Rainbow Beach Real Estate News October 2011

"I once wanted to become an atheist, but I gave up - they have no holidays”
Henny Youngman

There has been a minor increase in buyer enquiry over the past 2 – 3 weeks, which has coincided with the warmer weather. However, generally speaking, prospective buyers remain somewhat cautious and have are still adopting the “we’ll just wait and see what happens” approach which is somewhat frustrating.

The media is doing its best to scare the pants off people and if you didn’t believe that the “sky was falling” just spend about 30 minutes watching something like ABC News 24 on any given night and you’ll find yourself worrying about all sorts of possible financial disasters. Both the US and the UK have run out of ideas on how to stimulate their economies and with ridiculously low interest rates, there is very little room for movement in terms of trying to instill confidence in consumers and business.

Our feeling is that although the Australian property market is currently experiencing slow sales and vendors are having to discount their price in order to meet the market – we cannot foresee a full scale price crash. Whilst in overseas property markets (eg across Europe and parts of the US) there have been sharp price falls (over 20%) since the GFC, national property prices in Australia have remained relatively steady.

Being out of step with other housing markets across the world is causing some prospective buyers to be quite nervous. The pessimists among us believe it is only a matter of time before house values plummet here in Australia. But there are a myriad of reasons why they won’t fall significantly any time soon:

Population growth - Whilst it has slowed in recent years, we maintain strong population growth. Our domestic population is aging, 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. (Source: Micheal Matusik, July 2011)

Prudent lending practices - Our interest rates have room to move downwards and as previously mentioned in this article, many countries do not have this buffer. We also have full recourse loans in Australia, allowing lenders the right to take any assets of the borrowers if repayment is not made. 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. Quite literally in the US during the latter part of 2008 and early 2009, there was a well-known practice of sending “jingle mail” – which was when the mortgagor would post their house keys to their mortgagee and simply leave their house empty. The bank would then have an asset on their hands which had lost close to half of its value; no one wanted to buy and the person/s who had taken out the loan to buy the property in the first place simply moved out and got on with their lives.

Relatively high equity - Current loan-to-value ratios in Australia are around 53%, reflecting our conservative position towards debt. The long-term average is around 65%. According to the latest official statistics, Australia’s housing debt to housing assets is 29%, and our debt to overall assets is just 19%. So in other words, we, as a nation, own around 70% of our homes – a far cry from the “jingle” loans that typified the US housing market collapse. (Often, mortgages on houses in the US were up to 90% or even 100% of the value of the property).

In addition, household balance sheets are being strengthened by additional savings. We are currently saving 10% of our disposable income, which amounted to a staggering $74 billion last year alone. This improved state of our personal finances further reduces the risk of house prices collapsing as there will be less “fire sales” occurring.

Under supply – Not necessarily for every dwelling type and in every geographic area – but certainly at the bottom third of the market. This helps place a buffer under property values. Due to a range of reasons, mostly political, (ie. cost of new development etc) there is an under supply of basic, affordable housing across our capital cities and now in our major regional centres too.

Economy growth - Whilst many of us would like to earn more money, and some feel poorer today than a few years back, nearly all of us can find work. Housing markets usually crash in conjunction with significant falls in employment levels.

Low unemployment - As long as our unemployment rate stays below 8%, then wholesale falls in property values are very unlikely. It is currently 5.3%. (Source: Australian Bureau of Statistics Aug 11)

Few mortgage defaults - Whilst recent headlines in the media screamed, “Rising mortgage arrears”, the latest figures show just 1.37% of home loans across Australia are 30-days in arrears and 0.54% are three months behind in mortgage payments. The trend is upward, from 1.30% and 0.48% respectively on the previous quarter, but the number of home loans technically in default across Australia is very low.

It certainly pays to take a long-term view. Residential property values – when looking at resale performance rather than simplistic medians – have risen across Queensland by just over 10% each year over the last decade. Over the last five years this has dropped to about a 6% annual gain and during the last 12 months, values have declined slightly by about 1%.

There is little doubt that values are now falling. How far they will continue to fall is unknown but we don’t think it will be anywhere near as far as most property pessimists believe.