Housing bust has been a real fizzer

The 'inevitable Australian housing bust' has turned out to be a real fizzer. We haven't been short of property crash predictions in Australia, but so far the forecasts have come to nought, with market sentiment once again reversing northwards from mid-2012 as interest rates were dropped. Until the day we get a crash, of course, we never will be short of predictions, but yesterday's housing finance data showed further increases in May.

Some housing bust predictions

Neil Jenman, 2001: "The real estate market will crash".

Jenman reiterated his coming Melbourne property crash prediction in 2003, noting that: "The peak will probably turn out to be late 2001 to mid 2002, around time that we issued our first warnings."

But we never really got a property crash. Instead we got something of a slowdown in many markets, but prices in Melbourne have since surged and more than 80% higher than they were at that time, while Australia's city populations have surged. 

I note in passing that the Australian population when Jenman made his first crash call, as recorded in the 2001 Australian Census, was 18.972 million, as compared to 23.115 million today. Demand for housing in capital city suburbs is rising with every passing week.

The property crash predictions have continued, yet prices in many areas have kept on climbing:

Professor Steven Keen, 2008: "When the expectation [of rising asset prices] goes, ultimately goodbye 40% of the current price of houses."

David Llewellyn-Smith, 2010: "This blogger reconfirms his assessment of the bust ahead for Australian housing."

Leith van Onselen, 2010: "In my opinion, an Australian house price crash is inevitable and cannot be avoided."

Philp Soos, 2011: "Australia's property bubble will inevitably burst."

Jordan Wirsz, 2011: "Property prices will crash by 60%."

Jordan Wirsz, 2012: "Buy gold." (immediately before the gold price crash).

David Collyer, 2012: "I predict that property prices will fall by 15-20% in 2012".

Harry Dent ,2012: "The real estate market will crash in 2012. Prices could fall by more than 60%."

Philip Soos, 2013: "Australian housing will crash."

So, the first thing we can ascertain is that the timings of asset price cycles are far more unpredictable than we tend to believe they are.

But while it might appear that Australian real estate is on the up, on closer inspection, I'd suggest that perhaps in many markets a long, slow decline in real terms is already well underway, which in all fairness to Keen is precisely what his words seemed to imply back in 2008. In particular, property markets in Adelaide, Brisbane, Canberra and many regional markets have not yet responded in any meaningful way to stimulatory monetary policy.

In fact, only Sydney's housing markets have broken through to new highs, with all other markets below previous peaks, which thus represents something of a decline in real terms.

Housing finance data

Has the risk of a property crash gone away? No. Whilst prices remain high, there is always the chance of a crash. However, yesterday's housing finance data suggests that no housing bust is imminent, with the value of dwelling commitments rising seemingly inexorably over the past year:

Source: ABS

To instigate a property market crash, given that there is no real over-supply of dwellings in most cities, we'd probably need a credit shock, a sharp rise in unemployment, much higher interest rates or a policy change such as a reform of the negative gearing tax laws (or, of course, a 'black swan' event, which by its very nature is an unforeseeable trigger). These factors look to be unlikely in the short term, but we could yet see unemployment rising materially as the labour-intensive mining construction boom unwinds.

Prices declining in real terms?

There could also be some hidden good news for homebuyers in some Australian cities. Prices have essentially gone nowhere for years in cities such as Adelaide, Canberra and Brisbane, which means that prices in real terms have been declining and are becoming more affordable, particularly with interest rates falling to record lows.

FHBs

Plenty have said that this can't be a property recovery without the participation of first homebuyers, and some have also said that prices cannot move higher without first homebuyers propping up the bottom of the market (not that this has ever held back London house prices over the past quarter century).

However, you choose to define the word 'recovery', it's heartening to see the number of first homebuyer commitments picking up over the last few months, although the value of their commitments remains relatively low to date. I have long felt that FHBs will gradually come back into the market once they believe that prices won't fall further, but this is one data set to keep a close eye on.

Investors are leading the recovery

There have been some reports 'on the ground' that at last activity in Brisbane is beginning to pick up. And some have also been arguing that prices in Adelaide are going to now pick up strongly after a slack five years. I'm not so sure about Adelaide, as the supply appears to be meeting the demand for housing.

A closer look at the figures shows that investor activity in Australia (value of investor commitments) is up an astonishing 24% over the year which in part explains why Sydney recorded yet another extraordinary 81% clearance rate on Saturday. Investors are pumping up the market.

Sydney prices are up +8.5% in this cycle already, with the inner west markets running very hot (as I've been saying forever and a day now, it's the $500k-$1 million inner west suburbs which represent the hot markets).

The 'positive cashflow investors' who are suggesting that regional centres and fringe suburbs are going to beat inflation and be good investments over the next decade are, in my opinion, stuck in the past - in 2005 to be precise, which is when households stopped leveraging up and began saving.

It may not have been a bad strategy from 1993-2005 for those for whom servicing investment mortgages was an issue, but it's the wrong strategy today. If you are waiting for households to simply keep on taking on ever more mortgage debt in perpetuity and prices to magically keep increasing ahead of incomes you are likely to be very disappointed.

The recovery in property markets has been investor-led, which means that quality inner-city markets will be the likely outperformers - the regional markets/fringe suburbs look much more likely to me to struggle badly. If you want to outperform you will need to anticipate where the next huge wave of speculative investment capital is heading, and that is to the four main capital cities, and in particular, to Sydney suburbs close to the city.

Melbourne has already experienced a tremendous boom in prices since 2007. Perth is travelling very strongly again with its low unemployment levels of just 4.6% and booming population growth. And prices in Sydney seem set for more very strong growth. I'll be forced to change the broken record on Sydney's inner west at some point, but judging from the scorching auction clearance rates recorded on Saturday, not for quite some time to come yet.