Property Market – Australia v’s USA

How does the Australian Property Market Compare to the U.S. Property Market – Will our prices crash?

Just in case you don’t want to read on, the short answer is No, we do not expect our prices to crash, as the fundamentals of our market are very different to that of the U.S.

It’s always good to hear what the respected economists think.  Saul Eslake, chief economist for the ANZ recently suggested in the Oct 2008 Economic Update ANZ Economics:
As we know house prices have already fallen dramatically in some other
countries – notably the US and Britain – where both house prices and
household debt have previously risen by similar proportions as they have
in Australia.
THE DIFFERENCES:
1. Australia does not have a physical excess supply of housing. The US does
because unlike us, it actually built significantly more new dwellings than it
required.
2. Australia does not have a supply of existing dwellings for sale “at any
price” hanging over the market that can be seen in the US due to the huge
increase in foreclosures. Mortgagees in posession will sell at any price to
get at least some of their money back – this will not happen in Australia.

Let’s have a look at how the fundamentals compare:

Supply:
At the same time as US rental vacancy rates and homeowner vacancy rates have been so substantial, the country has continued to build.
Census Bureau figures show that between June 2002 and June 2007, the USA commenced work on 9.268 million dwellings, whilst at the same time the population grew by 13.7 million.
The current average US household size is 2.6 persons, highlighting the dramatic oversupply of housing.
In contrast, Australia is estimated to be building around 50,000 too few dwellings.

Population Growth:
Based on figures from the UN World Population prospects 2007:
Annual Population Growth rates included:
Australia at 1.6% growth
US at just under 1%
UK at just under 0.4%
China at just under 0.6%
Australia’s population growth is well above both the US & the UK.

US Non recourse Loans v’s Australian loans:

In the US in the event of default, the lender can take possession of, and sell, the
property against which the mortgage is secured – but cannot make any claims against any other assets or income which the defaulting borrower may have.

When an American home owner finds themselves in a position where they cannot meet mortgage repayments (or even doesn’t want to) it can be quite rational to simply walk away.  At the expense of their credit rating.

In Australia, lenders are personally liable for their debt.  Yes, their house can be sold by the lender, but if this did not clear the debt, then the individual remains liable until the debt is paid off.
 
This is a major reason why default rates on Australian mortgages have remained
vastly lower than US ones.

Here’s the simple but critical point: house prices will only fall if lots of owners have to sell them for whatever price they can get.

Subprime?
The US market has had a much greater occurrence of sub-prime lending.
This is where banks lock borrowers into a home loan at an initial low rate say 2% and after a set period this rate gets increased, usually to above the standard interest rate.
The people borrowing in this way can be generalised as being a higher risk: generally those with nil or low incomes and essentially, they have little chance of fulfilling the repayment once the interest rate is lifted.

In Australia, there are laws which prevent this kind of lending and the fact that their
are recourse loans mean that people are more wary of these types of arrangements.
Most borrowers realise that if they can’t afford the repayments they may lose much
more than just their property.

Quality of Loans:
There has been far less imprudent lending here than in America:

For  Non Conforming Loans (the closest thing we have to sub-prime)
In Australia they account for around 1% of total loans, in the USA around 15%.
For “Lo-doc” / “No-doc” Loans
In Australia they account for around 7% of total loans, in the USA around 20%.

Mortgage Delinquencies (30 days +):
In the US in 2004 was around 3% and in 2008, above 5%.
In Australia, in 2004 was well under 0.5% and in 2008, is still under 0.5%.

Vacancy rates:
Fundamentally, ongoing value growth in Australia’s property market is driven by a shortage of supply, this is best highlighted by residential rental vacancy rates.
On a quarterly basis, across the last 10 years, the USA has had an average
residential vacancy rate of 9.1%.

Average vacancy rates over this same period in Australia:
Sydney 2.7%,
Melbourne 3.0%
Brisbane 2.8%.
Importantly, as at the end of June the USA’s rental vacancy rate sat at 10% whilst
Sydney’s was 1.1%, Melbourne’s was 1.0% and Brisbane’s was 2.2%.

The property markets in Australia and the USA are literally worlds apart.  Whilst we would expect the US property market to take many years to recover and infact it may not yet have reached the bottom.  The Australian market has very strong fundamentals and we would expect the next leg of the property cycle to begin in 2009, as interest rates continue to fall.

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