Housing damage won't be drastic | The Australian

IT'S ridiculous, but Rudd government ministers still can't bring themselves to admit Australia is in recession and is likely to remain there through 2009.However, Julia Gillard, Wayne Swan and Lindsay Tanner have all admitted that unemployment will exceed the 7 per cent forecast for 2010 in the Government's Updated Fiscal and Economic Outlook in February.

The 7per cent figure, on any sensible definition, was already an admission of a recession, and now it will be worse. Just look at the latest forecasts from the Organisation for Economic Co-operation and Development, with growth in the OECD area expected to fall by 4.3 per cent this year, global growth to fall by 2.75 per cent and world trade by 13 per cent, and unemployment to rise to more than 8per cent (10 per cent in 2010).

As the Treasurer cautiously concedes, this has obvious implications for jobs in Australia. It also has implications for housing prices, which are of great interest to most Australian households. According to the OECD, in nearly all of its member countries real (inflation-adjusted) house prices are falling and in previous housing cycles the contraction phase typically lasted about five years, with an average fall in real house prices of the order of 25 per cent.

In the US and Britain, (nominal) home prices already have fallen by more than 20 per cent. The Standard &Poor's/Case-Shiller index for 10 leading US cities is down 30 per cent from its 2006 peak and the 20-city index is down 29 per cent. Nothing like this has happened in Australia, nor is it likely to.

Last year, average housing prices fell 3 per cent, with larger falls at the high-priced end of the market. However, according to the RP Data-Rismark index, the best available measure of housing prices, in the two months to February this year, prices rose 1.1 per cent .Does this mean the fall in housing prices is already over and from here on prices will rise?

That looks like too optimistic an expectation, given the severity of global recession. But, as with the Australian economy overall, there are good reasons to expect our housing market will stay in much better shape than housing markets in the US, Britain, Europe and Japan. At the moment housing prices are being buoyed by the combination of the Government's measures to subsidise first home-buyers and rapidly falling interest rates. The area of the market for houses and apartments below about $600,000 - which accounts for about 80 per cent of sales and more than 90 per cent of housing loans - is running hot.

This is beginning to worry some people, including the Commonwealth Bank's managing director and chief executive Ralph Norris. He told a conference in Hong Kong the banks had to make a careful assessment from a credit and risk perspective about whether some of the potential home buyers could be overcommitted as a result of job losses and, later on, higher interest rates.

This risk also requires a policy response because the Government's June 30 deadline for the first-home buyers' grant is creating an unnecessary frenzy in the market. If, as is highly likely, the Government intends to extend this deadline, it should say so now. And it should say it will phase it out, to avoid the risk of a sudden drop in prices as the bring-forward of home purchases abruptly ends after the deadline.

However, even if it does this, the question remains of what effect recession, rising unemployment, the loss of competition in mortgage lending and more restrictive lending criteria from the banks will have on Australian housing prices. Macquarie Bank's interest rate strategist Rory Robertson, who has argued vigorously and persuasively against dire predictions of 30 per cent or 40 per cent falls in local house prices, makes a comparison with the early 1990s recession. Then, despite a savage 7 per cent decline in full-time employment, house prices rose modestly, thanks to falling interest rates.

Now, of course, we have the worst global recession since the '30s and an international credit crisis, but an authoritative analysis last week by Anthony Richards, the Reserve Bank of Australia's resident housing expert, highlights several important reasons for expecting Australian housing prices to perform better than in many other countries. One is the significant improvement in housing affordability.

This has come from two factors, the first being the four percentage point cut in official interest rates and its substantial flowthrough to mortgage rates. (The rate cuts have improved the debt servicing ratio of the household sector by 5 per cent of household disposable income, freeing up cash flow for spending or paying down debt.) The other factor is the ratio of housing prices to income, which has declined significantly from its peak in late 2003 as a result of a much slowerrise in housing prices and strong income growth.

Richards says this suggests any overvaluation of housing prices in the boom years also has eased significantly. In fact, households have changed their behaviour in several important ways since 2003, including through increased savings and increased housing equity injection, as households slowed their borrowing for housing and borrowing against their houses. This change reflected the earlier slowing of the housing boom in Australia, compared with the US, Britain and others.

These developments were encouraged by the RBA's rate increases from 2003 and the accompanying warnings of the dangers of a housing price bust if the boom continued from the bank's then governor, Ian Macfarlane. The quality of home lending in Australia is also higher, with little in the way of sub-prime style lending, which means arrears on mortgage repayments, defaults and impaired loans will remain significantly lower here. Our big four banks also have had minimal exposure to securities based on sub-prime style loans.

Another positive frequently mentioned is the gap between housing supply and demand as a result of a rapidly growing population. Although Richards thinks the size of the gap is probably exaggerated, the housing market is relatively tight. This contrasts with overbuilding in the US, although a shortage of housing hasn't stopped a crash in prices in Britain.

It's an impressive list of positives, but I suspect as recession extends here and unemployment rises, the most likely outcome is at best a period of stagnating house prices, with a real risk of a fall, albeit a far more modest one than in the US and Britain.

Housing damage won't be drastic | The Australian

First Home Loan Specialists Comment

A general roundup of the current property market situation in Australia reported in The Australian today. It provides some indication that the Australia will not suffer house price decreases like those in the US and Great Britain. Food for thought.

Greg Brierley
Principal

T: 1300 880 809
F: 02 6241 2545
E: Greg@firsthomeloanspecialist.com.au
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