One thing we know for sure is that every bubble bursts. Ron Bewley looks at the ballooning price of property.
As the prospect of a double dip fades away, it seems some foreigners are getting a bit restless – or is it jealousy? Australia was one of the handful of developed countries to walk through the GFC – helped very much by China, which hardly missed a beat from its stellar growth path. So why is the International Monetary Fund (IMF) telling Australia to get its house in order? Why is the rating agency, Fitch, stress-testing Australian banks for the fall-out from a burst property bubble that it is not even predicting?
To top it all, the US Congress just voted to “punish” China for not doing the right thing in its economic policy formation. Imagine the Australian parliament having a vote to “punish” the US for causing the GFC! On second thoughts, I couldn’t face Rob Oakeshott’s speech.
A bursting property bubble would hurt our home-loan-dependant banks and their stock prices. With the banks representing more than a third of our equity market, the direct impact on the ASX 200 would be massive – not to mention the indirect effect on companies through their inability to lend.
Goldman Sachs just came out with a note stating there is no property bubble in Australia but homes are over-valued by up to 35 per cent (I hope you understand that one).
Fitch doesn’t think there is a bubble but wants to stress-test the banks for one anyway. Treasury and the Reserve Bank of Australia don’t think there is a bubble either.
The thing that gets me is that it is not possible to determine what value property should be unless you are prepared to assume there are no disequilibria. Home values are determined by demand and supply. Speculation – or a little over-exuberance of the purchasers (disequilibrium) – can cause bubbles; but the only way to effectively determine relative property prices is to set a benchmark. As with scientific experiments, you need a control group to measure what is going on.
So with whom should we compare ourselves? California, with all its State Government debt problems, non-recourse (throw-the-keys-away) home loans? Greece? Iceland? Ireland? Spain?
The prices in Australia are what they are because the buyers think it is such a great place to live; and home-ownership – for whatever reasons – is the thing to do. But property bubbles have burst around the world. Are we different? We have a few things going for us. We do not have an over-supply in the big cities. Paul Keating has recently been on about creating higher density living in Sydney to cope with the demand. Immigration has just slowed to a quarter of a million people in the latest 12 months. Where do they all live?
Most people have substantial equity in their homes – often through a 20 per cent deposit and capital gains since purchase. So, if prices were to fall, say, 20 per cent, most people would still have equity and so something to fight for. After all, unlike in America – the banks will make up any shortfall by going after any other assets you have – it’s called bankruptcy!
In the US, 100 per cent loans were being granted to people who had no chance of keeping up with the payments in a downturn. But will people in Australia just default on payments? We are virtually at full employment, with rates at the low end of anything we could consider normal. So most people are better off than when they took out the loan. Indeed, rates were probably higher for most people when they took out their loans.
What can, and may, happen is that property prices go nowhere for a while, as I show in Chart 1. That’s how prices have evolved in this country since WWII. I remember publishing a paper on Property Price Plateaus in 2003 – the last time the bubble story did the rounds. Brisbane had an 11-year plateau from about 1992, as prices only just kept up with inflation. Sydney had a seven-year plateau, et cetera. It’s because no one really knows what a property is worth that they bid prices up a little too far. No one wants to sell at a loss, so prices tend not to fall much; but they do not increase until the inflation erodes the previous over-pricing. Simple.
Perhaps it is not a great time to buy property for short- to medium-term speculative purposes. But if you need somewhere to live, just stay calm when you bid.
Ron Bewley is executive director of Woodhall Investment Research – www.woodhall.com.au
