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

Rising home costs means changes to Australian dream in an election year

home prices and location and convenience are forcing Australians to redefine the dream.
One of the hardiest perennials in the political garden is the "home affordability crisis". As is often the case in an election year, a lot of fertiliser is being spread about at the moment on the issue. While some of the policy ideas have merit, our politicians are too often focusing on the wrong parts of the problem and thus coming up with wrong, or at least inadequate, "solutions".
A big crop of new housing proposals has sprung up recently.
Australia's housing ministers are talking about a national shared-equity scheme where government becomes an equity partner in purchasing a home aimed at low and moderate-income households, as well as a revamped first home owners grant.
Federal Labor leader Kevin Rudd is proposing low-tax home deposit savings accounts, an overhaul of local government funding to rein in rising infrastructure charges on developers and home buyers, a shared-equity scheme and tax credits that can be offset against tax liability for investors who agree to charge below-market rents as a way of encouraging the supply of low-income rental housing. All will be considered at a national housing summit in Canberra later this month.
Federal Treasurer Peter Costello wants an audit of government land that could be released for development, while resisting Coalition backbench calls for that most hardy of all perennials in this debate - a doubling of the first home owners grant from $7000 to $14,000.
And Prime Minister John Howard has taken the opportunity to get stuck into the states for what he says is the key source of the problem - their failure to release enough land for residential development on the periphery of our cities.
Some of these approaches attack the problem of falling home affordability from the demand side and some from the supply side.
Demand-side solutions tend to be self-defeating. For example, government first-home buyer grants intended to make buying a house more affordable can, perversely, push up prices as sellers simply absorb the handout into their asking price especially in an overheated market. With no increase in supply, bumping the grant from $7000 to $14,000 would simply mean the going price would rise, more or less, by $7000. Likewise for the suggestion to scrap stamp duty.
And while Rudd's idea for tax-preferred savings vehicles would make it easier for people to gather a deposit (albeit with a cost to the budget), it would do nothing to restrain house prices and may actually add to them for similar reasons.
More broadly, what is happening here is simply a case of constrained supply meeting increasing demand, as incomes rise and housing finance has become relatively cheaper and more accessible .
If there is more money available (higher incomes providing the capacity to service bigger loans on offer) at a relatively low price (low interest rates) chasing a limited amount of housing (because there are only so many places people can, or want, to live), prices can only go one way - up.
Prices have also been pushed higher by cashed-up property investors chasing a limited stock of existing housing, assisted by easier finance and the tax system through negative gearing, depreciation allowances and the halving of the capital gains tax in 1999.
A supply-side policy approach is more likely to succeed, although many of the solutions offered have tended to be simplistic and inadequate.
As both the Productivity Commission and Macquarie Bank analyst Rory Robertson have pointed out (and the federal Treasury seems to agree), it is simply not enough to say that homes are now unaffordable for many first-time buyers because state governments have not released enough new land on the edges of the big cities.
The heart of the problem is that prices are being pushed up by competition for housing in the places in which people actually want to live - big homes close to the centre of cities and to the coast, with short commuting times to work and access to the entertainment, educational and cultural amenities that these places offer.
"The issue of location, location, location dominates the housing-affordability problem," Robertson notes. "Would-be home buyers on average incomes (or less) have been pushed towards the periphery of our cities and beyond, 'priced out' of the market for well-located family homes. Indeed, the extremely high price of land 'close to the action' leaves most of us struggling with that never-satisfying compromise between proximity maximising work, educational and leisure opportunities, while minimising travel time and the size of our houses and yards.
"In Australia . . . average home prices generally are much lower inland, or near the coast but well away from 'the action'.
"Unfortunately, all six of Australia's state capitals where most of us tend to live are high-demand coastal centres, and so are prone to be relatively expensive."
This demands a different sort of supply-side policy solution effectively shrinking distances in our cities through better transport and decentralisation and increasing housing supply closer to the city centres through more medium and high-density development.
The most promising approaches involve improving transport infrastructure, to reduce commuting times and effectively increase the quantity of "well located homes". It also involves creating jobs closer to plentiful lower-cost housing land by promoting suburban and regional economic development and encouraging decentralisation of major employers in both the public and private sectors.
And there needs to be new approaches to planning regulation and a change in expectations among some home buyers themselves especially accepting the new reality of apartment living instead of a house on a quarter-acre block.
As Robertson concludes: "The harsh reality for most of our younger generation (and others left behind) is that the housing-affordability horse has bolted and it ain't coming back.
"For those would-be home buyers priced out of the market for well-located family homes, the best practical advice remains to look further afield or to start thinking about apartments. These days, that never-satisfying trade-off between proximity and house and yard sizes simply is a fact of life.
"The Great Australian Dream has been downsized."
Source: The Age