There has been a lot of hotly contested debate recently about whether house prices in Australia will ‘crash’. Some pundits have predicted that property values will drop by as much as 40% and yet others predicted prices would crash in 2010 or 2011.
2010 and 2011 are now history and despite poor performances in some pockets of the country where clearly there was a highly speculative market, overall, house prices have only suffered around 3% decline nationally.
Frankly, I think there are some very good reasons why house prices won’t crash and I sit firmly in the ‘no crash’ camp. In fact I think that whilst we may see a further small decline over the coming year, with some speculative areas still to feel more pain, I believe house prices will remain generally resilient, but flat over 2012 and a general, but slower recovery and growth in 2013 and beyond.
So, here are my 8 reasons why I think house prices won’t crash
1. Our economy remains strong relative to the USA and Europe.
Contrary to the tale of woe being experienced in Europe and to a slightly lesser extent, the USA, our economy is chugging along quite nicely thanks largely to the resources sector. And even if Australia was to experience an economic downturn, the RBA has plenty of room to move on interest rates and therefore provide a stimulus to the domestic economy, unlike the US and most of Europe where central bank cash rates are already at or near 0%.
2. Our population is concentrated in the major urban areas
Well over two thirds of the population live in Australia’s seven capital cities and this is not likely to change, because outside of a few regional areas associated with the mining and resources sector, the capital cities are where the jobs are. And with population growth running at around 2% there is going to be an ever increasing demand on housing in the cities. Of course this will put increasing pressure on urban boundaries of the cities but people will generally want to live as close as possible to where the jobs are and where the action is, which inevitably is closer to the cities’ core.
3. We are large and isolated
Our isolation, as a nation from the rest of the world actually works to our advantage. It means we don’t share borders with other countries which might influence our population bases and location living choices.
4. Our banking system is strong and well regulated
During the GFC our major banks were amongst only 14 globally that maintained a AA credit rating, with combined profits last year of over $24 billion, a regulatory system that is considered second to none and a government that all too readily supports the banks with taxpayer dollars, there is no doubt that we have a robust and perhaps too profitable banking system. Banks continue to make exceptionally good profits across all business units and in particular from their home loan books. Whilst there are some ‘headwinds’ ahead with respect to increasing cost of funds on the global markets, bank’s continue to benefit from conservative Aussies who are now saving at a historically high rate which is easing pressure on the need to access funds offshore.
5. A tax system that favours housing
For investors there is the ability to allow interest payments and other costs to be written off against personal income and then if you sell the property you get a 50% reduction in the Capital Gains Tax, provided you have held the property for at least one year. For owner occupiers, their home will always be exempt from Capital Gains Tax so any increase in value, by whatever means, is a tax free windfall.
Successive governments have been loath to change any of these benefits as they know that it will cause immense voter backlash and also a drop in house prices which would have an enormous negative impact on other revenues from property.
6. We are not building enough houses
If you look at the total number of houses in Australia and the average number of people per house, which is reducing, across the country then you could certainly argue that we already have enough houses in Australia. The problem is that a percentage of these houses are unoccupied for various reasons, some are infrequently used holiday houses and some are just plain derelict. However, the big problem is that there are not enough houses in the locations where houses are needed. And that is where the population is growing and where the jobs are, which tend to be the Capital Cities. So, in these areas of undersupply they need to build more houses and if they can’t keep up with demand then property prices will naturally go up. The inverse is true for areas in low demand/growth or with poor job prospects.
7. It’s generally easy to get a home loan
Australia has one of the most innovative and robust home loan markets in the world. In fact, of recent years both the US and UK have sought to introduce products into their markets that us Aussies have had access to for years. Banks are always keen to lend against bricks and mortar security as it is seen as a safe investment for them as well as giving the Banks a good return on equity. Australia also has one of the lowest home loan default rates in the world. Consequently the Banks lending policy’s are reasonably generous as their risk is low, particularly where the loans are mortgage insured which protects the Bank should the loan default and cause a loss.
8. Vested interests of government
Both State and Federal governments have a vested interest in maintaining a robust property market. For every block of land that is sold, every house that is built and every renovation the federal government gets GST income. And for every housing transaction, State governments get enormous amounts of stamp duty revenue as well as Land Tax from property investors which increases dramatically as property prices increase. If housing prices were to decline then people would stop buying houses, stop building houses and largely stop renovating houses which would cost the government, both state and federally enormous amounts of revenue. If indeed house prices start to decline more than a couple of percentage points don’t be surprised if federal and state governments start to offer more incentives, particularly to first home buyers, to boost transactions and therefore keep activity in the markets, which in turn will keep prices up.
I still maintain that now is one of those ‘once in a generation’ opportunities for the astute, educated and well researched investor. Property should always be a good size part of any portfolio of investments and my old, trusted and well used saying that ‘the deal of the century comes along at least once a month’ is never truer than right now.
Mark Lewis is the Executive Chairman of Bernie Lewis
This article is for general information only. Since everyone's personal financial situation is different this article can't be taken as financial advice. If you would like to discuss this article further or how it could relate to your personal financial circumstances please give us a call on (08) 8300-8300 so we can discuss it with you in more detail.
