Why not be optimistic for a change...

Author: Smartline Personal Mortagage Advisers. 20.09.2010

Recently there have been some fairly negative comments made by some "international" experts concerning Australia's residential property values. Essentially they feel the Australian property market is overvalued when compared to other developed countries.

As you know, I have been looking at this issue for quite some time and I am more convinced than ever that the Australian property market is in a comparatively strong position.

Here are my reasons:

• Unlike the UK and US markets in particular, there is not an over supply of residential dwellings in Australia. In fact, excess demand has been running at about 25,000 dwellings per annum for the last 4 years and Australia has one of the highest population growth rates in the OECD.

• The RBA Governor has only recently stated that they will work to "prevent" a property price bubble by setting interest rates at levels that prevent exuberant speculation. Given around 85% of Australian mortgage holders have opted for a variable rate loan, the RBA is able to significantly influence property prices. Remember, only 2 years ago the RBA had us paying over 9% for our variable home loans.

• Estimates that suggest Australia has a dwelling price problem are usually based on comparing capital city prices to nation wide incomes data. This is not the correct methodology to use. If based on cities that have a population of 700,000 or more, Australia’s urbanisation rate is higher than in Japan, the US, Canada, NZ and the UK. Higher urbanisation tends to support higher capital city property prices. In addition to this, more than 80% of the Australian population lives near the coast. Coastal properties tend to attract a price premium globally.

• Australia enjoys a very low default rate of 0.5% (1 in 200) on all housing loans. This is not a statistic that suggests widespread affordability problems and cruels any arguments that we have a property bubble based on a lack of affordability. Unlike many other developed markets, Australian mortgage holders are liable for debts on their houses should they default. In other words, if we sell a house and the proceeds aren't enough to pay out the home loan, we are still required to pay the difference. American's for example can just walk away (which was in itself one of the reasons for the sub prime crisis).

• Low mortgage default rates and low unemployment rates go hand in hand. Our comparatively low unemployment rate of 5.3% and improving private sector wages growth is not something that many other economies enjoy. It should also be noted that low unemployment rates assist in underpinning housing asset values.

• Australians tend to spend more of their income on home improvements compared to other industrialised nations and less on consumption goods. So our house values improve and our credit card debts are comparatively low. In other words, we are more likely to take on debt that generates tangible value such as dwelling prices.

• One of the easiest ways to spike a property market's value is to provide easy access to cheap credit. However, Australian housing credit growth is well below average and most mortgagees are ahead on their owner occupied loan repayments despite our interest rates being relatively high in world terms.

• Recent statistics published by the CBA show that Australia has the largest homes in the world, with the average floor area of a new dwelling (including townhouses but excluding apartments) topping 214m?, up from 150m? just 25 years ago.  The average floor area of new free-standing houses also set a record at 245m?.  Our homes are much larger than those within Europe and most American cities. In simple terms, our houses are worth more because they are bigger.

I tend to find that many people get spooked by negative headlines and unfortunately it is the glass half empty news that sells papers. Hopefully this email has gone some way in addressing the imbalance.