebted Australian households could become forced sellers.
Leading US real estate analyst Jordan Wirsz predicts that a flood of properties will begin to hit the market in Australia from next year as investors scramble to bail out. In fact, he reckons this could lead to the biggest property crash the country has ever seen.
“Right now is not a time to be buying real estate in Australia,” he says. “Residential prices are likely to fall up to 60%, possibly even more, within five years.”
What does this mean for you? A country’s – or region’s – currency is a useful barometer of investor confidence: just look at the eurozone.
Right now, the Aussie dollar (AUD) is high against the US dollar as AUD buyers hope the looming China slowdown won’t be too bad. But as markets begin to ‘price in’ what less Chinese growth really means, this AUD strength is likely to reverse. A housing market crash would drive it down much more.
David Stevenson
Associate Editor, Money Morning (UK)
Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (UK)
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January 25th, 2012 at 2:10 pm
http://www.heraldsun.com.au/news/more-news/melbourne-house-prices-bounce-back-up/story-fn7x8me2-1226249803469
This article from last Sunday’s Herald Sun claims Melbournes property prices are on the rise again. The interesting feature are the comments, the vast majority of which are damming of the Real Estate Industry’s credibility.
January 25th, 2012 at 6:24 pm
Most of the comments in the Herald Sun article are ill informed.
If you go into a car dealership to buy a new car today, the salesman will tell you there is a price rise coming through soon and it would be wise to buy before then. He works for the dealership and his job is to make sales now.
The real estate agent works for the seller. Not much difference, it’s just that we think the agent is working for us when we buy and we feel ripped off if the value goes down – not his fault.
I’m not sticking up for agents as they will lie and cheat as much as any salesman (maybe not as much as a banker, politician, stockbroker or lawyer). It’s just that 70% of the population don’t understand the role of the agent and believe him if he tells us the house next door sold for X so this is worth X. We might not have checked whether the house next door was bigger and better but we make it the agents fault when we find out.
Commenting on short term movements in property values is overdone – property is, always has been and always will be, a long term investment.
I wont be selling any of my properties this year, next year or the year after. Today’s value is unimportant to me, what is important is the return I get (which is currently very suitable thanks to the “rent, don’t buy” brigade – and likely to continue to increase).
January 25th, 2012 at 6:32 pm
For anyone who cares, I also have a small portfolio of shares (which is why I’m on this site). I have had some wins and some losses and currently about 10% down but I’m getting better and learning more about share trading every day.
I no longer trust a share broker (I was 20% down before I sacked him) and take full responsibility for all my decisions.
January 25th, 2012 at 7:05 pm
For anyone who even 1/2 believes what they read in the mainstream media, stop to think for 30 seconds what the newspaper industries largest source of income is… classified advertising. And what is the biggest section in classifieds? Real Estate. Fairfax and News run dedicated R/E websites the business is such a money spinner for them.
If R/E agents want the media to run spruiker stories to try and BS the public and perceived housing demand, believe me, they have no moral dilemma about doing it.
January 26th, 2012 at 6:32 am
“Residential prices are likely to fall up to 60%, possibly even more, within five years.”
I can’t wait that long.
It was difficult to see the link with the AUD and housimg. But ill put my two cents in.
To me, house prices are overpriced. If the AUD falls in the future or if you think it has peaked, wouldn’t a foreign investor start selling up and maximise their return in foreign currency…now before its to late?
Has that begin? Is there any anecdotal evidence out there?
I see on today tonight that foreign expats are leaving Aus. But that’s not what I mean.
January 26th, 2012 at 8:40 am
A huge problem in Australian society today is that the media and the blogosphere are dominated by the one-percent. They control everything, the news we read and watch, the “truth” that they drip fed to the unthinking masses, to the 99 percent.
It was recently revealed that the real estate industry actually pays spruikers and shills to post positive spin on forums and blogs (yes even forums like this one) to talk up the market, to post as if they’re just one of the 99 percent, a normal person, when in fact they are part of the corrupt 1% feeding us their lies and propaganda.
Read the blog below and watch the included video for evidence:
http://www.differenthere.com/2011/08/on-internet-nobody-knows-youre-dog-or.html
On the Internet, nobody knows you’re a dog, or a paid property spruiker
The public needs to open their eyes. To stop believing what they you read and watch in the mainstream press. The problem is the 99 percent don’t read forums like this. They don’t find out the truth. So pass this on, pass the message on to everyone. Tell your friends what’s happening. Make them read this blog. Make then watch the video. Above all, remember, the 99 percent are fed lies by the 1 percent and this is a huge obstacle we must overcome. But in time, the truth must come out. It always does.
January 26th, 2012 at 10:03 am
For housing prices to fall a several things should happen. It is either a new cheaper priced supply (not possible with a lack of finance, planning system and governments of all level hooked on a development revenues), or owners of existing real estate taking a hit to their holdings.
For the latter to occur, there should be a serious calamity in the employment market, a hugh rise in servicing costs (unlikely as interest rates are down), a hugh drop in rents (unlikely, at least in the major city).
Otherwise, the prices would just stagnate or slowly fall, in particular because of the profit taking from those bought before 2003-2004.
January 26th, 2012 at 10:54 am
I think you are right Greg @ 5.
The two main factors that will drive the purchase of property are employment and affordability. Employment is likely to fall slightly but I doubt this will have much of an effect on the property market – it would take a substantial spike in unemployment (say from 5.8% to 7.5%) to make a difference and I think that is unlikely in the short to medium term.
With regards to affordability, if people feel they have a secure income and their purchase costs are not much above their renting costs, they may venture back into the market.
However, I think it is likely that we will see at least 5 years or so of annual growth of between 5% and -5% in residential property, probably resulting in values being about the same in 2017 as they are today. I can’t see anything on the horizon that will send property prices down by 30, 40 or 60% in one year. On the other hand, I expect rents to continue to creep up – providing better returns for those already in the market but not sufficient to entice more investors. After all, it is investors, first homebuyers and migration which drives the property market – everyone else is just moving from A to B.
Claims of 60% drops by these American “experts” are just an attempt to grab headlines and sell something else. Conversely, the Real Estate Institutes around Australia will always talk up property. Everyone has an angle.
January 26th, 2012 at 11:32 am
Jordan Wirsz is not a property expert, here or anywhere else, he just claims to be. Many people who listened to him have lost their money. Google him and read it for yourself.
He is young, inexperienced, and he sells books, and to sell books you need to make controversial comments to get media exposure. The media live on headlines so someone predicting large house price increases or armegeddon are their staple diet. Sensible people in the middle get no exposure because they are not controversial. Being right is not what the media want – they want headlines.
Is residential property over priced – yes probably, but it is likely to be about 10% to 20% overpriced on a long term basis. Whilst we are in a mining boom you would expect it to be overpriced by about 10%, so potential falls are about 10% on an across Australia basis, although different areas will respond according to their supply/demand ratios – we are after all in a mining boom, and despite claims to the contrary it won’t end tomorrow. It will end at some point, so you do need to make plans for that. Guessing when the end will come is your problem.
Brisbane and Perth have seen falls of close to 10% already. Gold and Sunshine Coasts much more due to the tourism recession caused by our high dollar. Melbourne is yet to experience substantial falls but it will happen, Sydney probably won’t see a substantial fall at all, same with Canberra – maybe 5% or so. Hardly enough to get excited about if you already hold property. If you are a buyer, then make sure you get a good deal and especially make sure you can ride out any interest rate increases that may come later. Pay as much as you can off your loan when you have the money to do that, and limit unnecessary expenditure.
Sites like this, demographia, Steve Keen, and others who have consistently predicted large falls of 40% or more have now reached a point where they either moderate their predictions to a more likely scenario, or become increasingly desperate to salvage their credibility by making even more outrageous claims. Perhaps they hope to talk down the market.
You can make up your own mind on what you believe is their chosen course.
January 26th, 2012 at 9:41 pm
“The bad news – for Australians – is that it looks as though it’s on the verge of popping”
I wonder if MMA ever heard the story about the boy who cried Wolf?
Cause they’ve been milking this poor horse for over two years now…
January 26th, 2012 at 9:58 pm
“The bad news – for Australians – is that it looks as though it’s on the verge of popping.”
Yes it will be a painful adjustment but falling house prices is good news. The fact that they rose so high was the bad news.
January 31st, 2012 at 7:28 pm
All of the above comments present nothing but arbitrary and unjustified guesses about long term property values and future directions. The CORRECT and only way to value property, shares or any investment is YIELD, YIELD and YIELD. It is common knowledge that rents are currently at or below 5% GROSS yield. i.e they are still at historical lows. The long term average yield is about 6.5%. That makes property overvalued by about 30% on an average long term yield basis. However also consider that property costs such as rates and state land taxes have skyrocketed in recent years so NETT rental yields have fallen dramatically perhaps by one entire percentage point if not more. Hence after adjusting for such property cost increases, the long term (gross) average yield on property would need to return to closer to 7.5% making property overvalued by around 50%!!!! So claims that Australian property is overvalued by between 40% and 60% are easily justified on this measure as well as measures based on average incomes used by our fellow American property experts. Yes, rents might increase 5% pa for the next couple of years as long as the economy stays on track but it would take an increase of up to 50% in rents to prevent a significant fall in property prices. My bet is that rents will continue their gradual increase thus providing a cushioning effect on the falls in property prices and the two will meet somewhere in the middle. i.e Rent increases of 20% to 25% over the next 2 or 3 years combined with a fall in property values of 20% to 25% thus returning that market back to the “norm”
February 1st, 2012 at 7:58 am
Most mortgages in Australia are supported by two incomes.
The average income required to sustain these mortagage repayements is around $140,000.
The average income per capita in Australia is around $69,000
That is unsustainable and given an increase in unemployment because our economy has been caught in the back wash of Europe or US will be the tipping point for a steady decline in property prices.
China just like Japan in the 80s-90s cannot continue its growth path for too much longer
When China slows and there are already signs of that, then Australia will start to hurt bigtime.
April 25th, 2012 at 10:41 am
Regional areas will be hit hardest, especially coastal sea change areas. Around the sunshine coast i have seen prices for dumps that were selling for $389 back to $250 and still not selling. Units prices are now back to 2003 prices, and house stock on the market contiunes to climb. The bigest hits are the $1m plus market now falling below the magic $1m and then those from $700-$900, selling at $600. Across the board i would say prices have fallen no less than 10% in 2011 and another 5%- 10% already in 2012. I expect the market here to settle at 2003-2004 prices, with some of the poorer properties falling to levels prior to the boom of 2001, when prices doubled in a year.
April 27th, 2012 at 5:27 am
I think the Aussie economy is going to hit the wall Aussie bank exposure to the hosing market is around 800 billion dollars, mining is only 10% of GDP and what worries me is that a number of top world economists and institutions are concerned about the credibility of GDP figures from china. Are the books cooked to keep investors happy and the masses, the communist regime are hanging on by the skin of there teeth? Commies or capitalists?