Should we rethink traditional approaches to home ownership?


“Too many people bought too much house for too many years”.

That is a quote from a New York Times article, published recently. The article looked at the impact of housing on the financial crisis from the point of view of a person in the United States. From here in Australia, the “seven new rules” seem a little out of touch with the real estate market that we live in – or is it?

Lean back for a moment and ponder the situation in Australia versus elsewhere. Somehow, we have managed to be the only “developed” country in the world that has avoided a recession (all arguments about the narrow definition of ‘recession’ aside..). Our real estate market (residential) has managed to hold up remarkably well – to the point where some argue that we now hold the crown for the most expensive real estate for any country. Although it is true that some specific areas have seen very heavy discounting of prices, we have definitely NOT seen the 30% decline in national prices that has occurred in the U.S. On a national level, prices in the U.S. are back where they were in 2003. Individual areas are obviously better or worse. As you would expect, Detroit has an index value equivalent to where it stood in 1995!

There are many arguments and debates raging around Australia on the likelihood of our real estate market following those of the U.S., the UK, Ireland, Spain or a number of other developed countries. Here is an overview of house prices from the website. In fact, the website includes an excellent graphing system through which you can compare a number of countries. From it you can see that the impact in Australia has been minimal, especially when compared with the US or UK.

However, a comparison using simply house prices isn’t necessarily as helpful when comparing between countries. Using that same graph you can look to see how the prices have changed over time when measured to average incomes in the respective countries. Using this system, it can be seen that Australia’s real estate is expensive – but certainly not as expensive as that in Belgium, the Netherlands or New Zealand.

So it seems that the various price measures do not really help us, even though they can help to give some idea of relativity.

There are a number of very good blog’s around the country that include excellent discussion on these topics. i especially like the clarity of A Stubborn Mule’s Perspective. Some blogs are positive and others quite negative on the outlook for residential property. Here is a very positive one on real estate in general and Melbourne prices more specifically.

If we return to the New York Times article, it suggests that some of the ‘old’ assumptions on real estate should be rethought. Especially the idea of stretching yourself to the absolute limit (and for many people, beyond their limit). It certainly makes sense to consider mortgages and purchases very carefully when we are at what are historically very, very low rates of interest. For Australian buyers though, it is difficult to pay much heed to such thoughts when our real estate market has been so stable and while supply/demand factors appear to favour continued scarcity of homes.

With the large drops in broad market values over the last two years, the family home has become the repository of an increased percentage of family wealth. What happens when some of that wealth is needed elsewhere? An interesting perspective of the trials and tribulations of “down-sizing” are in another New York Times article. We here in Wealth & Security Planners have not witnessed a lot of downsizing here in Perth. With a large percentage of the population moving from an accumulation stage of their life to a retirement (and therefore ‘drawdown stage’), it will most likely be an increasingly common event for people to face.

We could look to Japan’s dramatic deflationary house prices as an example of where things could go from here – but that would ignore the very different demographic drivers behind house markets. Australia’s population continues to increase, and forecasts of future population levels continue to be lifted to account for Australia’s increasing birthrate and immigration intake. These contrast strongly with Japan’s aging population, which is resulting in a declining overall population, with the obvious reduction in demand for housing. If population growth continues then that would tend to indicate continued demand for housing.

The alternative way of looking at housing is to look at the supply of credit. It would appear that the world has avoided economic collapse (said with fingers crossed behind my back), and if this is true then there is little reason for Australian banks to reduce lending for residential real estate. However, house prices and bank lending live a symbiotic life, and any large impact on one will have a correspondingly large impact on the other (it would be relatively easy to argue that Australian banks remain in good shape because we have not suffered major house price declines, while it can also be argued that our house prices have remained stable because banks have been able to remain stable). If the world has truly avoided a banking collapse then it is reasonable to argue that the supply of credit will remain somewhere around current levels. Of course, we have yet to navigate the full extent of global Government borrowings and it could be that credit becomes more scarce when developed world deficits start hitting the peaks predicted in a few years.

Regardless of the outcome of your additional research, there are enough black clouds on the horizon to suggest that a bit of caution should be adopted before treating some of the traditional statements on residential property as unassailable.


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