House prices in the US have fallen 16.3% over the last 12 months; in the UK the market is now down 12.4% and in certain bubble areas the falls have been truly spectacular – for example homes in Las Vegas and Northern Ireland have lost a third of their value, whilst Miami has suffered a 26% fall. But it’s not just the Western world which is witnessing a property market crash – even prices in booming urban Chinese cities and over-populated Hong Kong are now falling.
So can Australia remain immune? Quite simply Australia’s property market will turn ugly very quickly. Here’s why;
Firstly, it’s important to understand what factors drive property.
i) Supply and Demand – e.g. immigration, land zoning, building approvals.
ii) Price – the price of a house relative to earnings, and the availability of funding (how much deposit you need to put down and the mortgage rate).
And then remember that every bubble has a hook. The Tech bubble’s hook in 2000 was the that the internet would exponentially increase the productivity of business. The hookfor Australia’s stock market bubble last year was that China would grow at 13% every year. And the hook for the property bubble? How many times have you heard the following –
Property never goes down..
Immigration will ensure prices stay high for a long time to come..
Firstly it is true that demand will increase (net immigration) and supply is not keeping up (especially in NSW). This is fundamentally supportive of the Australian property market. But it is not the primary reason as to why property prices have risen so much over the past decade (more on this later). The immigration and tight supply argument is even more relevant to the UK market but this hasn’t prevented prices from rapidly heading south. So clearly something else is at work.
Supply and demand cannot propel home prices forever. There are millions of Australians who would like to drive a Porsche 911 and yet there are only a few thousand on the roads. Why? Because even though demand is there, the price is too high.
Quite simply, as this chart demonstrates, Austrailan housing has never been more unaffordable. And this is with 100% employment.
Second, there is much talk about the increase in rents making property yields more attractive. However, as this graph shows, yields are still pathetic. And the ‘official’ published data don’t take into account minor items such as depreciation costs, agents fees, repairs etc etc. The net yield is at least 100bp lower.
So why have prices risen so much? This chart suggests that availability of funding and a willingness to borrow on the part of the consumer are far more important than a supply and demand mismatch.
Funding is disappearing fast as 100% mortgages becomes a distant memory. Required downpayments will increase from nothing to 20%, and mortgage rates will stay high despite the RBA progressively lowering interest rates. And the poor Australian consumer is already up to his eyeballs in debt. The ratio of household debt to disposable income has doubled to 160% in just a decade (coinciding with a near tripling of property prices).
Finally, who would want to buy into this market?