September Newsletter 2010: Debunking the Property Bubble Myth; Property buyer’s September Update

Welcome to your September propertybuyer market update. In this edition we will look at…

1. Market update – Debunking the Property Bubble Myth
2. Singapore Property Expo – October 9 & 10
3. Clients stories
4. Sydney Property Expo – Rich is keynote speaker (Oct 29-31)
5. DVD – Why and Where to Invest in Sydney
6. Inspiration Corner - Thoughts of the Month

1. DEBUNKING THE PROPERTY BUBBLE MYTH: BY RICH HARVEY

1. Low interest rates,
2. Large government handouts or subsidies for home buyers or investors,
3. Widespread speculation on property (lots of spruikers, off-plan sales and wealth education seminars everywhere),
4. Banks lending to anyone, lending over 100% on valuations and dramatically relaxing credit policies,
5. The arrival of more non-bank lenders and a return to high LVR no-doc loans,
6. A much larger proportion of investor loans as a percentage of total mortgages,
7. Auction clearance rates over 90% in each capital city….and
8. Buyers generally paying over-market prices for fear of missing out.

1. Unemployment rising rapidly,
2. A dramatic increase in housing supply
3. China dramatically reducing demand for our natural resources,
4. Interest rates rising by another 2.5% or mortgage payments rising to over 60% of average incomes,
5. Major tax changes to negative gearing making property investment less attractive

But in reality, our economy is the envy of much of the developed world. We have GDP growth on track for 3.25% this year and possibly rising to 4% in 2011. Unemployment has declined to just 5.1% and the labour market is gaining significant strength off the back of rising confidence, commodity prices and large-scale business investment around the nation.

Interest rates are now back up to their long term levels and our government debt (while higher due to the GFC stimulus package) is still much lower than any of our overseas counterparts. Our public debt currently stands at 17.6% of GDP (Gross domestic product) which is sustainable and manageable. Compare this to the US at 53% (which engages in large scale bank bail outs), UK at 68%, Canada 75% and Japan a massive 189% of GDP.

In terms of the property market, it is very hard to see how a strong economy will result in a property collapse. The property market has already cooled significantly since May and we expect prices to go sideways for the remainder of 2010 before beginning the growth cycle next year.

The biggest problem with the bubble commentary is that it is all about averages and not specifics! There are many different markets within Australia and property values are location specific. The average house price of property in Mosman is currently $2,422,500 while the average price in Penrith is $345,000. There’s also a big disparity in prices from inner harbour suburbs to outer suburban areas.
Australian real estate is unique in the world and that’s why our prices are high. Melbourne was voted as one of the world’s most liveable cities, Sydney has a spectacular harbour, loads of national parks and excellent beaches, Brisbane and Adelaide have great waterways, lifestyle precincts and housing styles.

The Reserve Bank of Australia has just released a research paper rejecting the idea of a housing bubble. The RBA claim that the range of problems suffered in the early 2000’s are not present, that investors now play a less prominent role in the market, banks have tightened lending policies and that the ratio of house prices to income has been relatively flat for a number of years.

The Commonwealth Bank (CBA) has also weighed in heavily in the debate noting that the average loan to value ratio is just 43%. The CBA also point out that we have much larger houses compared to our overseas neighbours – the average internal size of an Aussie home is now 214m2 compared to just 150m2 around 25 years ago (and for new homes the average is 245m2).

So does the bubble theory hold any weight? Here are my seven reasons to debunk the bubble myth:

1. Massive undersupply in housing – Dwelling completions (ie supply) of housing is estimated to peak at just below 160,000 in 2011 before retreating to 150,000 in 2010. This remains well below our underlying housing demand of 200,000 pa. (ANZ estimate that we will be short 400,000 houses by 2014).

2. A growing economy with GDP growth on track for 3.5% pa. A strong economy builds consumer and producer confidence. Australia has had a fairly resilient economy and has further capacity to borrow if required to generate a further stimulus.

3. Unemployment is down to just 5.1% (which some say is the natural level or the full employment level). With increasing demand for workers and wages pressure building, there is little risk of mortgage defaults. The current rate of mortgage defaults (repossessions) in 2009 was 3800 (which equates to around 0.5%). Compare this to the dire situation in the US where defaults were over 300,000 due to sub-prime lending.

4. Credit policies of the major banks were tightened during the GFC but are now being slightly wound back. Some LVRs for major banks is going from 80% to 85%. I don’t expect the re-emergence of low-doc loans but a gradual increase in LVRs. Below is a quick snap shot of Australia’s overall LVR:

Of a total of 10 million dwellings in Australia:
3,500,000 mortgaged
3,000,000 no mortgage
2,500,000 investor owned
1,000,000 empty dwellings

Total value of Australian housing is $4.4 trillion
$3.3 trillion is equity
$0.4 trillion is investor debt
$0.4 trillion is upgrader debt
$0.3 trillion is first home buyer debt

First home buyer debt only makes up 6.8% of total lending. The overall LVR is just 25% (ie 1.1/4.4 = 25%). Therefore its hard to imagine how prices could collapse given the sizable chunk of equity. Many Australians households are prepaying their mortgage in advance, a scenario unlikely in the face of an imminent burst.

5. House price to income ratios above average (but not at unsustainable levels).
I recently interviewed Paul Braddick, head of Property Research at ANZ Bank. Braddick produced an excellent article titled “Are House Prices Overvalued” in which his main argument is that comparisons of Australian real estate prices to overseas countries are misinformed because they are using the wrong measurements. The overseas economists use a “house price to income ratio” – but this is fundamentally flawed because it does not consider interest rates.

The chart below explains the situation. In the mid 1980’s we had much higher interest rates averaging around 14%. However, since 2000, the average mortgage rate has been hovering around 7%. Braddick notes that the halving of the interest rates fully explains the rise in the “income to house price ratio”. In other words while we used to spend three times our average income on housing, we are now spending around five times, but this is still affordable because the average mortgage rates have declined.

The current interest rate will determine the “Affordability” of housing and competitive buyers will drive property prices the maximum extent within that interest rate constraint. With low interest rates at say 5%, more buyers will enter the market than with interest rates at 9%. Under high interest rate conditions, only those on higher incomes can afford mortgage repayments for higher priced properties.

6. Population growth – from natural increase and migration.
Australia’s population stands at 22.1 million. Last year we had an increase of 432,600 people of which 277,700 was overseas immigration. Growth projections point to a total population of 36 million by 2051. This will result in continued demand for housing near major employment areas (ie cities).

7. Property prices have already slowed. Figures compiled by RP Data Rismark have shown that in the June quarter, national prices rose 11.8% from a year earlier. Rising interest rates will make it harder for first home buyers and renters. Only those with solid incomes and good credit will be able to get approval to purchase. Interest rates are like a rationing device the RBA uses to help stimulate or cool the economy (and house prices) at various points. Between Feb and May this year we found the market to be very strong and in fact we missed out on virtually every auction we attended for clients (we won’t let clients go beyond a reasonable limit). Auction clearance rates in both Sydney and Melbourne have cooled – last weekend Sydney was 63% and Melbourne 66%.

In summary, there’s no doubt Australia property prices in capital cities are high, but we are not in a property bubble! There is a high level of resilience amongst Australia’s household debt and Aussie real estate owners exhibit a stronger tendency to keep up repayments ‘no matter what’ as shown by a very small rate of mortgage delinquencies in the country (compared to others) thus minimizing the chance of a rapid fall.

If you are considering buying a home or investment property and would like to get the upper hand with a professional buyers’ agent representing just you (not the vendor), sourcing and negotiating the best opportunities throughout Sydney and Australia, then please call our team on +61 2 9975 3311 or This email address is being protected from spambots. You need JavaScript enabled to view it. for an obligation free chat.
Click here to send us your property Wishlist…

2. SINGAPORE PROPERTY EXPO

I have been invited back as a speaker to the Smart Property Expo in Singapore on the weekend of 9th and 10th October at SUNTEC Singapore International Convention & Exhibition Centre. Rich will be speaking on Satuday 9th at 1.45 pm and also on a panel discussion looking at investment opportunities in the Australian property market and the latest updates.

If you are an expat or investor living in Singapore and would like to meet up with Rich he will be available for private meetings on Friday 8th or Monday 11th October. Limited time slots are available so please email directly to This email address is being protected from spambots. You need JavaScript enabled to view it. if you would like to make an appointment.

3. CLIENT STORIES

4. DVD - Why and Where to Invest in the Sydney Property Market

Our most recent seminar was a great success with positive feedback and most people rating the night 9 out 10 on the topics covered. A DVD recording was made of the evening and is now available for sale at just $19.99 + $5.00 postage and handling

To purchase a copy of the DVD:

1. Call the propertybuyer office on +61 2 9975 3311 with your credit card details
2. Email us with a request to This email address is being protected from spambots. You need JavaScript enabled to view it.
3. Download an order form from our website: seminars-program

5. SYDNEY PROPERTY EXPO coming soon

Keep the dates of October 29- 31 in your diary. We will exhibiting at the Sydney Property Expo and Rich has been invited back as a keynote speaker for both Saturday and Sunday and giving presentations at 2.00pm each day. He will also participate in an expert panel alongside David Airey the President of the Real Estate institute of NSW.

6. INSPIRATION CORNER

“Bravery is a mean between cowardice and recklessness.” Aristotle

"Procrastination is the grave in which opportunity is buried." Anonymous

"If people throw rocks at you, collect them and build something.” Jim Garrett

"The manner of giving is worth more than the gift." Pierre Cornneille


I hope you enjoyed your September market update and we look forward to keeping you informed in the next edition.

To get a professional buyers advocate on your side sourcing and negotiating the best opportunities throughout Sydney and Australia, please call +61 2 9975 3311, click our wishlist, or This email address is being protected from spambots. You need JavaScript enabled to view it. to find the easier way to buy property.

Warm regards

Rich Harvey
Managing Director
Tel: +61 2 9975 3311
www.propertybuyer.com.au


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Many thanks. Rich