Market Insights by Kevin Young

Australian Housing Collapse Saved By APRA

Property Club Property Market Insights

APRA IS GOING TO INCREASE PROPERTY INVESTORS WEALTH

“As in the United States (US) in 2008 there will be a US style housing collapse in Australia.”

These sensationalist headlines have been thrown around Australia since 2006, by so called property experts. However, contrary to the above, Australian property has continued its historical climb.

Yet, these scare tactics remain a regular fixture in the media. It is baffling that the media hasn’t bothered to identify the facts regarding the Australian and American markets and compare them, nor expose the forecasters which continually spruik the Australian property doomsday.

In 2005, I was amongst the first people in the world to state that the 2008 Financial Crisis would happen and I publically stated this at our 2005 national conference.

Why did I make this prediction and why did the market crash?

In 2005, in the US, it was far cheaper to rent a property than it was to buy a property. Landlords were getting a paltry 3.5% return on their money which had dropped from the 4.5% they were traditionally getting the previous year.

At the same time, the costs of owning property, in the US were rising with rates increasing from a low of nearly 3% to 3.7%. The US housing supply was going through the roof with record highs of nearly three million homes being completed. Ultimately, the US property market was on its way to a huge five million new homes completed at the time of the collapse.

Therefore in 2005, the warning signs of the 2008 collapse included a rapidly rising supply, falling property sales coupled with falling rental yields and a record rental vacancies rate of approximately 10%. These warning signs were still present in 2008 when the collapse hit, ‘too many bananas – too few buyers’.

There was an oversupplied marketplace but the housing sector still needed to sell their rising unsold stock. To accomplish this, They implemented balloon funding. To encourage a dwindling number of buyers the US offered extremely low start loans that were less than the cost of renting. It was then promised that as peoples incomes increased or the unemployed got jobs, the mortgage would then gradually increase over three, four and five years.

However, the inevitable happened, people incomes did not increase and the unemployed did not get jobs. They simply posted their keys back (which you can’t do in Australia), ended their legal obligations to their bank then went and rented a far better house in a far better location.

The result was, naturally, a huge implosion of prices.

We have the reverse!

The Australian housing supply and demand situation is dramatically different than the US.

Currently, all the factors in our market are for increasing prices, not falling prices. Australia’s population increases approximately between 160,000 and 200,000 annually. Add our naturally evolving and growing population and each year we have to create as many homes as there currently are in Canberra.

With APRA’s short sightedness and lack of knowledge of the historical market, they are actively working hard to limit the housing supply, which is helping our investors.

Any person in the street with common sense can tell you that if you have a rise in demand for a product and a fall in supply of that product, the price goes up!

APRA though, is inventing a new economic rule that you can defy the markets. The process of obtaining funding is extremely difficult at the moment they’re hoping to contain and actually reduce this rise. It’s a bit like squeezing one end of a sausage balloon, it will simply bubble up elsewhere.

APRA have inadvertently started our next property boom.

Summary:

So in summary, when the US they had a housing crisis they had huge amounts of unsold stock – and most of it was shoddy lightweight properties on the outskirts of towns with limited services.

In Australia, only the Perth and Darwin markets are in short term cyclical oversupply. With the APRA restrictions our housing supply is going to get shorter and shorter with at least one thousand construction sites on the east coast stalled.

The US then had a high vacancy rate, causing landlords to compete with lower and lower rents to get tenants. This is not the situation in Australia, in certain locations landlords are king. Vacancy rates are hovering around 1% and the supply, thanks to APRA, is critically short.

We are far from a housing collapse in Australia, we are about to have a housing boom as we stated two years ago. We said then that APRA’s foolishness would restrict the supply despite rising demand, and this would force an increase in rental prices throughout the country.
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Regards,

Kevin Young