Economy

The biggest property myth of 2011

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Probably the biggest property myth of 2011 was the claim that Australia was in a “property bubble” that was about to burst.

It was only a few years ago when “doomsday economist” Steve Keen predicted Australian house prices would plummet. Awkwardly for him, average house prices went up 40% rather than down.

Interestingly, he now predicts that house prices will fall around 10% this year. I must admit I can see property values falling further in some areas, but I don’t see a property crash happening.

Watch out for the economic tsunami

Let’s not forget Harry Dent, another purveyor of doom, who came to our shores last year warning that an economic tsunami was about to hit. Starting in Europe, Dent predicted the downturn would spread to the US, China and eventually Australia, causing property values to drop to levels not seen since the late 1990s.

He was right about the economic troubles facing most of the world, but I don’t think he understands the fundamentals of the Australian property markets.

I’m not suggesting we are immune to the overseas problems, clearly we are not, but I can’t see a property crash occurring here.

What about affordability?

Throughout the year there were cries that housing is unaffordable and “something” had to be done.

The year finished off with The Economist magazine warning that Australian house prices could plunge by as much as 25% on the back of a global credit crunch caused by the European meltdown. This is not as bad as last year when the pundits suggested our property markets were overvalued by 61%, based on the ratio of house prices to rents.

This year started off with the latest Demographia International Housing Affordability Survey reporting that, “Australia exhibited the worst housing affordability of any national market outside Hong Kong”.

So is our property market really so overpriced and is there a bubble waiting to burst?

Let’s start by looking at the latest figures from RP Data. They suggest Australian property values fell by 3.6% nationally for 2011, with Brisbane and Melbourne experiencing a 6.8% and 6.1% market value decline respectively.

The most recent Australian Bureau of Statistics figures suggest capital city house prices fell 4.8% over the last year.

The predictions of a property market crash just did not eventuate in our main capital cities.

Of course, it did in some of our holiday locations, like the Gold Coast and the Sunshine Coast, but these were never really areas to invest in.

I know some property pessimists would argue that the bubble is just getting bigger and bigger, which means Australia is heading for an even larger property crash.

Is housing really unaffordable?

I agree that to many, housing in Australia is expensive. But that’s what comes from having large dwellings in some of the best spots in the world to live.

Let’s face it, house prices got ahead of themselves in some parts of Australia and have since corrected, especially in the more affluent areas and holiday locations.

But that does not necessarily mean property is unaffordable or that it is going to crash.

The most commonly used benchmark to determine whether housing is affordable is if it costs less than 30% of the household income. However, some households can afford to spend more than half of their income on mortgages or rents, while others struggled when housing ate up 30% or less of their gross earnings.

Another way of measuring affordability

A new study by the Australian Housing and Urban Research Institute strongly suggests that the traditional method of calculating housing affordability is outdated and should be considered in conjunction with other ways of weighing up whether people can afford their mortgage or rent.

According to a paper from the United States Census Bureau, the rule that households can devote 30% of their income to accommodation costs before the household is said to be “burdened” evolved from the United States National Housing Act of 1937.

Times have changed a lot since then; we now live very differently.

There are a lot more DINKS (double income no kids), SINKS (single income no kids) MINGLES (middle-aged singles) and one-person households.

Yet another way of looking at affordability

Property commentator Michael Matusik suggests that instead of the 30% rule, one should look at the income left over after debt servicing, as this approach paints a different picture to that obtained simply by calculating the proportion of income devoted to repayments.

Rising incomes have allowed households to meet rising loan repayments while maintaining (and often increasing) living standards.

Matusik believes that rising household incomes mean that the 30% traditional affordability benchmark is now outdated.

In fact, given higher income levels now, households can devote as much as half of their income to debt servicing, while maintaining the same standard of living.

The AHURI study I mentioned above found similar results.

Now don’t get me wrong, I’m not saying that some people are not suffering from mortgage stress. What I am saying is that some households can easily afford 50 to 60% of their income going on rents or mortgages and still have plenty enough left over.

What it boils down to is that potential first home buyers need to understand that buying your first property is not easy. It never was.

It involves saving discipline, sacrifice and compromise and perhaps not purchasing your “dream home” straight away.

Why I don’t think the Australian property market will crash

Currently a tug of war is affecting our property markets, with low interest rates pulling hard on one end of the rope and economic uncertainty joining forces with subdued prospects for economic, income and employment growth at the other.

I expect the economic side of the equation to win out in the near-term, influenced in the first half of 2012 at least by continuing global financial turbulence.

This will mean property values are likely to remain flat in most parts of Australia for the first half of the year.

But our overall market is unlikely to collapse. For that to occur we would need to have high interest rates, massive unemployment, a recession or a failure of our banking system.

I can’t see any of these events happening in the foreseeable future.

In the meantime, we’ll see more US analysts surprised that Australian real estate hasn’t collapsed as their market has. The problem is that these economists keep analysing Australian properties as if they were shares – it’s like comparing apples with oranges.

Remember in Australia, 70% of properties are bought by owner-occupiers. And one of the things that keeps pushing our property prices up is that, by and large, these property owners all want to live in the same areas.

If you think about it, 70% of our population lives in one of eight capital cities and most of these people want to live in the inner and middle ring suburbs, near the city, near amenities and near their jobs.

Secondly, Australia doesn’t have suburbs full of empty houses awaiting mortgagee sales like the US. And despite our population growth falling lately, it is still growing at a rate faster than most developed nations.

Sure, some Australians currently have issues with housing affordability and are putting off their home buying decisions. But people still need a roof over their heads. People are still getting married and people are still getting divorced, some are having babies and others have to move house for their jobs.

If they can’t afford to buy a house they rent one, hence vacancy rates are at unprecedented lows and pushing up rental prices.

We are moving into the next stage of the property cycle

And the next stage is the stabilisation phase of the cycle.

You see, the markets don’t move directly from the downturn phase to a property upturn. There is a period of time where buyers return and take up the slack before prices start rising.

And I expect more buyers to return to the market this year when they realise prices won’t fall any further.

By the way, the stabilisation phase is a great time for savvy investors to get set for the upturn stage of the cycle.

This year may be a good time to buy property – I have always found it a good time to buy when everybody tells you that property is a bad investment.

Now is the time to get set for the future.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.

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