I almost fell off my chair this morning when I read this Property Observer Op-ed piece by Steve Jovcevski on the reasons why the Australian property bubble isnt going to burst.
There is an extroardinary difference between what Australians are told and the reality when it comes to the housing market.
My responses to Steve’s 10 points from the Property Observer article below his quotes.
1. AUSTRALIA HAS HIGH CREDIT QUALITY
Australia and the US are two completely different markets. Australia has higher quality home loans thanks to stricter lending criteria and requirements, which means borrowers who are approved for loans can generally afford to service them. In contrast, banks in the US at the time of the GFC were lending to people who hadn’t provided paperwork and couldn’t service the loan – a recipe for disaster.
The Reality: I sincerely hope Steve Jovceski reads the LF Economics Submission into the Senate Penalties for White Collar Crime when the government releases it for public debate in the next week or so. Steve, like every other real estate cheerleader will surely be gobsmacked by the similarities in illegal practices between the Australian banking system today and the American banking system of yester-year when it comes to mortgage lending.
2. NOT AS MANY FORECLOSURES
Borrowers in the US weren’t required to stump up a deposit to get a mortgage. To make matters worse, banks had no recourse so a borrower could walk away from a property without being sued. In contrast, Australians can no longer borrow 100% of the property value, and lenders can seek financial retribution if a borrower defaults. Australian borrowers are therefore less likely to default on their home loan, resulting in fewer foreclosures.
Let me make this very clear. Most states in the USA (including Florida and Nevada) are recourse lending states. Why Australians continue to lie to themselves and the public that Americans can just return the keys to the bank if they cant pay their loan is beyond me.
If financial retribution means Australians borrowers are less likely to default on their mortgages, why the heck did the Irish housing market crash. Heck, in Dubai, you don’t pay your mortgage you could go to jail!! Furthermore:
-American borrowers were never allowed to borrow the same sums of debt relative to income.
– Many Australians borrow 100% all of the time by using ponzi financing. FHB’s get 100% financing by using their parents home as a guarantee.
-When a housing market hits the dirt in Australia, it really hits the dirt. We just need to look at the mining towns that have already taken a hit in recent time.
3. YOU NEED TO COMPARE APPLES WITH APPLES
A major problem with Tepper’s examples is that he was talking about the US as a whole and not comparing apples with apples. We need to compare prominent cities with other prominent cities, like Sydney with New York, which didn’t have much of a collapse during the GFC. No one would compare Logan in Queensland with Manhattan, would they? It just doesn’t make sense.
How on earth can you even compare Sydney to New York City? As someone who has lived in both cities, I can say unequivocally that compared to NYC, Sydney is a little quiet. To put it simply, Sydney is no NYC. The GDP of NYC is larger than all of Australia’s for pete’s sake. NYC is truly one of the worlds global hubs. You don’t see such global activity here in Australia period.
If you are going to do an apples to apples comparison Australians need to start looking at Florida or Texas as their cities have the closest economic, lifestyle and city elements. LA and San Francisco are too large and global economic powerhouses to make any comparison to Australian cities as there is no city that can economically rival those two mega hubs. This map of the greater San Francisco metropolitan area explains it all.
4. FINANCIAL BODIES ARE CLOSELY MONITORING THE MARKET
Down under, the Australian Prudential Regulation Authority is keeping a close eye on the market and responding swiftly. For example, last year when APRA found there were too many investors driving up the Australian property market, it brought in new regulations that required lenders to reduce their investor loan books. The banks responded quickly and as a result we haven’t seen a major drop in the property market.
The Reality: APRA and ASIC have the backbone of a chicken wing. Read the LF Economics Submission into Penalties for White Collar Crime when the APH release it shortly.
5. WE HAVE A STRONG EMPLOYMENT MARKET
For a 40-50% property collapse to occur, there need to be massive job losses and foreclosures – but we are seeing the opposite in Australia, as unemployment has dropped to around 6%.
The Reality: You mean unemployment has risen to 6%. When reality kicks in that Australia has overbuilt, all those construction jobs will unfortunately go. The domino effect is concerning when this takes place. Thats precisely what happened in Ireland.
6. THERE’S A LIMITED AMOUNT OF LAND AVAILABLE
The US is covered coast to coast with property, whereas in Australia we are restricted to areas around the coast where there is water and amenities, so we have a limited amount of properties available. We also have record migration at the moment, which will underpin prices for land.
The Reality: Australia only has 24 million people and more than enough dwellings to house the entire nation including the homeless. Migration is falling and most immigrants who come to Australia only have the means to rent and they aren’t paying a premium to rent suggesting no shortage of dwellings. The overwhelming majority of migrants do not have the financial means to purchase a property which theoretically should be driving rents through the roof. But there is enough dwelling stock to accommodate.
7. CONTINUED PROPERTY DEMAND FROM FOREIGN INVESTORS
The Australian market is also being propped up by continued investment by overseas buyers from countries like China.
The Reality: There is no evidence to suggest foreign buyers are putting price pressure across the whole Australian property market. Foreign buyers are not driving the the price of housing in Dapto. Aussies are doing that. There is only evidence of foreign buyers making an impact in a small handful of (roughly 30 or 40)suburbs across our major cities. Unlike the US where foreigners can buy whatever property they want, there are restrictions in place in Australia to what properties can or cannot be purchased.
8. THE MARKET IS SIMILAR TO 2003
If you compare the percentage of disposable income today to what it was in 2003, it is somewhat similar. Back then, the RBA increased the official cash rate and prices slowed down. However, prices still moved along with inflation – they didn’t drop. So we’ve seen this happen before and we are just as leveraged now as we were then.
It’s a whole different ballgame buddy.
9. THE RBA HAS ROOM TO MOVE
The good news is today the Reserve Bank of Australia still has 2% to play with, so if the market did start to collapse the RBA could push the official cash rate to 0%, which would help homeowners get through the tough period financially.
The Reality: If interest rates were to go to zero, how would Australia be able to access wholesale debt from the international market which the mortgage market is dependant on? If a major Australian bank asked the international wholesale lending community for debt in a ZIRP environment, trust me, wholesalers will be asking the banks to pay a heck of a lot more than 0% interest. Hence the housing market would crash with the ponzi financing system breaking down.
10. WE HAVE NEGATIVE GEARING
The US didn’t have negative gearing when the GFC occurred – and still doesn’t today. But tax benefits Down Under drive behaviour as many investors are willing to lose a portion of their wages for the benefit of capital gains and bringing down their taxable income. Even if negative gearing concessions were to be slashed, property prices are unlikely to drop by 50%.
The Reality: American owner occupiers have the same tax benefit to deduct from from their income. rather than investors