Why the Australian property bubble is NOT going to burst

Why the Australian property bubble is NOT going to burst

I recently watched the 60 minutes segment where US property agent, Jonathan Tepper predicted Australian property prices will fall by 50%.

Now it’s doing the rounds in the news that Australia could be about to face the same property bubble burst that occurred in American during the GFC.

In this blog, I’m going to explain why Tepper is wrong.

1. Australia has high credit quality

First things first, Australia and America are two completely different markets. Home loans in Australia are of a higher quality, as we have stricter lending criteria and requirements, which means borrowers who are approved for a loan can generally afford to service them.

Australian banks usually assess borrowers with an interest buffer in place that is 2% higher than the interest rate attached to the loan. For instance if a borrower is applying for a loan with a 5% rate, the bank will assess their ability to repay the loan if rates were to increase to 7%.

Borrowers also generally have to provide full financial details, such as their payslips, PAYG Summary and tax return statements to be approved for a loan, as today there are very few low doc loans approved.

Whereas in America at the time of the GFC, banks were lending to people who hadn’t provided this type of paperwork and couldn’t service the loan – a recipe for disaster.

2. Not as many foreclosures

Adding to this, in Australia you can no longer borrow 100% of the property value with a no deposit home loan. However, in the US banks didn’t require borrowers to provide deposits to obtain a mortgage and there was no recourse either, so a borrower could walk away from a property without being sued and without losing anything financially.

By comparison in Australia a lender can seek financial retribution for the amount of negative equity. This ultimately means Australian borrowers are less likely to default on their home loan to avoid being sued, resulting in less foreclosures.

3. You need to compare apples with apples

One major problem I had with the examples being given by Tepper is that he was talking about America as a whole but you have to compare apples with apples. For instance, rather than comparing Sydney with downtown Florida, you should be comparing prominent cities with other prominent cities like Sydney with New York, which didn’t have much of a collapse during the GFC.

No one would compare Logan in Queensland with New York Island would they? It just doesn’t make sense.

4. Financial bodies are closely monitoring the market

APRA is also keeping a close eye on the market and responding swiftly. For instance last year when it found there were too many investors driving up the Australian property market, it brought in new regulations that required lenders to reduce their investor loan books.

The banks responded quickly to the problem and jumped in early and there hasn’t been a major drop in the property market as a result.

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5. We have a strong employment market

Before a 40-50% property collapse occurs, there needs to be massive job losses and foreclosures. However, at the time of writing we are actually seeing the opposite, as unemployment has dropped to around 6%.

6. There’s a limited amount of land available

America is covered in coast to coast with property, whereas in Australia we are restricted to areas around the coast where there is water and amenities, so there is a limited amount of properties available. We also have record migration at the moment, so that’s going to underpin prices for land.

7. Continued property demand from foreign investors

I should also mention overseas buyers from countries like China are continuing to invest in the Australian property market, which is also helping to pop up the market.

8. The market is similar to 2003

If you compare the percentage of disposable income today to what it was in 2003, it is somewhat similar. Back then the RBA increased the official cash rate and prices slowed down, moving along with inflation but they didn’t drop. So we’ve seen this happen before and we are just as leveraged as we were then.

9. The RBA has room to move

The good news is today the Reserve Bank of Australia still has 2% to play with, so if the market did start to collapse the RBA could push the official cash rate to 0%, which would help homeowners get through the tough period financially.

10. We have negative gearing

Back when the GFC occurred America didn’t have negative gearing and it still doesn’t today. Whereas, in Australia tax benefits drive behaviour as many investors are willing to lose a portion of their wages for the benefit of capital gains and bringing down their taxable income. Even if Labor was to slash negative gearing concessions, it may drop prices but they wouldn’t go down 50%.

So where will the Australian property market go?

Property clearance rates have picked up in the last couple of weeks, so just like the property prediction I made for Sydney late last year I’m still tipping prices will go up by 3-4% and will keep up with inflation.

Watch this space…

Why the Australian property bubble is NOT going to burst was last modified: March 7, 2016 by Steve Jovcevski

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5 Comments - Write a Comment

  1. My investment property I bought in 2012 is being foreclosed. I am not just walking away as you said in your poor little excuse article – I cannot afford the repayment and it’s not my fault! I wanted enough just to buy a simple investment property but Commonwealth Bank made a mistake and lent me too much. I’ve tried debt counselling but it was all double dutch hypotheticals when all I needed was just a bit more money.

    Reply
    1. Mozo

      Hi Sandy,

      Sorry to hear about your investment property being foreclosed. Below I have addressed your concerns:

      – In the article when I mentioned borrowers “walking away” I was referring to people in the United States not borrowers in Australia. My point was that you cannot walk away in Australia without any repercussions, like in the US.

      – Since I don’t know your personal circumstances, I cannot comment on whether the bank lent you too much. My only point in the article was that generally speaking banks in Australia have much stricter lending criteria compared to banks in the US, as they assess you on a higher interest rate scenario and require a deposit of at least 5% (unlike in the US which at the time offered zero deposit loans).

      I was using these factors as a means of showing that the Australian property market is completely different to the US property market at the time of the GFC. Therefore, the comparisons made by the US property agent in the 60 minutes segment were incorrect.

      Thanks

      Steve

      Reply
  2. How is Sydney comparable to New York? New York is 20 million metro area, and Sydney is approaching 5 million. This is what fans of the property bubble do, compare Sydney, a regional capital to New York, a global capital.

    New York is 4x bigger than Sydney which is 4x bigger than Adelaide. Would you compare Adelaide to Sydney in terms of global importance and economics?

    Reply

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