About three years after Crikey started warning readers about an impending residential property collapse, it appears the mainstream media have finally caught on. Australia’s most-read newspaper, the Sunday Herald Sun, warned readers that $300 million had been lost on houses, with the “pain for … home owners far from over”. Hours later, Channel Seven’s news followed suit, warning of impending price falls for property owners, with buyers cautioned about purchasing property.

The price falls in Melbourne, Perth and Brisbane still pale in comparison to former Queensland hotspots, Noosa and the Gold Coast. Prices in Noosa have slumped by more than 20% from their peak, with little end in sight. Meanwhile, the Gold Coast is being devastated by a glut of apartment buildings as construction comes to a standstill with virtually no new developments under construction. The Gold Coast crash has been good news for administrators and receivers, who are currently busy offloading $2 billion worth of apartments.

The Gold Coast slump is further evidence that it is often a collapsing property market that leads an economy into recession — not vice versa. As  7.30 noted, since the Gold Coast market crashed after the GFC, more than 11,500 jobs have been lost. The US experience has indicated that construction is a large cyclical employer — when debt-funded booms end, the economy suffers not only from a destruction in faux wealth, but also the loss of real jobs and incomes.

Not everyone seems to have gotten the memo yet though. Even Ian Verrender, one of Australia’s better business commentators, still remains well and truly in the anti-bubble camp, noting last week that “despite a veritable army of doomsayers — as evidenced by the number of websites and chat rooms — salivating at the prospect of a crash in property prices, it has stubbornly failed to materialise”.

Like many, Verrender didn’t consider the returns on housing and instead tried to find other reasons why in Australia this time it’s different. Ignoring the fact that Australian residential property yields 2-3%, Verrender’s instead attempted to point out differences between Australia and the US, which could explain why houses in the US are about half the price of those in Australia. Verrender noted that:

“Our mortgages are fully recourse whereas in the US, they are non-recourse. Default on a home loan here, and the bank will chase you for the outstanding cash and bankrupt you if need be. Not in America. If you owe double the value of your home, you can simply walk out, leave in the keys in the door and let the bank take the pain.

“The result is that Australians are less likely to default than Americans, even under extreme duress. That means fewer houses on the market during a recession, which means less pressure on prices.”

The biggest problem with Verrender’s argument is that different US states have different laws — further, in the majority of US states, lenders do actually have recourse to the borrowers. In fact, only 18 of the 50 states actually have non-recourse loans. Further, there doesn’t appear to be any real link between the nature of the loan and falling property prices. For example, some states that have non-recourse loans fell substantially (Arizona, Florida) while other non-recourse states (Texas, Idaho, New York), have been among the best-performing property markets. Further, Nevada, which suffered falls of more than 50% in some cities, has recourse loans in which lenders can obtain judgments against the vendor.

It appears that whether the lenders have recourse to the borrower was not the determinate of falling prices. Instead, the US states that fell most in price tended to be where housing appreciated most above its intrinsic value. The only other argument (aside from the fallacious non-recourse suggestion) proffered by Verrender was that there is a supply shortage — Verrender even quoted the RBA, noting:

“According to a Reserve Bank research paper on our property market delivered this week, significant supply-side constraints have conspired to keep Australian home prices high. The growth in available housing simply hasn’t kept pace with population growth: in the past decade, population increases outstripped housing growth for the first time in more than half a century.”

This column has addressed the shortage myth on regular occasions. Quite simply, if there actually was a shortage, it would be reflected in increasing rents, not higher debt-fuelled prices. In the past decade, rents have barely kept up with inflation, while this year, based on ABS figures, enough dwellings are being constructed for 387,000 people, while Australia’s net population growth is 315,000.

Houses, like every asset, has a value that is based on the return that an owner can receive on their investment. That return doesn’t have to do with any alleged shortage (which would be reflected in higher rents), or a difference in lending and borrowing laws. And when news outlets such as the Sunday Herald Sun and Channel Seven start issuing dire warnings about the property market, expect buyers to start looking at real returns before making a purchase decision, not excuses to vindicate a bubble.

Peter Fray

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