How to tell the property market isn't about to collapse
THERE'S nothing like the prediction of a property crash to grab headlines.
And the recent program on 'Sixty Minutes' certainly did the job. It featured London economist Jonathan Tepper and Sydney fund manager John Hempton, who had seized upon the problems of a couple who had over-borrowed to buy property in mining town Moranbah and were now facing bankruptcy.
They then claimed "Australia now has one of the biggest housing bubbles in history" and forecast falls everywhere, and falls of up to 50% in house prices in Sydney and Melbourne.
Their conclusion is so full of holes that it's hard to know where to start. Think of the fundamentals. Last year's intergenerational report forecast that within 40 years the population of Australia would be in excess of 40 million. The majority of these will want to live close to the city for the facilities that city life offers.
Tepper tried to draw parallels with the housing crash in America but a major point of difference between Australia and America is the way home loan mortgages are structured. In most American states a borrower can hand the keys back to the bank and walk away, leaving the bank to cop the loss. In Australia, lenders take strict action against defaulting borrowers, and are also well covered against loss because in most cases mortgage insurance is mandatory if the borrower has less than 20% deposit.
The two major factors that could trigger a significant decline in general property values would be massive unemployment, or a sudden extreme rise in interest rates. It's almost unthinkable that these two events would happen together, because a spike in unemployment would tend to be countered by a reduction in rates. In any event, rates are turning negative in most of the major countries in the world and the smart money is on rates falling further here.
This is not to say that certain sectors of the market aren't potential time bombs. The obvious candidates are apartment buildings in Sydney, Melbourne and Brisbane, where supply is well in excess of demand and many of those who bought off the plan are going to get burned.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org