Ten fundamental reasons why prices won’t crash in 2013: Academics
As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.
The hotly debated question of whether Australian house prices are too high and must inevitably come crashing down to earth has been answered by Deakin University’s Phillip Dare, who says there are 10 fundamental reasons why the property market is safe from a crash.
Writing for The Conversation academic blog, Dare, lecturer in property and real estate at Deakin University’s school of management and marketing, says the question is “not whether Australia has a housing price bubble, but what fundamentals are in place that might sustain our housing prices”.
Dare notes in particular the most extreme predictions of a 60% crash in property prices by US academic Harry Dent labelling it a “gross exaggeration”.
According to Dare, the 10 reasons why the Australian property market is not destined to crash are:
1. We’re big and isolated
“Australia is a big country, without shared borders with neighbouring economic powerhouses – or economic basket cases that might impact our population bases or locational living choices.”
2. Australians stay put and in major urban areas
Whereas in Europe, workers can cross borders easily to seek work in other capital cities, reducing the demand for property in urban areas in their home countries, “[Australia’s] population flows remain largely static… We basically follow jobs, usually Victoria to Queensland and back in the other direction. We are similar in area to continental Europe and the United States, but with a population barely 10% of those geopolitical entities. The majority of Australians live within the major urban hubs of each state, with most living along the eastern seaboard.”
3. Our economy is strong is relative to the those of US and Europe
“Contrary to the economic woes being experienced by Europe and even the US, our economy is chugging along nicely, keeping us out of recession with a tight fiscal regime, low public debt and a central bank with a flexible monetary policy that concentrates on taming inflation and achieving low rates of unemployment. So it could be argued that compared to markets such as the UK, US and Ireland where prices have been in free-fall, Australian property prices may well look as if being overpriced simply because they have not receded in such precipitous levels,” says Dare.
4. Our banking system is strong and well regulated
“[Price] falls are inextricably linked to the catastrophic failures in the North Atlantic and European banking systems, while Australia has a robust banking system with strong prudential regulation. Thanks to this, we have not been burdened with a US-style sub-prime property disaster which figured so prominently in the 2008 global financial crisis,” Dare says.
5. A tax system that favours investors and owner-occupiers
According to Dare, among favourable tax rules in place for property investors are negative gearing concessions that allow interest payments to be written off against personal income and a 50% reduction in capital gains tax on property kept for at least one year. For owner-occupiers, profit earned on the sale of their principal place of residence are not taxed while the abolition of death duties decades ago means that “significant amounts of [property] value are transferred inter-generationally without attracting any tax”.
6. We are not building enough houses
Dare says stock levels are falling – though the likes of Michael Matusik would disagree. “Not enough new housing stock is being built to sate demand (such as new household formations and immigration),” Dare says. In addition, due to land banking, there has been a controlled release of development land. “Major builders and developers have bought large tracts of development land and [are] holding for controlled release.”
7. Election strategies support house prices
Dare says political parties have supporting housing values as part of their election strategies with policy promises such as the first-home owner scheme. “Propping up house prices was strategically used by previous governments for electoral purposes.”
8. Easier for investors buy real estate
According to Dare, changes in foreign investment rules have sustained prices in some areas. In 2008 the Foreign Investment Review Board dropped its requirement that only 50% of new dwellings could be sold to foreign persons in an off-the-plan transaction.
9. Continual spruiking of property
“[There] is regular spruiking in the daily newspapers of get-rich fast with property seminars/schemes,” says Dare.
10. It’s easier to borrow money
Dare notes the weakening of loan-to-valuation ratios from 80% to 95% and 100%. “Banking deregulation has seen housing finance freed from the shackles and once onerous (and at times ridiculous) lending guidelines,” he says.