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16-03-16 Ten reasons the property bubble isn't going to burst

Advice & Hot Topics-PROPERTY OBSERVER

Steve Jovcevski | 15 March 2016

Ten reasons the property bubble isn't going to burst:

Ten reasons the property bubble isn't going to burst: Mozo's Steve Jovcevski

GUEST OBSERVER

With plenty of hype around US property agent Jonathan Tepper’s predictions that Australian property prices will fall by 50 percent, here are ten reasons I think the Aussie property bubble won’t burst.

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.

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.

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.

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.

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%.

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.

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.

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.

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.

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%.

So where will the Australian property market go?

Property clearance rates are improving from last year despite predictions the market would keep dropping, so I’m still tipping prices will go up by 3-4% and will keep up with inflation.

Watch this space…

STEVE JOVCEVSKI is a property investment and home loan negotiator