Will House Prices Fall?

If you owned property in western Sydney and paid attention to the populist media then you would be shivering in your boots.

According to the tabloid terrors, a property tsunami is sweeping across NSW’s blue collar suburbs leaving people homeless and broken.

Price falls of up to 40% have been reported based on nothing more than the flimsiest of data – often little more than opinions from “sources”.

I suspect that half the time the “source” is the reporter’s keyboard.

This weekend’s issue of The Australian contained a classic scare. The headline read: “Sub-prime crisis hits Sydney”.

The first paragraph then described how western Sydney was suffering a US-style sub-prime meltdown fuelled by shonky lending practices with NSW home owners more than twice as likely as other Australians to be at least 3 months behind in their mortgage payments.

Now, I’m sorry but in the United States the estimate from the Congressional Joint Economics Committee was that 2 million people would lose their homes by 2009.

How does being 3 months behind in your mortgage repayments become a “US- style sub-prime meltdown?

And, how many people are actually 3 months behind in their mortgage payments?

Well, ten paragraphs down you find out that nationally the number is 17,000 – up 2000 from the year before  

In the next paragraph we are told that this “surge” in arrears remains low by historical standards

In fact, banks expect bad and doubtful debts to be around 0.3% of the total loan market this year a fraction of the 1.5% of bad debts which occurred in 1992!

Give me a break!

The truth is that while some people are doing it tough we are a long way from a crisis.

Property Researcher, Michael Matusik, says much of the reporting has been hyperbole and the fundamentals supporting residential property remain robust.

That doesn’t mean that prices won’t go down in some areas. But will the international credit squeeze cause them to crash by double digit figures in the way they have in the United States and in the U.K?

Dr Don Stammer, one of Australia’s leading economists says there are some big differences between the market here and those overseas.

The driving forces in the US are the huge number of foreclosures caused by the sub-prime mess and over building.

In the UK, the problems have been caused by interest rate cuts which followed membership of the European common currency. They fed an early boom in prices and an oversupply of stock.

Now that Britain has slipped into recession the downward spiral has gained momentum.

On the other hand, Australia can be comforted by strong population growth. Last year our number grew by 330,000 and is likely to remain around that level.

According to the Australian Bureau of Statistics there is a shortage of stock. Dwelling commencements have declined for the second quarter running.

RP Data’s analysts suggest this will remain the case because many developers are adopting a wait and see approach.

Dr Stammer also argues that the Reserve Bank’s decision to move interest rates upwards early in the piece took some of the steam out of the surge in house prices leaving the bank with scope to lower interest rates as the economy slows and inflation declines.

However, there are some negatives – affordability levels, tight credit and a spooked market - so Dr Stammer expects real house prices (meaning prices adjusted for inflation) will drop on average by about 7.5% over the coming twelve months.

“Of course, these are suggestions for the national average. We are likely to continue to see very different housing markets across individual cities and regions,” Dr Stammer wrote in The Australian newspaper.

In other words, some will suffer and some won’t.

Residex’s property guru, John Edwards has some suggestions for winning at the property game in this unsettling environment.

He says:

• Buy well at prices lower than the asset’s value

• Buy in areas where the property will be desired and tenants will be keen to live in it.

• Negotiate hard and walk away from opportunities unless they are more than excellent value.

• Borrow not more than you can afford

• Don’t invest in areas where there are large numbers of brand new properties

• Research to know when you are buying well and have picked the right locations.

Michael Matusik urges property investors to ignore the short term ups and downs of the market and instead give thought to the medium to long term potential.

He quotes legendary share investor Warren Buffet who said: “Our favourite holding period is forever”.

Paul Ransley
Finding Finance