From this morning's Money Report
Is the Australian property market good value or is it indicating it still has further to fall?
Some weeks ago your editor wrote of a property in our street that was on the market for a ridiculously high price ($800k-plus if we recall correctly), well since then the owners were forced to drop the price to $690k-plus - still too high we thought.
Much to our surprise, the house sold for somewhere just north of $700k. That represents a discount of roughly 12% from the original asking price. Now, even if you take into account the seller's high expectations being driven down by the buyer, it is still a reasonable price cut.
We wonder then, whether the Australian property market really is as robust as the commentators and real estate industry claims it to be.
Quite often you will hear the real estate cheer squad claim the Australian market is different to the US and the UK markets - where property prices have slumped.
Various arguments are put forward for why this is so. Some of which include the fact that 80% of Australian mortgages are variable rather than fixed; that lending practices were more conservative here than overseas; and that, well, things are just different so forget about it.
Take the ANZ Property Outlook - it's worth a read - for March 2009, it says "Our macro-team remains confident that the Australian economy will come through the global downturn in far better shape than our developed world counterparts."
It argues that will be the case because "The domestic economy was well positioned going into the crisis and significant, pre-emptive and effective policy action (and substantial capacity for more) and a sharp decline in the $A should help avert a US/Japan/UK/Europe style economic collapse."
The report from ANZ is put together well... however, much of it still doesn't add up to the Australian property market remaining untouched by a global economic downturn.
I'll cover off three of the major points made in the document...
It does have something of a "head in the sand" feel about it. Take the argument about Australia not having a sub-prime mortgage market. That is only partially true. The sub-prime problems in the US were largely because lending institutions were able to lend money to the borrower but then effectively get their money back and get rid of the exposure by selling the loan to Fannie Mae or Freddie Mac.
That means they had very little interest in the credit quality of the applicant. Getting the loan approved was all they cared about.
This has happened in Australia with Residential Mortgage Backed Securities (some of which are owned by the Australian people as they now appear on the RBA balance sheet). However, a sub-prime equivalent has been created with the first home buyers grant.
The grant allowed borrowers who normally wouldn't have qualified, to borrow big sums of money to buy a house without having saved any of their own money for a deposit.
And don't forget, much of this happened when house prices were already high. In effect, 'sub-prime' borrowers were being 'given' money to buy a house at an inflated price.
Is that really so different to what happened in the US?
What happens if they are no longer able to afford the repayments? Especially if during that time they have traded up to a bigger house with an even bigger mortgage in the belief that house prices always rise. And what happens when interest rates inevitably start to rise again?
As for the commercial property market, the ANZ report does state there could be some problems. But can the residential property sector really survive unscathed while the commercial property sector goes into a hole?
One possibility is that CBD commercial properties will come under severe pressure as businesses realize they don't really need a fancy Collins Street or George Street address. That's particularly the case for small or medium size businesses that can easily move to fringe or suburban areas without it having a negative impact on their business.
But even so, chances are if the economy does worsen, there will be a flow on effect as businesses cut staff and those staff - many with mortgages - begin to face problems with servicing their loans.
Finally, the point about house prices falling by only 6% from the peak seems to be wildly optimistic. It is almost reminiscent of the stock market "correction, not a crash" claims that we heard early last year. "Now is the time to buy."
And it is also eerily familiar to the 'weight of money' argument that we were assured would keep share prices rising forever. In that case it was superannuation funds that would support prices.
In the case of houses it is argued that first home-buyers and the decline in new houses being built will have a similar cushioning effect on house prices - demand will outstrip supply.
But if the ANZ is trying to paint a rosy picture of the property market what do we make of the initiative from Ray White Real Estate and their "Auction Spectacular"?
It's been reported the "Spectacular" will feature 500 properties valued at a total of over $350 million. It will include residential, investment, commercial and rural properties. You will be able to turn up to one venue and bid on multiple properties - Wow!
But something strikes us about this. When a successful company decides to do something new and different from what it has done before, it means one of two things. Either they have recognized a niche in the market that will help them increase sells compared to what they would normally have sold...
Or it means they are desperate. In fact it almost has the ring of the Persian Rug Clearance Sale ads. Everything must go!
It doesn't really sound as though demand is outstripping supply if real estate agents are resorting to these tactics.
Australian property prices may remain "well supported" as the ANZ research claims. However, as with much of the bullish sentiment we read on housing, it is based on the stars being perfectly aligned. At this stage of the downturn our view is there is still plenty of margin for error.
House prices are still very close to the peak and job losses are only now starting to filter through. It will take time before the real effects of the economic downturn are felt in the housing market.
Some weeks ago your editor wrote of a property in our street that was on the market for a ridiculously high price ($800k-plus if we recall correctly), well since then the owners were forced to drop the price to $690k-plus - still too high we thought.
Much to our surprise, the house sold for somewhere just north of $700k. That represents a discount of roughly 12% from the original asking price. Now, even if you take into account the seller's high expectations being driven down by the buyer, it is still a reasonable price cut.
We wonder then, whether the Australian property market really is as robust as the commentators and real estate industry claims it to be.
Quite often you will hear the real estate cheer squad claim the Australian market is different to the US and the UK markets - where property prices have slumped.
Various arguments are put forward for why this is so. Some of which include the fact that 80% of Australian mortgages are variable rather than fixed; that lending practices were more conservative here than overseas; and that, well, things are just different so forget about it.
Take the ANZ Property Outlook - it's worth a read - for March 2009, it says "Our macro-team remains confident that the Australian economy will come through the global downturn in far better shape than our developed world counterparts."
It argues that will be the case because "The domestic economy was well positioned going into the crisis and significant, pre-emptive and effective policy action (and substantial capacity for more) and a sharp decline in the $A should help avert a US/Japan/UK/Europe style economic collapse."
The report from ANZ is put together well... however, much of it still doesn't add up to the Australian property market remaining untouched by a global economic downturn.
I'll cover off three of the major points made in the document...
- The strength of the Australian financial system (and virtual absence of a sub-prime mortgage market)."
- The commercial property market remains at an impasse... office markets in both Brisbane and Perth... appear particularly vulnerable."
- Since peaking in early 2008, the national median house price has fallen by 3.9%... Peak to trough we expect the median national house price to fall by around 6%, which while significant, pales next to the 50%+ (and counting) collapse in equities."
It does have something of a "head in the sand" feel about it. Take the argument about Australia not having a sub-prime mortgage market. That is only partially true. The sub-prime problems in the US were largely because lending institutions were able to lend money to the borrower but then effectively get their money back and get rid of the exposure by selling the loan to Fannie Mae or Freddie Mac.
That means they had very little interest in the credit quality of the applicant. Getting the loan approved was all they cared about.
This has happened in Australia with Residential Mortgage Backed Securities (some of which are owned by the Australian people as they now appear on the RBA balance sheet). However, a sub-prime equivalent has been created with the first home buyers grant.
The grant allowed borrowers who normally wouldn't have qualified, to borrow big sums of money to buy a house without having saved any of their own money for a deposit.
And don't forget, much of this happened when house prices were already high. In effect, 'sub-prime' borrowers were being 'given' money to buy a house at an inflated price.
Is that really so different to what happened in the US?
What happens if they are no longer able to afford the repayments? Especially if during that time they have traded up to a bigger house with an even bigger mortgage in the belief that house prices always rise. And what happens when interest rates inevitably start to rise again?
As for the commercial property market, the ANZ report does state there could be some problems. But can the residential property sector really survive unscathed while the commercial property sector goes into a hole?
One possibility is that CBD commercial properties will come under severe pressure as businesses realize they don't really need a fancy Collins Street or George Street address. That's particularly the case for small or medium size businesses that can easily move to fringe or suburban areas without it having a negative impact on their business.
But even so, chances are if the economy does worsen, there will be a flow on effect as businesses cut staff and those staff - many with mortgages - begin to face problems with servicing their loans.
Finally, the point about house prices falling by only 6% from the peak seems to be wildly optimistic. It is almost reminiscent of the stock market "correction, not a crash" claims that we heard early last year. "Now is the time to buy."
And it is also eerily familiar to the 'weight of money' argument that we were assured would keep share prices rising forever. In that case it was superannuation funds that would support prices.
In the case of houses it is argued that first home-buyers and the decline in new houses being built will have a similar cushioning effect on house prices - demand will outstrip supply.
But if the ANZ is trying to paint a rosy picture of the property market what do we make of the initiative from Ray White Real Estate and their "Auction Spectacular"?
It's been reported the "Spectacular" will feature 500 properties valued at a total of over $350 million. It will include residential, investment, commercial and rural properties. You will be able to turn up to one venue and bid on multiple properties - Wow!
But something strikes us about this. When a successful company decides to do something new and different from what it has done before, it means one of two things. Either they have recognized a niche in the market that will help them increase sells compared to what they would normally have sold...
Or it means they are desperate. In fact it almost has the ring of the Persian Rug Clearance Sale ads. Everything must go!
It doesn't really sound as though demand is outstripping supply if real estate agents are resorting to these tactics.
Australian property prices may remain "well supported" as the ANZ research claims. However, as with much of the bullish sentiment we read on housing, it is based on the stars being perfectly aligned. At this stage of the downturn our view is there is still plenty of margin for error.
House prices are still very close to the peak and job losses are only now starting to filter through. It will take time before the real effects of the economic downturn are felt in the housing market.
Comment