Is the property market about to collapse?
Author: John Hopkins, Executive Chairman
Doom and gloom ... you're in trouble.
The episode of ABC’s Four Corners on Monday 21 August was about the Australian property market.
In summary, they would have you believe doom and gloom is in store for the whole Australian residential property market, and that is an understatement.
There were two independent commentators that are adamant there will be a collapse; not a correction, but a total collapse.
Their fundamental belief was that this is due to over funding by the banks; the majors in particular. They were focusing nearly solely on the debt levels of Australians in relation to incomes.
ANZ chief Shayne Elliott was interviewed and explained that the bank (of course), with all its extensive resources, studies the minutia and the macroeconomic changes of ‘the market’ on a moment by moment basis. It does this on behalf of itself and all its stakeholders, which includes Australia and its citizens. They are careful and it seemed comfortable.
When you are as old as I am, you have the real benefit of hindsight. You learn that there are things that you know, there are things that you know you don’t know, and there are things that you don’t know that you don’t know.
Firstly, there are always naysayers – those that are predicting doomsday, similar to the messaging of this episode. I know they are always there, commenting on any market.
Now of course they aren’t necessarily wrong. However it’s very important to understand that no one individual or organisation has access to enough knowledge, facts, experience or ability to be completely certain. That’s what I know I don’t know.
So, considered conversations with carefully thought out and worked through facts and theories that are presented reasonably – considering all possibilities and nuances within the boundaries of what might be – is much more believable and likely than certainty.
The certainty and narrow investigation that this Four Corners report was based on is disappointing.
Frankly, it was a great example of how people don’t know what they don’t know.
Certainty, in predictions such as these, is nearly always correct in hindsight but very rarely correct in foresight.
For us, it is crucial to be careful and critical in making all our judgements and recommendations.
It is equally as crucial in the macro issues as it is in the advice given to each and every individual.
Property is still an appropriate investment vehicle for many individuals as it has been for every year since we have been advising, as we have continually done for the past 37 years. It is as appropriate today as it has been for every year that I personally have been involved in property, in a career of around 45 years. That is through the recession we had to have, the GFC and the introduction of major taxes and changes in laws and governments.
This same point could also be made about using leverage as an appropriate investment mechanism for many Australians for all of those years.
However when it comes to individual investment planning, with regard to the above two points, always remember the three golden rules; do your financial planning conservatively and correctly, buy the right property and, give it time (ten years minimum).
Spain, the US, and I think it was either Ireland or Tokyo, were used as examples of property crashes. Each circumstance is different; it serves no solid purpose to gloss over analogies or examples, nor does it exemplify quality journalism. It is impossible to cover these circumstances properly, on a show with the time constraints of an episode of Four Corners.
To compare the US housing crash – which was brought on by the subprime loans debacle – without investigation and careful explanation and comparison, is verging on being irresponsible.
Firstly, in regard to the recent US property crash, it was not all property markets in the US that crashed. Quality residential property in prime locations – say Manhattan Island or quality locations in San Francisco – did not fall out of the sky. However much more importantly, the fact that the home owners (the borrowers from the banks and various home lenders in the US) could, in most cases, literally hand back the keys with no recourse by the lenders or responsibility by the borrowers for the outstanding debts was wrong and had huge consequences.
This cannot happen in Australia.
Further, the fact that, by law, residential loans in Australia above 80 per cent loan to value ratio must have mortgage insurance is very important. So yes, the banks could feel pain, but that pain would be spread and supported around the world by many other financial institutions, lenders and insurers that have prepared for events like the US crash.
Then you must also consider that these loans in the US were bundled together and sold to many financial institutions and banks around the world as AAA security financial instruments. False values were applied to the properties and to these instruments. It was fraud, it was criminal, and it was a disgrace. They were not worth the paper they were written on.
All of the above is what caused the crash in the US property markets and then the impact on world markets and world economies. And even with the above dissertation, I am not doing the explanation justice. So how could they, in one minute of an episode of Four Corners, do justice to that crucial example they used, let alone discuss Ireland (probably a result of the GFC), Spain (a huge construction oversupply) and Tokyo (possibly a result of the Asian currency crisis and stagnant population increases) and then relate all that to Aussie land?
What a joke!
That is not Australia’s situation. Our banking regulations, the capital adequacy ratios, having the Australian people as lender of last resort, population increases – there is so much more that must be taken into account.
And that’s before we even start to discuss the fact that there are thousands and thousands of residential property markets in Australia. There are inner urban major metropolises, high density inner urban, outer urban, new subdivision medium density homes, low density residential homes, regional, resort, rural towns, NSW, Victoria, Tasmania and all the other categories we could divide into. Not to deal with each separately is naive to say the least, extremely misleading in reality, and possibly criminal.
For example, the focus of this particular episode of Four Corners was on Western Australia; Perth and Mandurah were singled out.
The report showed how people had invested in property in these locations and lost money.
It is awful to see the consequences for some of these people. Really awful.
But to use these markets and circumstances as examples of what is pending for all Australian residential property markets is wrong. It is sensationalism.
To explain those impacts in the west, as an argument for the rest of Australia as the commentators on Four Corners did, is very simplistic and unhelpful.
The situation in Western Australia is due to the detrimental impact the downturn in the resources economy has had on the Western Australian economy generally and then consequently its property markets; it has been in turmoil.
(By the way, a bit of good news, I have been anecdotally told that there has been movement and uplift in the resources sector in recent months. Particularly in renewed exploration.)
You can’t have the value of iron ore go from $160 to say $60 and have the West Australian Government have to adjust its balance sheet by what I believe to be around a billion dollars, have vacancy factors in commercial space reported by some at up to thirty per cent, and not have huge impacts on its property markets, particularly up and down the coast in near resort locations, outer urban residential, in mining towns and Perth as well.
To infer that these circumstances can be used as solid analogies for the rest of Australia is very, very, wrong.
But we only have ourselves to blame for reports such as these. Bad and shocking news sells. Unfortunately, the stories that should be told are not.
If you can take anything away from this, know that I am professionally and personally, on behalf of all Australians, very glad we have the Reserve Bank of Australia, our major banks and other financial institutions and regulators keeping an eye on our debt to income levels. It’s not all doom and gloom – there is always light.
There are always opportunities for long term property investors.