An example of Australia’s vast, undeveloped interior…
Is it just luck that only 4.9% of Australian homes are worth less than their purchase price?
First National Real Estate would argue that luck has nothing to do with it.
The latest figures from RP Data emphasise the resilience of the Australian housing market, despite the ongoing concerns of international market commentators.
According to the organisation, strong growth in home values over the recent growth cycle is why most regions have seen significant levels of equity accumulation. In fact, over the five years to September 2011, capital city home values increased by around 28%.
Although there have been recent declines, as outlined in First National’s 2012 Property Market Outlook, approximately 43% of homes are worth more than twice their original purchase price.
Capital city home values are down 3.3% from their October 2010 peak to September 2011, but taking a longer term view, that’s hardly something for Australians to fret about, especially given the dire circumstances faced by our European and US home owning colleagues who are facing losses in equity well exceeding 40%.
Australia’s property market circumstances are almost entirely unique and largely misunderstood by foreign analysts.
Firstly, the great majority of Australians dwell on the coastline, leaving our vast interior mostly ‘undeveloped’. This makes demand for available land and housing on the coastline unusually strong. This combines with a population which grows at more than 300,000 per year, while we continue to build less than 150,000 homes per year – the opposite of what was occurring in Europe and the USA prior to the GFC. In the USA, a building boom created an oversupply, financed largely through non-recourse lending.
What’s non-recourse lending?
It’s a type of finance you couldn’t dream of acquiring in Australia. Here, before a bank will lend you the necessary finances to buy a property, you must prove you have the ability to pay it back. That starts with at least having a job, unlike some of the lending practices that were prevalent in the States, prior to the GFC, that didn’t require such fundamentals of a borrower. Non-recourse lending also allows the homeowner to walk away if their home becomes worth less than they paid for it, and it then becomes the bank’s problem. Walk away in Australia and the bank will reposess your home, sell it for the best price they can, then sue you for any shortfall. So, in other words, there’s no walking or running away and the investment remains your problem. This provides a strong incentive to ‘hold on’ in times when the market isn’t rising.
The flood of property for sale in the USA is largely the result of homeowners simply handing back the keys and walking off. The cascading oversupply combines with almost zero demand, apart from the occasional foreign bargain hunter looking to take advantage, to further suppress house prices.
So, with an entirely different approach to lending, record immigration, almost zero unemployment, an under-supplied housing market, and a culture that embraces home ownership rather than renting, there’s scant chance of any form of major correction in the Australian housing market despite its current, cyclical softness.
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