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What’s being neglected from the mainstream media at the moment is that the economic fundamentals for property in Australia are actually quite strong.
All we read about in the news are the fear mongering headlines like clearance rates are plummeting, and mortgage defaults are rising, and house prices at risk of falling further.
However Australian house prices are underpinned by the simplest law of economics… supply and demand. In today’s show we discuss the key supply and demand factors relevant to house prices in Australia, and they should give listeners some more confidence.
The takeaway is that it’s unfair to directly compare the residential property market in Australia to other residential property markets in different parts of the world. Our banking system, demographic trends and attitude towards property are entirely different. In today’s show Patrick even gives us some insights from Ireland where pre-GFC it wasn’t uncommon to see 40 year interest only loans at loan ratios 100%+! (compare this to the more prudent lending standards we have in Australia)
Time stamps are below, thanks for listening!
[3:30] Australia’s population growth over the last decade has been up over 20% from the ten years to 2006, and this trend is expected to continue. Sydney and Melbourne are expected to gain a further three million residents by the mid-2050s, and Brisbane and Perth are expected to gain two million more each as well.
These growth expectations are positive for house prices because new entrants to an area need homes in which to live – this fuels demand.
[5:15] We are blessed in Australia that our natural resources are in strong demand globally, this has helped us enjoy 26 years of uninterrupted economic growth which is a record for the developed nations.
According to PwC, China is already the world’s biggest economy (as measured by Purchasing Power Parity, a proxy for total output adjusted for price level differences across countries), and India has the potential to overtake the US as the world’s second largest economy by 2050. The shift in global economic power to the economies of China and India will be of major benefit to Australia as a key trading partner. Economic growth creates jobs, and jobs in turn create housing demand, due to improved affordability.
[10:00] There’s no new land being released in the suburbs close to our major capital city CBDs. These are the areas near to where most people work and want to live though. This is what creates a supply shortage, which can drive up prices.
According to the Grattan Institute, over 60% of new jobs are created within 10 kilometres from our major capital city CBDs. The majority of new jobs are coming from our knowledge industries like healthcare, scientific and technical services, construction and education. Jobs in agriculture and manufacturing (which tend to be located further away from our CBDs) are now in decline.
[14:15] Our Big Four banks in Australia are among the world’s largest banks by market capitalisation, and with Double A ratings from all the major ratings agencies they each rank in the top thirty safest banks globally (see https://www.gfmag.com/magazine/november-2017/worlds-safest-banks-2017). We have an active banking regulator (the Australian Prudential Regulation Authority – APRA) ensuring prudent lending standards, and our credit providers adhere to the Responsible Lending obligations of the National Consumer Credit Protection Act to uphold minimum standards when assessing loan enquiries.
[15:13] Ireland – talk about a house of cards! Pre-GFC borrowers could 40 year interest only loans with loan rations 100%+!
[17:15] Another key feature of Australia’s banking system is that all our housing loans are full-recourse.
This means that in the case of default, the lender can go after the borrower’s personal assets, or take litigious action to have his or her wages garnished, to ensure they get the maximum amount of their money back.
This wasn’t the case in the United States in the lead up to the GFC. Those loans in the United States were non-recourse, meaning that it was easier for borrowers in mortgage stress simply to walk away from their commitments.
Lenders were limited to seizing the security properties only; they couldn’t go after anyone’s personal assets.
Full-recourse borrowing in Australia means borrowers have a stronger incentive not to overcommit themselves, and to avoid default, in order to protect their personal assets.
This also means economic shocks or slowdowns tend to have a lesser impact on our overall default levels.
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The Long Property Show provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing in the Long Property Show constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
