The Stale Rehash in Australia

What will happen to house prices next?

According to RPData-Rismark’s Hedonic Index, the Australian median house price fell 0.9% or $4,700 in the last quarter and dropped just 2% or $10,600 over the last 12 months.

Whoa. All of a sudden, real estate *isn't* local. Let's gloss over the 6.6% decline in Brisbane (a $30,000 loss) by mixing it in with Canberra. Or a 6.3% decline in Perth (for a loss of $33,000).

Australia has the largest dwellings in the world, and they are of high quality. This may be extravagant, but it’s the way we choose to live.

Long term, this is not the way it works. Houses are dead, economically. They are sinkholes. Every extra percent of income directed at houses (doesn't matter the size) is capital not being used for investment in economic growth. Excessive misdirected capital will choke the rest of the economy. Doesn't matter if the houses "deserve" to have all this capital thrown at them because they are so big and sexy with all that granite and smooth Italian tile. Eventually the capital will not be there to throw at them once housing has sucked the lifeblood out of other wealth generating pursuits.

What follows is a roundabout (don't know why) set of statements that distill down to "people are willing to pay for proximity". Well, sure. Who said they weren't? It's the scale that's under debate.

Importantly, despite relatively high levels of household debt in Australia, the households that hold this debt can still service mortgages. Less than 1 per cent of mortgages are in arrears in Australia, which is internationally low.

This is just wrong. Have you read the news in the last 4 months? It would explain a lot if you hadn't. And the trend matters too. It's on the way up. Of course it was low, in a rising market, the unwise and the unlucky can get out from under their situation with no scars. In a down market, they're trapped. This is why the market takes time to turn, but once it does, it accelerates. The desperate think they can hold out for better times rather than cutting their losses. Possibly because "advisers" like this guy feed them rehashed old myths about the market.

From: ABC News Fitch Ratings says the number of borrowers falling behind on repayments by 30 days or more climbed from about 1.4 per cent to 1.79 per cent in the first quarter.

From: Smartcompany Queensland is ranked as the worst-performing state for mortgage arrears, with a rise to 2% of mortgages in default as at March 2011, meaning one in 50 Queensland mortgage holders cannot pay their lenders on time.

Back to our main man:

And it is comforting to know that 75 per cent of all household debt in Australia is held by the top two-fifths of income earners – those that can most afford it.

Correct but irrelevant. The top two fifths of income earners also have 72% of the income and 87% of the wealth. Why wouldn't they also have 75% of the debt? Looks like exactly the right number. A "Point", you don't have one.

What could cause our property markets to collapse?

The factors that could cause an Australian property market crash are:

1. A recession – but I don’t know anyone who suggests we’ll be going into recession in the foreseeable future.

You don't get out much, do you? The basis for your economy is digging things out of the dirt to ship them to China at exorbitant bubble prices, tourism (from that economically depressed remainder of the world that so envies you (your words). What else ya got?

2. Massive unemployment meaning that people can’t afford to pay their mortgages – again this is unlikely in the near term.

Your consumers are already using credit cards to stay afloat. Credit card debt is soaring. It doesn't take massive unemployment to push a few households into forced sales and from there prices follow down rapidly.

3. A significant oversupply of properties – other than on the Gold Coast and in a number of our CBD’s, with a rash of off-the-plan high rise projects being completed, we don’t have an oversupply of properties.

Completely ignoring how fast households will consolidate in a downturn.

4. High interest rates – the prospect of this has now been averted by the world’s financial turmoil.

What is it with this? You tow out the U.S. to make yourself feel better then ignore that interest rates never went up in the U.S. when the bubble burst.

Now if you want to really get ahead of the pack I recommend you join me for 3 days at this year's "Real World" Real Estate Workshop that I’ll be holding in October.

Ah, and he ties it all up with an advert. If you are true believer, by all means, give this guy some money. He's going to need it.