Housing Crash ‘Dead Certain’

Attention grabbing right?

This headline’s possibly coming next because, despite hysterical storylines and catch cries to date, the Australian housing market just stubbornly refuses to throw in the towel to Australia’s newspapers and admit it is 40 to 50 per cent overvalued.

RP Data Indices, due for release tomorrow, will show that although home values were down 2.1 per cent over the March quarter, month to month results show an improving trend after January with values in February down by -0.5% and March virtually flat at -0.2%. Watch them say the market’s ‘locked in the doldrums’.

And this follows one of the world’s strongest post-GFC property market performances? There must be something wrong.

Considering Australian housing stock levels are riding 68 per cent above average and the number of days it takes to sell a house have adjusted accordingly, it takes no genius to work out that it’s the homes that are being significantly discounted that are selling. That hits statistics hard, but even still, these results show resilience beyond mere luck.

With the market showing a virtually flat result for March, one wonders when, if ever, Australia will indulge itself momentarily and acknowledge the market’s fundamental strength. Look around, the streets are not exactly awash with overly confident Australians. The rapidly rising cost of living and a looming carbon tax have seen to that. Yet housing prices have managed to arrest their slide?

But the horror, doomsday headlines persist.

Michael Pascoe explains it succinctly – scary headlines get attention. ‘You attract more readers by shouting “You’re about to lose everything” than with a headline that suggests “It’s a nice day”’.

The Reserve Bank and Australian Prudential Regulation Authority have closely analysed the risk of a huge swathe of value being wiped from Australian homes and have convincingly, easily and overwhelmingly declared it unlikely.

Yet when rating agency, Fitch (who helped create the US sub-prime crisis) declared it would ‘stress test’ Australian banks because of our housing prices, it sounded like something must be desperately wrong to the vast majority of Australian newspapers – once again. It’s an all too familiar refrain.

It didn’t bother them that our banks’ housing exposure had already been tested by more credible authorities, or that our banks had already passed the best stress test of all with flying colours in 2007 – the Global Financial Crisis.

What Fitch found amounted to almost nothing. Still, it made an announcement for the sake of an announcement, about just one part of the market.

The claim? The number of Mortgage backed securities and low-doc loans where repayments are 30 days late has increased by 0.42 per cent. Yes, that’s right folks, less than half a percent. And, worse still, these people who are late with their payments haven’t defaulted. They’re just a little late.

Somehow, this bit of data was translated into one of the most outlandish pieces of spin yet produced by the doomsayers – ‘Home loan defaults continue to soar as more households crumble under financial stress and fail to make mortgage payments’ – drum roll, take a bow Herald Sun.

Stop the press.

The proportion of non-performing Australian mortgages is a tiny 0.7 per cent. Only one third of Australians have a mortgage. With such high levels of unencumbered property owned by Australians, the kind of spiraling housing crisis being experienced in the USA is virtually impossible to replicate here. And that’s before you consider the local shortage of supply, strong immigration, near full employment. But let’s not digress with mere facts like those.

When house prices enter a downward cycle, many Australians just choose not to sell their property, whether they have a mortgage or not. In America, and particularly as a result of the GFC, it has proven the reverse. Non-recourse loans encourage borrowers to abandon their property, return it to the bank, and escape the responsibility of repayments on a property no longer worth what was paid. After all, why stick around if there’s no legal requirement to do so?

This vicious cycle hurls a glut of properties onto an ever-growing real estate bonfire, prices being the sickening casualty.

See any similarity to Australia Fitch?

Following one of the worst years of natural disasters in living memory, quite a few Australians have been pre-occupied with recovery. At the same time, we’ve been on a much-lauded saving trend as well. So, while many of us are busy replacing more TVs, washing machines, cars, furniture and household belongings than normal in any given year, clearly the overwhelming majority have managed to meet mortgage obligations as well.

It would appear the worst is over for Australian economy.

Well-known and respected economic forecaster, Charlie Nelson recently said Household debt is no longer growing, credit card debt is growing sustainably and house prices have recovered from their 5% drop in the GFC.   Household savings ratios have been increasing since 2006 and more and more people feel they have no major financial concerns.  Willingness and ability to spend are increasing, especially among younger and older age groups.

With increased savings, Mr Nelson believes Australians will go back to spending, but not until their asset bases have recovered to pre GFC levels.  With regard to house prices, ‘Negative price commentary from the media does not help the situation’ says Charlie, ‘we need to be more realistic’ he says.  ‘House prices will stay steady and then gradually rise unless there is an increase in interest rates.  Australia does not have the structural faults of the US market and we are still 180,000 houses short in Australia’.

So, while the media gets on with selling newspapers and its never-ending ratings war, the real estate profession needs to get the message out that there is no housing bubble, no looming crisis, and that when the elephant in the room, uncertainty, moves on, more normal conditions will return.