Do Australian house prices need US style market collapse?

Is the Australian Dream Fading away? Many believe that without a US style housing market collapse it will soon become a distant memory.

Some are saying that the Australian dream of home ownership is slipping away, leaving a threat of a US-style collapse in house prices, according to a team of university researchers from South Australia's Flinders University.

They have discovered that home ownership in the 10 years from 1996 rose only 0.8 per cent despite strong economic growth and low interest rates in that period.

The Flinders Institute for Housing, Urban and Regional Research analysis found home ownership fell by 15 per cent over the two decades to 2006 for low income earners over 45 years of age and medium-high income earners under 45 years.

Problems cited were that large gains in national income from the resources boom were "wasted" by increasing house prices and accumulating debt to unreasonable levels.

They also found the first home owners scheme boosted home purchases for people under 25 years of age, but many lower income earners in the 25-44 age bracket were unlikely to ever own their own homes because their parents were spending their inheritances and prices remained high.

We are going for either:

1. A sudden price crash of 50% or more US Style
2. A slow long drawn out price decline over 10 years or more Japan style.
3. A massive drop in aspirations of home-ownership

The Mr Mortgage point of view.

I don't think that this tells the real housing market story, research or no. I don't have have any research papers to back up my view, but here's what I think about the housing markets.

Firstly the US collapse happened because of the bubble caused by giving home loans at unsustainable low interest rates to people with poor credit and uncertain employment. The US housing market and mortgage lending business was a train wreck waiting to happen.

That wreck happened when the bankers that set these loans could not sell them on as investments to suckers anymore.

Why Australia's Housing Market is different.

That has not happened in Australia. Australia's lending practices have balanced home buyers income security, security properly values and large equity or deposits to compensate for patchy credit histories or incomes, to ensure low default rates. [A tiny fraction of the US credit defaults]

And Australians get stuck with the debt if they walk away from the home. This keeps them in when it gets tough.

Also Americans use their home's equity like we use stolen money [they get rid of it as soon as it shows up], and they drew it up to the limit. When you do this you tend to buy cars bigger than you need, and the result is a mortgage you can't afford. That does not happen in Australia. The weather here is kinder to cars.

It should also be pointed out that the US housing market did not collapse across the board. Good quality homes in strong economic regions have held up, whereas many homes in less desirable areas has lost up to 4 times there value. Now the banks have recovered, so will home prices in many more areas. Australia's banks will not have such a collapse in my view. They don't lend and sell on dodgy mortgage loan products and did not run out over money to lend. Australian Banks don't pay each other princely bonuses for failure either.

Some people in the US refinanced up to 9 times a year. That does not happen in Australia. Yes Australians may refinance their homes and debt every few years, not 9 times a year, but they have at least 10% to 20% equity in the home after refinancing, they don't get 125% loans like many US homeowners did.

In the US the loan is on the home. If you can't afford the repayments you just walk away and send the bank the keys "Jingle Mail". Here the loan is on you, and you can't walk away.

In the US people favour the stock market for investment. Australians favour residential real estate.

Japan has a low birth rate and a low immigration rate. The economy has been in recession for decades. Australia has a high birth rate and high migration that constantly pressured home prices and since the early nineties recession has powered on from boom to boom. Australia is a very fast uptake of technology and ideas and a highly mobile population. That is a good recipe for continued growth.

Australia is an extremely well managed country, socially, economically and commercially.

Yes, We haven't got everything right, and housing supply is one thing that does need to be addressed.

But housing shortages lead to price growth, not house price slumps. We don't have an oversupply problem, as in Belgium, where I understand that many homes are vacant.

Whilst Australia has limitless land, nobody wants to live in a desert, and the Outback does not have the infrastructure to take populations out of the capital cities, and regional centres and eastern coastal strip where over 90% of Australia's populations live.

This is the biggest reason that cheap housing and near universal home ownership to all comers now has become the most expensive housing in the world. Because we have not planned housing needs, we are 100,000 housing units short of what is needed. That gap is not closing.

When you have Governments constantly reducing income taxes to win elections, then there isn't the money to build Australia's Infrastructure, and renew what is there already. I am talking roads, power stations, schools, hospitals, shopping precincts, distribution centres and places of work, entertainment and recreation and sport. Not to mention water supplies, new dams and and reservoirs. Part of that money is going into house mortgage repayments instead. So saving taxes is good, but only in the short term in my view.

Also, I agree that first home owner's grants have raised home prices, because it has motivated people and provided the means to buy a home before young home buyers normally would have without addressing housing supply, including land development and infrastructure.

If we were to get things right in these areas, and be able to decentralise the population, and property prices still would not fall. People are living longer, and staying healthier, and staying in their homes longer. As peoples wealth grows they want a bigger home closer to the amenities they value. They invest in many things, but most Australians like and trust property as a wealth store. And their home is their Castle and their Keep.

Author: Rick Adlam Mr Mortgage

How to send your Australian Banks Broke

As the ANZ folded last week to pressure on penalty fees, it brings up a question. How dependent are Australia's banks on fees and charges, and how long could they avoid going under if they could no longer charge these fees, and up them at will?

Have you been caught in the ANZ money trap?

I was an angry victim of ANZ's penalty fees just last Christmas.

I have been caught several times with a $40 penalty fee from ANZ. Often these fees were subtracted on the same day that new funds hit my account, and on some of these occasions I believe that the bank had these funds for several days before declaring them. A double ripoff you might say.

But when on Holidays last Christmas I overdrew my account on a EFTPOS card by less than three hundred dollars.

The ANZ charged me over $40.00 for each time I made a draw. The first charge was on an overdraw of less than $10!

This overdrawn amount included the $120 or so "Honour fees". This meant that they charged me nearly 100% interest for a few days! The mind boggles at the actual interest charged on a per annum basis, but it would have been in the Tens of thousands percent interest annualised. As you can imagine I was not well pleased.

How I struck back at the ANZ.

When I rang the bank I pointed out this practice as wrong and I believed unlawful.

The bank officer reminded me that I had "Signed a contract" with the terms and conditions, and that I was stuck with the charges, and that it was therefore legal.

I then pointed out that any contract had to be fair and reasonable, and this obviously was neither, and therefore where I had agreed with the terms and conditions or not, it was unlawful, as it did not meet this implied condition.

I pointed out that they were entitled to charge an default interest in the order of 4% per annum, which is fair and reasonable, and that this would amount to only a few cents. Their charges i said amounted to several thousand percent per annum, and this was I believed predatory interest.

I also pointed out that I had signed nothing. I was given a booklet with the terms and conditions in then, after I signed up for a bank account, and that these charges were not clearly explained to me.

I also pointed out that I was under the impression, and had asked the bank not to allow any overdrawn amount, and because they did, it was their fault not mine, and that had a duty to me to inform me that the amount would be overdrawn and incur penalty rates if I proceeded, and this did not happen. As I had several bank accounts with clear funds in them I could have used another card.

After initially arguing with me they quickly capitulated under the weight of seeming legal argument. I received a reversal of all three honour fees.

One hundred and twenty dollars tax free for five minutes on the phone, I feel was a good investment of time.

In a move that will cost it about $140 million a year, the ANZ abolished 27 fees on personal accounts and cut other account, credit card and loan fees.

I must not have been the only person to complain, and obviously the ANZ was not the only bank to charge these fees.

But I kind of like to think that I was part of the momentum that caused this charge of heart by the ANZ.

If you were one of the ANZ customers who complained as well, thank you. We did a good thing, and saved millions from a nasty surprise.

So will the banks really go broke if they did not charge fees. Of course not. They make billions a years. But they did lose a little icing off the cake.

The ANZ bank and in fact all Australian banks are great services that we cannot live without. They are full of honest and good people. But if you let them they will try it on. Don't let them even think they can with your account.

Plus, all fees will be abolished for accounts of customers on government benefits who have an Access Basic account. If that's you, tell your bank today, and save even more.

Author: Rick Adlam Mr Mortgage