Property Crash Just a Myth

ONCE again, the apocalypse has been averted and the four horsemen have ridden off to create havoc elsewhere. Rather than the much-heralded assault on the Australian residential housing market, as has been predicted for the past five years by an ever-increasing host of international and domestic doomsayers, we are instead witnessing an orderly retreat.

There's little doubt that Australian property is likely to be subdued for at least the next few years and that values here are likely to decline. As in previous times, the property market appears to be settling in for a prolonged hibernation after a debt-fuelled run-up. But those gleefully predicting a US-style crash in the Australian property market are so far wide of the mark it beggars belief that anyone bothers to listen.

About the only place there has been a US-style property market crash in the past few years is in the US, a catastrophe sparked by reckless lending and a total failure of regulatory oversight that ricocheted around the globe in 2007, sparking round one of the global financial crisis.

Those American-style excesses (loans to borrowers with no ability to repay) were almost universally repelled in this market. As a result, we've largely avoided the after-effects. That hasn't stopped the hyperbole by an ever increasing mob of normally reputable commentators. But the facts are far more sobering.

The official figures released this week by the Australian Bureau of Statistics clearly show a downward trend in the domestic housing market. Overall, we experienced a 4.8 per cent national decline in the 12 months to the end of December. But the manner in which the declines were carved out provides the most interest. Australia may be a nation in the throes of a once-in-a-generation economic transformation, with resources squeezing out traditional industries, but there has been little evidence of that in demand for housing.

Among the biggest surprises was that Brisbane, one of the beneficiaries of the resources boom, led the housing market price declines with a 6.7 per cent drop in the year to the end of December. Adelaide and Melbourne were next. But the biggest surprise was the pullback in Perth residential real estate, shedding a whisker under 5 per cent. Unlikely as it may seem, Sydney was the best performer of all with a decline of just 2.7 per cent over the year.

Australian residential real estate is expensive on just about any measure. And it is clear it has reached a tipping point, for it has outgrown the capacity of Australians to service the debt required to buy a property. Not only that, the stronger dollar has made our property more expensive for foreign investors. But to employ that argument as the exclusive rationale for a domestic property market collapse is naive and ignores basic economic fundamentals of market operations - supply and demand.

Given the tighter lending criteria imposed upon our banks during the boom years up until 2008, the only way that we will experience an American-style property crash here is if there is a serious lift in unemployment, which would spark loan defaults and a flood of distressed property onto the market.

That's not impossible. But it is highly unlikely given our current historically low unemployment level and our place in the global economy as a resources supplier plugged into the only growth region in the world right now.

For a US-style property collapse to occur here, we would need to see sovereign debt defaults across Europe, the disintegration of the European Union and an international banking crisis that would cripple even China. And if that happens, we'll have bigger concerns than the price of our homes.

As with any market, there is a delicate balance between supply, demand and price. For those pining for ''the good old days'' when we had ''affordable housing'', it is time for a reality check.

Housing was never affordable. All that's changed in recent decades has been a shifting of the equation surrounding supply, demand and price. In the good old days, the only reason housing was far cheaper - on an average earnings basis - was credit was restricted. Up until financial deregulation in 1983, our banks had to labour under the yoke of federal regulations that prohibited them from offering home loans to customers above 13.5 per cent. Credit was in such short supply, few were offered enough cash to buy a home.

It wasn't until our banks discovered cheap offshore credit in the mid-1990s, and brought the cash onshore, that we suddenly had ''affordable'' home loans. But the cheaper credit simply shifted the price of real estate higher.

It was a windfall for the banks, for the real estate boom resulted in ever larger loans. And those larger loans bloated the earnings of our major banks, a financial perpetual motion machine that now came to an end more than two years ago.

As a nation, it's left us with a serious, but not insurmountable foreign debt problem. (That's right, it's a private, not a government, debt that is the problem.)

It also is the reason global ratings agencies are considering downgrading our banks, particularly given the threat to international finance from Europe. And it goes a long way to explaining why our banks have aggressively switched back to domestic funding, to raising their cash at home. The adjustments are in place. A crash? Don't bet the house on it.

Property Crash Just a Myth

Chinese Buyers Pick Up Property in Australia

Foreign developers made up about 30 per cent of the Australian market last year, and China took up 9 per cent of that – an increase over previous years.

The China Daily News reported that more than 1,200 apartmentswere either planned, being marketed or were under construction by Chinese companies in Australia in the fourth quarter of 2011, according to real estate firm CBRE. The Chinese mainland was only led by Singapore (37 per cent), Hong Kong (20 per cent) and Malaysia (12 percent ).

They did not offer comparison numbers for 2010.

Chinese investment is being driven by rising Chinese wealth, a desire for secure investment, and freehold laws. “Unlike in China, once a buyer purchases property in Australia, it’s theirs forever and can be passed down from one generation to another”, Melbourne real estate agent Chris Bevan told China News Daily.

Bevan said his recent sales to buyers from Shanghai ranged from two-bedroom apartments priced at $300,000 to a luxury beach-front home for $18 million around Melbourne.

He said JPDixon, the company he represents, has attended property shows in Shanghai for the last three years. “(This)helps keep our real estate and economy growing,” he said. Another factor driving investment is the Australian education system: There are some 160,000 Chinese students in Australia, and many Chinese families who can afford it would prefer to buy an apartment nearby.

It's Going to Be the Year of the Unit - Apartments Sydney

New or old, apartments will be a popular choice for Sydneysiders in 2012.

It's just possible that apartments, especially those at the cheaper end, are one bright spot in Sydney's real estate market.

Prices generally for units have performed better than those of houses during the past five years, according to RP Data - with units recording average annual growth of 5.2 per cent compared with 3.6 per cent for houses. In the 12 months to December, RP Data reports unit prices rose by 0.9 per cent, while house prices fell by the same amount.

RP Data's senior research analyst, Cameron Kusher, says units should continue to do well this year and the more affordable ones should do best, even though there will be fewer first-home buyers now that the stamp duty exemption has ended for existing properties under $600,000 (it continues for new properties).

Kusher and other experts believe there are several reasons why units will continue to prove popular. The most obvious is that in a city as expensive as Sydney, they are the cheapest way into the property market. And with rents continuing to climb and the rental market in most suburbs very tight, this creates an incentive to buy.

A director of Richardson and Wrench, Peter Baldwin, believes the rising cost of renting makes buying a unit a much more sound option at the moment. ''It will be a price-factor thing,'' Baldwin says.

''The young ones won't be able to afford houses.''

A second reason for the popularity of apartments is that Sydneysiders are actually growing to like living in them.

''There's no doubt about it, people are embracing apartment living,'' says the senior economist at Fairfax-owned Australian Property Monitors, Andrew Wilson.

Prices

One of the biggest influences on the price of apartments (and houses) this year could be decided this week. The Reserve Bank is widely tipped to announce the first of several more cuts to interest rates on Tuesday, which, if banks pass the cuts on, would make prices more affordable.

The head of real estate strategy at Macquarie Capital, Rod Cornish, says if the cuts occur, affordability will ''be getting back to 2002 levels''.

''That is going to encourage the market to stabilise first and by the second half of this year, we think there will be some mild growth,'' he says. ''[That will be] predominantly growth in the mid-price range - $400,000 to $800,000 - because that's the one that will be most affected by the cuts.''

Baldwin says two rate cuts this year would be ''kindling to light the market'' and would ''really be a fillip to anyone'' buying. But he is not confident there will be much price growth. ''If it flatlines, that's the best possible result for the [apartment] market this year.''

Wilson predicts that if the economy continues to grow this year, the market for prestige apartments, along with the rest of the apartment market, should also start to pick up.

The managing director of Meriton, property developer Harry Triguboff, is more bullish. He thinks unit prices will rise by between 5 per cent and 6 per cent this year, although there will be nothing like a boom. ''Councils never approve enough [developments] so it will just go up gradually,'' he says.

On the lower north shore, apartments under $1.5 million will be popular because prices have stopped falling and buyers can see more chance for capital growth, says the principal of Belle Property Mosman, Tim Foote. ''I'm not predicting that prices are going to improve dramatically but I think there will be activity,'' he says. His office has already had strong interest from buyers this month.

The same is happening in the eastern suburbs and inner west. In Bondi, a unit that was for sale with expectations of $520,000 to $530,000 last year sold this month for more than $540,000, says the managing director of Morton and Morton, Ewan Morton. He says the start of this year has been much busier than that of last year, which he thinks is because buyers and sellers need to ''get on with things. They can't sit and wait forever.''

Baldwin predicts the most popular suburbs for apartments this year will be those close to public transport and within easy reach of the city centre, in particular Parramatta, Ashfield, Marrickville and the area from Epping back to Meadowbank. Buyers will mainly be owner-occupiers, especially upgraders, Cornish says, while investors will be more cautious until they see the market has stabilised and prices are rising.

New v old

The senior director of residential properties at CB Richard Ellis, Tim Rees, thinks there will be a lot of activity this year from buyers wanting affordable new and off-the-plan apartments up to $900,000. But the real ''market drivers'' will be several state government incentives that encourage buying off-the-plan or new dwellings under $600,000.

One of them, stamp duty exemptions for first-home buyers, has just ended for existing properties but they continue for new and off-the-plan dwellings. Another, the Home Builders Bonus scheme, gives all other buyers a full exemption on stamp duty for off-the-plan dwellings where construction hasn't started, or a 25 per cent discount where it has. However, this scheme finishes on June 30 and Rees says this will create a lot of demand in the first half of the year.

CB Richard Ellis alone has more than 12 off-the-plan projects earmarked for sale before July, all of which are in inner and middle-ring suburbs, such as Mosman, Homebush and Macquarie Park, Rees says. So far this year, they've sold 40 apartments, a better result than this time last year, which Rees says is also a reflection of interest rates coming down and a tight rental market.

The managing director of residential for Colliers International, Peter Chittenden, says there has been consistent interest in apartments under $600,000 in the past year, something he thinks will continue until closer to the June 30 cut-off. After that, some developers might extend this exemption themselves by offering to pay buyers' stamp duty to maintain their market share, Chittenden says.

Meriton, too, will be building several hundred more apartments this year than its usual annual total of 1500, Triguboff says, in areas such as South Sydney, Rhodes, Epping, Warriewood and St Ives.

Despite this strength in new apartment sales, Cornish believes there aren't enough being built to satisfy demand and there is ''not as much new construction as there has been in previous cycles''. Most of the demand will be for established apartments, he says.
Mani's ready to enjoy the calm after the storm

Mani Thiru has been in Australia for just six months but has decided now is the time to buy an apartment.

The British-born IT worker of Sri Lankan heritage spent the past decade in the Netherlands and came to Australia last year for work. Since arriving, she has lived in Mosman, near the beach.

She wants to buy in the same area and is looking for a one- or two-bedroom apartment, possibly with a view of the water, up to $600,000.

Thiru says she usually invests her savings in the sharemarket but economic uncertainty in Europe, cuts to interest rates here, plus the high cost of renting encouraged her to buy.

''The stamp duty concessions were in place last year, which I think inflated the prices, especially towards the end,'' she says. ''It felt like there was a lot of competition last year whereas now it seems to have calmed down.''

So far, Thiru has seen several units she likes, one of which is being sold by Adam and Jasmina Vernon of Belle Property Mosman.
Investors read the signs of the times

Just a few weeks into the year and already Bahar Etminan, the editor of fashion and beauty website rescu.com.au, and her town-planner husband were pounding the pavement looking to buy an investment property.

The couple, who have a young daughter, are renting in the eastern suburbs while they save up to buy a house. They have been investing in apartments every 12 to 18 months as a way of working towards this goal and already have several investment properties close to where they live.

They started looking for their latest purchase - a two-bedroom unit, possibly with a study up to $650,000 - towards the end of last year but Etminan says the time is right to buy because ''prices have come back a bit''.

They're looking in areas that they know - Woollahra and back towards Bondi Junction, Double Bay and Darling Point, all suburbs that are close to public transport, shops and have strong rental yields and good capital appreciation, she says.

''People are talking about the market getting lower and lower but, in the price range we're looking at, I don't think it's going to bottom out,'' Etminan says.

''It seems to be a fairly stable price range and also excellent for rental returns.''

It's Going to Be the Year of the Unit - Apartments Sydney

Big Four Tighten Grip on Market With Mortgages up $175bn

THE big four banks have further entrenched their dominance in the Australian market, growing by tens of billions of dollars despite Labor reforms to increase competition in the retail banking sector.

Exclusive analysis of APRA data by The Weekend Australian indicates that in the three years from when the global financial crisis hit in 2008, the big four have grown their mortgage books for owner-occupier housing by more than $175 billion, eclipsing smaller lenders.