Australia's Housing Shortage: Is it just an urban myth?

I have been accepting as "fact" for 8 years that Australia has a housing shortage. But what if that was not the case. Would you still buy a home? Is that the question?
Investment Banker Mortgage Stanley recently released research that pointed to Australia actually having a glut of housing, rather than the much touted housing shortage we have all heard about that keeps growing like an evil magic pudding.
Admittedly, I have heard about this housing shortage since 2003 and wondered where all the tent cities were being erected in Australia to justify these claims.
Maybe we will see fake one's sprouting up all over Australia soon?

Housing Shortage, Fact or Myth:Australia goes from an estimated 228,000 housing shortfall to a 341,000 home glut in the time it takes to produce a report!

So how did we get this 569,000 housing turnaround in weeks?

There has to be a reason that house prices have not collapsed in the wake of the GFC.

The estimated 228,000-home shortfall, cited by everyone from the construction industry to economists at the major banks as evidence for why prices remain so high, may, in fact, be an excess of 341,000 homes, according to Morgan Stanley.

Whether the new figures are accurate will only become clear in time, as house prices either level off because real estate is scarce, or prices fall and attract more scrutiny about the fundamentals of the market.
But what if there are other reasons why home prices are staying high in the gloom. Here's a few.

1. Real estate is worth what someone else will pay you for it. People have not been willing to pay what many buyers want, but...
2. Real estate is also worth what you are prepared to let it go for if you are selling. When people have not been able to sell at the price they want or even need, they are hanging on to it.
3. If you have a job you can afford the mortgage till things come good. In Australia's case the job market never went bad, so people can hang onto property for longer.
4. If you hang onto to the old property, then real estate agents are not going to be happy, because you don't effect your sale, and you therefore can't buy the next home. This is exactly what is happening.
5. People are now hanging on to their homes longer and their mortgages longer.
6. From a generational point of view, people are living longer and staying in their homes for longer. And the Government assists this with carers and other services to help people stay out of nursing homes longer.

But the all-important nature of house price movements underscores a bigger issue: we simply don't know what impact elevated property prices have on other aspects of the economy because we don't have a long history of clean, robust and comparable data to rely on.
But I will give it a try here.

1. When you pay too much for a home, you have to hang onto it for longer or risk going underwater.
2. When you pay too much, your mortgage is bigger than it should be. That makes banks happy and rich and that means that you pay more of your income in mortgage repayments than you should be, for the next 30 years. That causes a thing called mortgage stress. As these things have happened then we can say people have paid too much for their homes in the recent past.
3. Are they still paying too much? That will be clear in 2 years time. If prices go down, then yes they are still paying too much today.

In Australia, there is no clear, undisputed authority of information in this area crucial to the economy.

In the US, the S and P Case-Schiller index, which measures changes in prices of the same properties over time, and that is only 25 years old. So where do investment gurus pull 100 year figures from?
The problem I have with any long range figures is that they only rate the homes that are still standing,and over 100 years maybe more than half the housing stock may be demolished. SO counting just the best ones that are left is a hardly a way to determine the appreciation of housing generally. Its taking a generalisation and making it specific. But what about the home that was bought, and later demolished. Surely its worthless. When these homes are included in the overall picture, actual returns are lower.

In Australia, Residex's repeat sales index goes back to 1991, in the middle of a Sydney house price correction on 17% pa interest rates just before the two-decade run-up in house prices began.

One thing for certain is that it is unwise to expect the "boom conditions" to persist indefinitely. That is a interesting term. I thought the boom finished in 2003 and we got ripples in 2006, and last hurrah in 2010?

In 2010, Reserve Bank governor Glenn Stevens appeared on breakfast TV to warn viewers it was a mistake to ''assume a riskless, easy, and guaranteed way to prosperity is just to leverage property''.
That advise I was giving out from 2005, but nobody wanted to listen back then. That's why home prices went too high. Are they still too high. Well RBA Governor Stevens says no, they are not.

Source; Mr Mortgage

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