More doom and gloom headlines circulate Australian media today with comments from an United States based property analyst suggesting Australian property could crash by more than 60 percent. At the same time, Australian experts counteract the argument saying it can’t happen in Australia, in fact – some say we have no bubble.
Is there any substance to the article?
Jordan Wirsz says “Right now is not a time to be buying real estate in Australia.”
“The market has slowed substantially but residential prices are likely to fall up to 60 per cent, possibly even more, within five years.”
We don’t believe the 60 percent figure has been simply pulled from the air. It is consistent with the Economist Magazine that calculates Australian housing is overvalued by 53 percent on a rent to price basis (sort of like the PE ratio for shares) and 38 percent on an income to price ratio. Such a large bubble can scar the indebted and cause markets to over correct. I would be cautious about the 5 year time frame, although. I would expect prices to deflate over a decade or two, although the large falls will occur in the first couple of years in this window.
“I’m bearish about world real estate but I couldn’t be more bearish about the Australian market, There have been corrections but they don’t hold up to the scale of what is coming, ” said Mr Wirsz.
This is also consistent with The Economist report that states house prices in Australia, Belgium, Canada and France is more overvalued today, than during the peak of the American housing bubble. Assuming house prices fall back to nominal levels, this would suggest we could potentially have a bigger housing downturn than America.
But experts in the thick of it here in Australia disagree.
Paul Bloxham, HSBC’s chief economist, said there would have to be sharp rises in interest rates, unemployment and housing stocks for property values to crash. As per our prevous post, unemployment in Australia looks shaky and is expected to be worst this year as the effects of high household debt take their toll.
SQM research shows there are now 48,586 Victorian homes on the market in December 2011, up 43 percent for the 12 months. Stock on the market is up 23 percent in Sydney, 26 percent in Adelaide, 52 percent in Hobart and 21 percent in Canberra.
Peter Green from Laing+Simmons in South Sydney told the Sydney Morning Herald in a different article today, “In the last three months, the number of people visiting open houses has been cut by half. And buyers may show up to auctions, but they don’t bid.”
This could suggest turnover of stock is falling and is likely to contribute to even more stock on the market this year.
The official cash rate is likely to go down this year, although banks may choose not to pass rate cuts on, especially the ANZ who now set their own mortgage rates independent of the Reserve Bank of Australia. But with the World Bank warning on Wednesday that we are on the brink of GFC 2 and it is expected to be deeper than GFC 1, the cost to access international credit markets is anyone’s guess.
Mr Bloxham reassures News Limited readers that the combination of rising interest rates, unemployment and housing stocks levels is not on the cards.
He also says “Surely if the market was going to collapse it would have happened in 2009 after the Lehman’s collapse when we had the biggest aversion to housing assets that you’ve seen.” Maybe he forgot the First Home Owners’ Boost was “designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.”
Ray White Inner West agent Charlie Bailey has the same thoughts, telling News Limited he believes the bubble can’t bust because there is no bubble. “People have been predicting house prices to fall every year and every year we have an increase in prices.”
The comment that there is no bubble because it would have burst by now is common. It’s a similar concept to boiling a frog, because the market is slow moving there is a perception the market hasn’t changed, just like the rising water temperature before the frog boils. This is also common among baby boomers who will tell Generation Y that they thought housing was expensive when they brought, but if they hadn’t taken the plunge, they would still be renting. While housing debt as a percentage of household income has quadrupled, it has done so over a period of three decades.
But the quote that a housing bubble can’t burst, because there is no bubble was first made famous by Alan Greenspan and Ben Bernanke. They both testified before Congress in 2005 that a bubble didn’t exist in the United States. Three months later, the America housing market started one of the biggest corrections in history (blue line):
» Bloodbath to hit Australian real estate, US property analyst Jordan Wirsz says – News Limited, 20th January 2012.
» World Bank’s crisis warning – The Sydney Morning Herald, 18th January 2012.
» How much property is on the market in your capital city? A state-by-state analysis – The Property Observer, 18th January 2012.
» Hammer falls on auctions – The Sydney Morning Herald, 20th January 2012.