The extreme Armageddon-like Australian property outlook portrayed by the likes of Harry Dent, Dr Steven Keen and Jordan Wirsz have been extensively publicised recently by the media, spreading wide concern amongst first home buyers, and the largely uninformed mum and dad home owners. Whilst these views are not only unfounded, flawed and often sensationalised, they also have a tendency of robbing the average Australian of the opportunity to invest into an asset class that has proven its resilience to global economic downturns and recessions for well over 100 years, essentially scaring them from buying an investment property.
On this note, the most extreme point of view was voiced by US real estate analyst, Jordan Wirsz, who believes that Australia is heading towards a “property bloodbath” as the global economic downturn spreads, with a decline in property prices of 60 per cent. Mr Wirsz was quoted saying:
“Right now is not a time to be buying real estate in Australia,” and further to this, he stated;
“The market has slowed substantially but residential prices are likely to fall up to 60 per cent, possibly even more, within five years.”
Similar doom and gloom opinions were voiced by visiting US economist Harry Dent who recently said Australian house prices were 50 per cent overvalued, and were destined to crash, just like they did in the US.
Conversely, these extreme views have been largely slammed by Australian property experts, leading economists, and property research based companies including, but not limited to, Residex, RP Data, AMP, ANZ, HIA, BIS Shrapnel, HSBC leading economist -Paul Bloxham, and the list goes on. To put this statement into context, a 60 per cent decline in property prices across Australia would translate to, Sydney’s house prices dropping from $660,000 to $264,000, Melbourne’s house prices dropping from $550,000 to $220,000, and Brisbane’s house dropping from $580,000 to $232,000. It’s laughable, isn’t it?
Did I mention that this proposed ‘market crash’ is supposed to take place in an Australian economic environment which includes low unemployment rates, historically low interest rates, a strong Australian dollar riding on the back of a resource and commodities boom industry, not to mention a massive surge in incoming migration, most of whom will settle in the major capital cities, with a back drop of a decline in housing construction and shortage of dwellings of approximately 160,000 by 2021?
These ‘doom and gloom’ ravings of Steven Keen, Harry Dent, and Jordan Wirsz remind me of the childhood story of Chicken Little. For those unfamiliar with the story, there are several European versions, of which the best-known involves a chick that believes the sky is falling after an acorn falls on its head. Having reached this astounding conclusion, Chicken Little decides to tell the King. On his journey meets other animals (mostly other fowl) which join in the quest. After this point, there are many endings. In the most familiar, a fox invites them to its lair and there eats them all.
The main theme and phrase of this famous fable – The sky is falling! – has been used to make light of the behaviour of those paranoid individuals who catastrophise, or incite panic and fear in others, sometimes to the point of mass hysteria. The Mirriam-Webster Dictionary records the first application of the name Chicken Little to ‘one who warns of or predicts calamity, especially without justification’ – I cannot recall a better application of this phrase than the recent representation made by the likes of Steven Keen, Harry Dent, and Jordan Wirsz.
Before we examine the basis on which most of these doom and gloom arguments rely, keep in mind that this is certainly not the first time in the last 50 years that predictions of the Australian Property Market crashing have been made by so called experts, and academics. In all instances they were proven wrong, as the Australian Housing Median Prices continue to defiantly appreciate decade by decade. The table below depicts median price increases across the major capital cities in Australia since 1966.
It would seem that it’s been raining acorns for the Chicken Littles of this world over the last 50 years. Here is a short list of major economic events, both local and global that triggered a flurry of media articles and predictions that the Australian Property market would crash;
“Baby Boomers are facing an enormous challenge. And the sad fact is that they are probably not even aware of the problem. You see, if they haven’t sold their traditional inner-suburban homes before 2012 they need to be prepared to hold onto them until 2025, because there simply won’t be a market for that type of property before then.”
There is, in fact, an exhaustive list of other arguments that all predict that the Australian Property Market has to crash, ranging from demographic reasons, to economic reasons, stock market related reasons, to monetary and fiscal changes in Europe.
One argument used excessively by various commentators is that Australian house prices are overvalued, with the average mortgage representing the equivalent of 9.2 times the average annual income. Hence, the argument is, that this is unsustainable, as eventually people will not be able to service or even qualify for these loans if prices continue to rise. This argument was addressed in a recent report issued by the ANZ bank, senior economist David Cannington and Paul Braddick, head of property research at ANZ, stated that;
“Despite the continued concerns about significant Australian house price overvaluation from some commentators, housing market fundamentals remain supportive,”
The report goes on to state that majority of the capital growth in Australian median prices since 1986 can be attributed to gains in average household incomes and a structural decline in the cost of borrowing. See table below.
Furthermore, the report stated that some 92 per cent of the median price appreciation since 1986, of the residential market, can be explained by these two contributing factors (shown above) which are interest rates, and household income growth.
Here are my personal top 8 reasons why the Australian Property Market will continue to beat the odds and continue to exponentially appreciate over time, especially over the next 15 to 20 years.
1. Increasing Population growth via migration. If we look at the basics, the number one driver of house prices is demand, especially if that demand is every growing, consistent, and focused on specific areas and suburbs. This is definitely the case with the record high level of migration that is coming into the country on an ever increasing basis, year after year.
Based on estimates released by the Treasury, Australia’s population will explode to over 35million by 2056, that’s an increase of 14.5million people, most of whom will come from overseas. It’s important to note that most of these people will be living along the eastern cost of Australia, concentrated around the major capital cities like Melbourne, Sydney, Brisbane, and Perth. This point is further highlighted by the table below, depicting population increases in the specific cities around Australia. For example, the estimated influx of additional 3,355,957 people that will be migrating to Victoria, 2,991,976 of them will be living in Melbourne.
2. Australiana faces a looming housing shortage, and our Housing Industry cannot cater for the ever growing demand of housing. One of the most significant and perhaps challenging issues that will have to be addressed by the Australian governments in the next 5 to 10 years is how to solve the ever increasing housing shortage which according to the Housing Industry Association (HIA) will stand at approximately 160,000 by 2020 in NSW, 112,000 in WA, and there will be a shortage of 105,000 in VIC.
As can be seen by the table below, the shortage of new dwellings coming into the market is dire across the board, with a prediction of over 500,000 dwelling shortages across Australia by 2020.
Whilst these shortages are staggering, there are two more aspects of this issue that need to be appreciated in order to fully take in the gravity of this situation. The first is that the majority of new dwellings are being constructed on the fringes of the major capital cities in Australia in new estates. This is mainly due to established suburbs having height and density restrictions; large scale developers are usually left with fringe city farm land that has been rezoned as the place to establish new housing estates. In Melbourne, there are over 105 new housing estates located in all directions on the outskirts of the city. This means that the housing pressures on established suburbs and inner city areas are likely to keep increasing, along with their prices, due to the majority of jobs and infrastructure being concentrated in the city areas of the major capital cities in Australia.
The second point to appreciate is that currently Australia does not have a workforce that is capable of building 500,000 new homes by 2020. This shortage of skilled labour, combined with the bureaucracy involved in creating new land estates will continue to underpin property prices across the nation for decades to come.
3. Australia has strong economic fundamentals in place that will underwrite the demand for houses for decades to come. With the Australian Government’s constant focus on the trade and strengthening economic ties with the emerging Asian markets since the 1970’s, shifting from reliance on the western European markets has certainly paid off. Since the 1980’s Australia has experienced extensive periods of economic growth averaging 3.3 per cent in real GDP growth rates. This shift has turned Australia into one of the fastest growing advanced economies in the world.
Australia is the 13th largest economy in the world according to nominal GDP (current prices) and the 17th largest according to GDP (PPP). In 2010, Australia’s GDP (PPP) was US$882.344 billion – a 3.94 percent increase from 2009. Australia’s nominal GDP (current prices, US dollars) growth during the same period was even more amazing – GDP (current prices, US dollars) grew from US$994.25 billion in 2009 to US$1.219 trillion, a 22.68 percent increase.
With strong ties with China, who is about to relocate 130 million of its people into city areas, and skilled jobs, the likelihood is that China’s thirst for Australian’s commodities is likely to last for decades.
4. A unique banking system that is underwritten by the residential property market. Our $3.5 trillion dollar private residential housing market is completely dominated by the four major banks in terms of mortgage exposure, which only stands at about 30 per cent. Putting aside unencumbered houses and investment properties, owner occupied properties in Australia have mortgage levels where the average loan to value ratio is located somewhere between 50 to 60 per cent. This is a very important point to appreciate for two reasons. One, properties would need to devalue by 40 to 50 per cent before there would be any effect on mortgage sentiment, and even at that point in time, given the strength of the economy and emotional link to owner occupied living, most people would be hesitant to sell their house, and perhaps more importantly, two, the mortgage debt is not evenly spread against all dwellings across all suburbs. Taking Melbourne as an example, top suburbs like Kew, Camberwell or Balwyn have 65 per cent of all properties unencumbered. Contrasted with new our ring estates like Point Cook, Tarneit, or Pakenham, 95 per cent debt. The reality is that there are a lot of rich people in Melbourne, Sydney and Brisbane, sitting in houses that are completely paid off, and completely unaffected by any property price movements.
The other unique aspect making up the Australian banking landscape is the very stringent lending policies and credit scoring systems that are widely used in Australia, where the majority of loans written are full doc loans, insured by QBE or GE, resulting in an extremely low mortgage default rate of 0.7% per year. This is an extremely low default rate by international standards, and it’s a credit to our banking system, which has provided so much needed stability in recent economic times.
5. Strong social emphasis on house ownership, entrenched by government and developers. We have all heard at one time or another that the‘Great Australian Dream’ is to own a 4 bedroom house on a 1200 square metre block. Whilst for many this is a now all but a dream, with median prices around Australia’s major capital cities hovering around the $550,000 to $600,000 mark, and realistically requiring $900,000 to buy a 4 bedroom house in an established area, many first home buyers or migrants struggle to buy into one of the most expensive markets in the world. Ranking ahead of London, New York, Rome, Los Angeles, Berlin or Hong Kong, the latest survey by the Economist Intelligence Unit, shows that Sydney leads the list of the five Australian mainland capital cities in the Top 20. Sydney globally is ranked at number seven, slightly ahead of Melbourne at number eight. Perth is the 13th most expensive place to live in the world, Brisbane is 14th and Adelaide is 18th.
One of the contributing factors to the resilience of our residential property market is the extensive push by our government since the end of the Second World War into home ownership. This has, in large, been reflected in the various financial incentives, such as the First Home Buyers Grant, offered by both the state and federal governments. The other major contributing factor is the constant drive and advertising by major land developers such as Delfin, Vic Urban, Australand and others, depicting families in new house and land estates. This relentless push of home ownership has resulted in a deep entrenchment of home ownership as part of the Australian culture and rite of passage from one generation to the next. The point being made here is that one cannot underestimate the potency of the belief systems and values of a society, that have been developed and reinforced by family members and peers over decades.
6. Geographically isolated premium suburbs, and estates. One of the most unique features of the Australian Housing landscape is that virtually every suburb in Australian came into existence within the last 200 years, and more importantly, each suburb was at one stage a ‘master planned’ estate that was sold to home buyers based on a stage released process. This means that each and every suburb at one stage or another had a similar price range, and housing design guideline, attracting a similar type of buyer based on demographic, and income band. Needless to say, over time, some suburbs have transformed, with many of the traditional inner city suburbs which were originally made up of blue collar workers, such as Melbourne’s Middle Park or Port Melbourne, have now attracted white collar workers due to their unique proximity to the city, being 3 to 4 km, access to infrastructure, and the beach. However, there are always exceptions to this rule; many of the original affluent suburbs have also remained affluent over the decades, such as Melbourne’s Toorak, South Yarra, Canterbury, Kew, all of which shared a common thread of having land blocks in excess of 1000 sqm and houses of 25 to 50 squares being offered in the original suburb marketing plan. The end result being that Melbourne, Sydney, and Brisbane have ended up with very distinctive and often fragmented property markets, virtually independent of each other, and have no real common links. In Melbourne for example, there is no correlation between Broadmeadows in the western suburbs, where the median price is $350,000 compared to Toorak, where the median price is $2.75million. These distinctive suburbs house have virtually nothing in common, in terms of level of debt, income bands, job industries, etc.
Due to this unique and fairly recent establishment of suburbs by international standards, within the main capital cities around Australia, we have ended up with a situation where the rich are concentrated in very specific areas or suburbs, as are the middle class, as are the less affluent. This has resulted in different suburbs and areas being affected in completely different ways depending on what the economy or interest rates are doing. During times of high interest rates for example, the outer ring suburbs in Melbourne experience much higher ‘mortgage stress’ levels than the ‘old money suburbs’, where over 50 per cent of house are completely paid off.
Further to this, suburbs within the 10km ring around the CBD have also been under mounting pressure due to their close proximity to major job hubs, transport, and lifestyle areas.
7. Taxation system that is biased in favour of property investing. One aspect that has been a catalyst of property investing is the numerous tax advantages that are available to property investor due to a unique tax system. The list of tax deductions that are available under the current tax legislation runs literally into hundreds of potential tax deductions that are available to individuals who choose to invest in property. Perhaps the most notable of these is the ability to claim the interest component of the loan as a tax deduction, not to mention building deduction of 2.5 per cent over 40 years, depreciation of fixtures and fittings over 5 to 15 years (depending on method of depreciation, diminishing value or straight line) and a multitude of other deductions relating to upkeeping; insurance, property management costs, and ongoing costs associated with an investment property. All of these factors combined have the potential to turn a negatively geared property (whereby the rental income from the property does not cover the interest only repayments) to a neutrally geared property or even cash flow positive.
Essentially, the implications of a taxation system that is completely biased in favour of property investing means that accountants, mortgage brokers, and some financial planners will continuously be recommending direct property investing as a holistic solution to wealth creation.
8. Social proof of property investing as a safe, predictable way to make money. Despite the recent international stock market volatility, according to an investment report by Russell Investments, the average house in Melbourne has returned an average of 49.8 per cent over a five year period until June 2011. This equates to an average annual return of 9.98 per cent per year, which is a hefty contrast compared to the stock market, bonds, or commodities. What’s more astounding, is that despite all the doom and gloom predictions, and in light of major international economic turmoil, the Australian Residential Property Market has managed to return an average of 10.1 per cent for the 10 year period until June 2011, and a staggering annual average of 11.6 per cent of a 25 year average until June 2011.
Similar results were documented in a recent ANZ report, which showed that over a 24 year period, taking costs, taxes and gearing into account, property was the winner compared to that of the ASX200, Government bonds, Commercial Property and term deposits. See table below.
Further studies by RMIT substantiated these findings, showing that over a 20 year period of time, residential property outperformed the ASX top 200 companies. The ANZ report called ‘Australian Property Research Asset Returns: Past, Present and Future’, showed that once all the associated holding costs were considered for the various assets included in the study, owner-occupied housing was found to have generated an annual return of 12 per cent. Investment property 9.6 per cent, stocks 8.9 per cent, government bonds 4.8 per cent, commercial property 4.2 per cent and term deposits 3.7 per cent.
Despite these unquestionably outstanding results, every year there is a new breed of ‘doom and gloom’ seers, who eagerly await the mythical property bubble to finally burst, and for the property market to come tumbling down. These prophets of doom seem to reappear every time the property market enters its decline or stabilization part of the property cycle, and they disappear as quickly as they came, when the market shows signs of recovery and progresses, once again, to the upturn and boom part of the property cycle. They then retreat into the dark cubicles, libraries, or university research departments, collecting new documents and data, preparing for a new opportunity to herald their next Apocalyptic prophecies.
At the end of the day, you will have to make up your own mind on the outcome of the Australian Property Market, and whether or not it is ‘safe’ to invest. Invariably, some will go the way of Chicken Little, assuming ‘the sky [or market] is falling’, catastrophising their way to quiet desperation. Others will proceed with caution, evaluating the true situation, recognising the excellent prospects before them. Personally, I advise you to pause and be wary of the hysteria – it has been the source of regret for so many Australians, who, after realising their lost opportunities, have now been forced to swap their old mantra for a disheartening new one; “If only”. So instead, do this; go out, buy a helmet, and the next time ‘The Oracle’ hollers that the sky is falling, look up, look down, and realise, it’s just an acorn.