Many people subscribe to the fact that what happens in the USA affects all of us (which it does) and if property prices slump there the same must happen in Australia.
This however, is not the case!
Firstly the financial systems of the two countries are vastly different and the pitfalls of the US financial system have been uncovered in recent months.
The USA’s lending system includes non-recourse loans where if property owners default on their mortgage, the banks will take the property as security and not chase the value of further outstanding debts.
By contrast, the Australian financial system has recourse lending where the bank will repossess the house and they will also chase borrowers for the outstanding balance of the debt should the sale of the property not cover their cost of debt.
Secondly, the US market has had a much greater occurrence of sub-prime lending.
This is where banks lock borrowers into a home loan at an initial low rate say 2% and after a set period this rate gets increased, usually to above the standard interest rate.
The people borrowing in this way can be generalised as being a higher risk: generally those with nil or low incomes and essentially, they have little chance of fulfilling the repayment once the interest rate is lifted.
In Australia, there are laws which prevent this kind of lending and the fact that the country has recourse loans mean that people are more wary of these types of arrangements as most borrowers realise that if they can’t afford the repayments they may lose much more than just their property.
Across the USA, dwelling values peaked during June 2006 at a median value of $226,290 and between Jun-06 and Jul-08 they have fallen by 21.1%. During the first seven months of 2008, median values have seen a fall of 11.1%. It’s not just the falls witnessed across median values, but sales volumes have also taken a significant dive. Volumes peaked during Aug-04 at 111,099 sales, since that time sales volumes have recorded a decline of almost 54%.
In Australia, dwelling values have peaked much more recently at $469,258 during Feb-08. Over the year to August, dwelling values have seen a decline of just 1.3%. Sales volumes across Australia have also fallen through 2008 however, volumes peaked much earlier in Australia than they did in the USA. Australia’s peak sales volumes occurred during May-01 when 35,758 dwelling sales occurred, since that time volumes have fallen by almost 62%.
Importantly, even after Australia reached its peak volume of sales, value growth continued for another six and a half years. Once the USA reached its peak, it took less than two years for property values to start falling.
Fundamentally, ongoing value growth in Australia’s property market is driven by a shortage of supply, this is best highlighted by residential rental vacancy rates.
On a quarterly basis, across the last 10 years, the USA has had an average residential vacancy rate of 9.1%.
Over this same period Sydney has recorded an average vacancy rate of 2.7%, Melbourne has had 3.0% and Brisbane has recorded an average of 2.8%.
Importantly, as at the end of June the USA’s rental vacancy rate sat at 10% whilst Sydney’s was 1.1%, Melbourne’s was 1.0% and Brisbane’s was 2.2%.
At the same time as US rental vacancy rates and homeowner vacancy rates have been so substantial, the country has continued to build.
Census Bureau figures show that between June 2002 and June 2007, the USA commenced work on 9.268 million dwellings, whilst at the same time the population grew by 13.7 million.
The current average US household size is 2.6 persons, highlighting the dramatic oversupply of housing, in contrast, Australia is estimated to be building around 50,000 too few dwellings.
With a rental vacancy rate at around 10% and a homeowner vacancy rate above Australian rental vacancy rates, it’s easy to see why significant property value falls have been recorded.
Such a glut of property being built over the last five years coupled with the fact that vacancy rates were already exceptionally high have led to a significant oversupply.
This oversupply, coupled with a poorly regulated financial system has led to the downfall of the USA property market.
The Australian market is undersupplied with population growth the highest on record and dwelling commencements remaining flat as well as having minimal rental vacancies.
Australia is also recognised as having one of the world’s best banking systems designed specifically to ensure that what happened in the USA does not happen in Australia.
