As the title suggests I will be talking about opinions. Opinions are the lifeblood of civilisation, we need them to survive and to thrive. Without opinions the world would be a pretty boring place.
This topic jumped out at me this month for one major reason. After 20 years in this industry I have been surrounded by opinions on a daily basis. They can come from myself, experts, industry professionals, clients, real estate agents, bank managers, accountants, the general public and of course (least I forget) my wife. Having said that, this month has blown me away in the diversity of opinion on the short term prospects of the Australian Property Market.
I say diversity because the current range of opinions is quite staggering. There seems to be many contradictory opinions and some extraordinary ones at that.
Over the last week US economist, Harry Dent has come out and said he expects Australian property prices to fall by up to 70% in most areas around Australia over the next 2-3 years. Now before I go on, it might be considered quite bias on my behalf to challenge Mr. Dent's assertions due to the fact that my primary business role in life is that of CEO of a Property Investment Organisation that needs property prices to go up in order to justify our existence. That being said my following points might make me somewhat of an eternal optimist or they might be thought provoking and create some totally opposite conclusions.
Before I give my own views, let me shed some light on some of the other opinions I have been reading about lately.
As of the last two weeks on my constant travels around Australia, I have been confronted with some of the most positive stories imaginable on specific property markets around Australia. I will delve into some of the key points being raised in this newsletter. Other recent articles are as follows:
Toowoomba Chronicle on 2 September 2011 titled ‘Toowoomba Property Market Set to Explode'. The article goes on to say that Toowoomba is on the verge of becoming an economic powerhouse. Last year alone Toowoomba accounted for 33% of the state's total employment figures, which came in at a staggering 14,000 last year alone. It also stated the region will be responsible for the creation of another 45,000 jobs in the interim and it will be up to Toowoomba to find ways to accommodate them.
Daily Mercury on 18 July 2011 titled ‘450 on Waiting List for Rentals'. This article goes on to say that the state of the Mackay property market is in a current state of turmoil. What sort of turmoil, you may ask? The turmoil related to the fact that there are currently not even 450 vacant properties in the whole of Mackay, yet one mining company alone has requested 450 for their employees. That is one company alone in the midst of an impending mining bonanza for the region. On top of all this an unprecedented event is set to happen in this region with the announcement (refer to Daily Mercury 1 June 2011) that Abbott Point is set to become one of the largest coal producing ports in the world on the back of $6.2B coal expansion, consisting of up to four new coal terminals.
The West Australian on 27 June 2011 titled ‘Perth Housing Prices Tipped to Rise 20 Percent'. This article relates the message of a leading business researcher, BIS Shrapnel, that emphatically believes Perth prices will rise by up to 20% by 2014. Tremendous supply and demand pressures, most notably brought on by the mining sector influences in Western Australia are set to have a massive effect on the Perth property market.
To be perfectly frank, I could go on and on with expert opinion. Many other areas across Australia currently have positive short, medium and long term implications on their respective property markets. Areas such as Townsville, Geelong, Bendigo, Ballarat, Mandurah, Bunbury, Geraldton, Newcastle/Hunter Region (to name a few) have all been talked about in the most positive of ways.
Now let's get back to some core fundamentals.
What makes a property rise in value? Well as we're all aware, supply and demand pressures. Without this we have stagnation or falling prices. What causes Supply and Demand pressures? Population growth versus dwelling approvals. A clear and concise Labor government policy on immigration rates would certainly help with this (which doesn't seem to be coming through with any certainty at this stage). What we do know is that the Australian population has recently hit 22 million and indicative figures suggest we can most likely add another 1 million to that over the next 3-4 years. Can current rates of dwelling approvals keep up? Well not according to the experts over this period of time and most notably we are currently at 20 year lows for housing approvals with an alarming drop in new house starts. This trend is widespread across Australia, which at first glance seems negative. Well it sure is for certain parts of the economy, there is no doubt about that. However, for property investors this is fantastic. Low housing approvals and starts, coupled with population growth, creates supply and demand pressures and as any Australian economist will elude to, this will force rents and property prices up as a result. I mention Australian economists, as poor old Mr. Dent from the US doesn't seem to understand this core economic principle.
The same US that has made a mess of its economy, foreign debt, unemployment levels and property market. A property market that led by the ambitious plans of the major lenders "Fannie Mae and Freddie Mac" lent money to a subprime market that shouldn't have been lent money in such alarming numbers in the first place for property purchases. This wasn't led by the banks but was actually driven by the US Government who saw lending to people that couldn't afford a loan as a solution to the homeless crisis in the US. The US Federal Reserve offered to back these loans on direction from government which is why they tried so hard to bail them out (to the tune of a Trillion dollars) and this would have been ok if the property values kept rising. It resulted in 4 million too many homes being built, it artificially decreased unemployment with all the construction and when this slowed and the decline in manufacturing with many companies sending jobs overseas we saw a massive spike in unemployment. The 4 million extra homes upset the supply and demand ratio and the rest is history. If someone handed back their keys and the banks struggled to sell the house the neighbours often bought them for 20-30 precent cheaper than their current homes and simply handed back their keys. A massive economic problem which all started with some well-meaning solutions to a social problem that didn't take into account the economic backlash. Add to this the diabolical situation of having non- recourse loans for these people, meaning they could walk away from trouble without any recourse whatsoever. How intelligent does that sound? The implications were enormous and led not only to the current state of the US property market but was the major catalyst for the Global Financial Crisis.
Let's address the next point of contention.
Unemployment. This is critical. The US unemployment rate is currently spiralling out of control and Barrack Obama is at a loss to stem the tide. In Australia our current unemployment rate as of July 2011 is running at a steady 5.1%. This is before the unprecedented levels of job creations about to be borne on the back of the next resource boom in Australia. If the unemployment rate in Australia spiralled out of control as in the US then I would be the first to put my hand up and say our property markets are indeed in trouble. Property Investment Company CEO or not, I would accept point blank that large scale unemployment would have a detrimental effect on our property prices. The irony though is that nothing could be further from the truth. Our unemployment levels are steady and not expected to go into strong negative territory.
Let's dig deeper.
Contagion. Contagion is a word given to describe the impending spread of economic conditions from one country to another. With the European debt crisis now a global discussion point, the fear is that the current status in Greece, Portugal and Ireland could spread to larger European economies such as Spain and Italy. What effect would this have globally and in particular to Australia? Well is it fair to say that the US has been on economic death row. For the first time in history they almost didn't meet their financial obligations and were set to default on payments. They survived this but in the process lost their AAA credit rating to the current AA+. What has happened to our property markets while all this has been happening? No widespread panic and in some areas, for example Melbourne, there has been 3 years of sustained growth (which is now at the end of its particular growth cycle). We no longer catch a cold when the US sneezes, more so now when China sneezes. Interestingly enough, for all intents and purposes, it is China who are now acting in an unofficial capacity of the World Bank and interestingly have sought to buy Italian bonds which would act as a massive stabiliser for Europe at present.
And so hopefully, by offering these interpretations on the logic of varying opinion, I have avoided too many accusations of bias.
Do I believe Mr. Dent will be right? Absolutely not. I would find it quite amazing that anyone would actually believe that the Australian property market would fall by up to 70%. It's worth pointing out that mortgage defaults otherwise known as delinquency rates are currently running at approximately 1.6% in Australia. This is 1.6% on the back end of a Global Financial Crisis. Let's think about that. We've just gone through the worst economic period since the Great Depression and in Australia our mortgage defaults are currently running at a miserly 1.6%! How many of the remaining 98.4% not in default would sell our properties for 70% of their current value? Come to think of it, how many of the 1.6% in the delinquent state would sell at these levels?
Opinions are opinions and everyone is entitled to one. I trust my opinion comes across as thought provoking and I look forward to getting this article out of mothballs in 3, 5 and 10 years (over a glass or two of good red wine) and having a look at what actually did occur.