Despite the residential property market collapsing in the US, UK, Spain and Ireland, Australia’s over-leveraged housing continues to buck the international trend, assisted in part by the Federal Government’s First Home Owner’s Grant and reduced interest rates. The FHOG, coupled with burgeoning rental costs in Sydney, Darwin and Perth, has led to more first owners’ lathering themselves in debt to fund their great Australian dream.

However, while prices in high-end suburbs like Toorak, Vaucluse and Cottlesloe are believed to have dropped by more than 20%, mid-range properties (between $600,000 and $1.5 million) haven’t yet suffered similar drops. How long this situation lasts remains to be seen, with unemployment rising and China’s growth believed to be negative in the December quarter.

However, if unemployment isn’t enough to cool the property sector, a sobering study of rental vacancy rates produced by SQM Research may do the trick. In its study of the Australian rental market released last week, SQM found that:

Australia’s nationwide rental vacancy rate stood at 3.3% in December 2008, which is up from 2.1% recorded in December 2007 […]

In the middle to upper end of the market place there is an increasing oversupply situation with a number of inner and top end suburbs recording vacancies above 5% and in some cases, above 10%.

SQM outlined its method of calculating vacancy rates, noting that it is based upon “monitored online rental listings, adjusted for false listings and properties that have been withdrawn from the market within the monitored period concerned.”

The results outlined by SQM cast further doubt on the ability of the housing market to withstand a recession. It also contradicts the oft-repeated claims of a widespread housing crisis. While there is no doubt a shortage of housing in certain areas, it appears confined to ‘affordable’ suburbs. For example, SQM noted that Victorian suburbs Kilsyth, Frankston North, Doveton and Springvale all recorded vacancy rates below 0.6 percent. By contrast, middle-upper class Caulfield East, Canterbury and Camberwell had vacancy rates approach 10 percent.

In a functioning free market, high vacancy rates will inevitably lead to stagnant or reduced rental levels. A rational landlord will opt for to lower their required from rental from say $50,000 to $40,000 annually if faced with the possibility of several months vacancy. This then places pressure on yields earned by investors and further increases the attractiveness of renting compared with purchasing a property (and reducing investor demand), placing further downward pressure on property prices.

The SQM report is not without a degree of controversy, with the vacancy rate calculated by the independent SQM Research contrasting with the more optimistic calculations produced by State-based real estate bodies, such as the Real Estate Institute of Victoria. This point was acknowledged by SQM boss, Louis Christopher, who noted that:

Currently, there is no independent body that calculates rental vacancy rates in Victoria. The widely reported vacancy rates compiled by the Real Estate Institute of Victoria, is an entity that aggressively represents the interests of its own real estate members….I do not believe for a moment that vacancy rates ever reached 1.0% in Melbourne.

Christopher’s claims were denied by REIV boss, Enzo Raimondo, who told The Age that the REIV’s findings were based on responses from 124 Victorian agencies, across a range of different markets, with 50,000 properties on their books. The problem with Raimondo’s argument is that agents reporting to the REIV tend to not report negative data, as Crikey uncovered late last year with respect to auction results. This then has the direct effect of providing articually higher clearance rates or lower vacancy rates.

Despite increasing unemployment, a collapsing international property market and an apparent slowing rental sector, many still believe that a shortage of housing stock will prevent the residential property market from dropping. Not only is this perception contradicted by SQM’s figures, such a view fails to take into account the dynamic nature of any marketplace. Perhaps this is best explained by Jeff Goldblum’s fictional scientist, Dr Ian Malcolm, in Jurassic Park, when he noted “if there is one thing the history of evolution has taught us it’s that life will not be contained. Life breaks free, expands to new territory, and crashes through barriers.”

While Goldblum was talking about dinosaurs, not residential property, the same principle may apply. When an asset class or item becomes too scarce (and expensive), people adjust their expectations and requirements. Instead of living in quarter-acre blocks, they settle for apartments. Instead of living in Sydney or Darwin, they move to a more affordable city or a rural area or another country altogether (on a relative income–price basis , Australian property is now more expensive than the US and UK).

A housing shortage will not lead to a never-ending boom — life finds a way. People will adjust their requirements and alter and change their lifestyles such that the property boom, like the mining boom of the 1970s, the share-market and property bubbles of the late 1980s will come to an abrupt end.

Peter Fray

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