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If worst came to worst, Australia would buck another global downturn

Australia’s economy is the envy of the developed world.  Not only did we escape the global downturn with hardly a scratch, but we’re in a very strong position to withstand any more external economic shocks.

We have interest rates back up to average levels and government debt at much lower levels than any of our overseas counterparts.

This means that if the US fell into recession again, or even if China’s economy took a turn for the worse, Australia still has the levers to stimulate the local economy.In a recent articleAnthony Ishac, general manager of Australian Property Monitors suggested that when it comes to housing, the strength of the local market has overseas investors and commentators all worked up, even given the moderation in price growth experienced over the last quarter.

He explains how foreign financial markets are convinced that Australian housing is the next big bubble that is about to burst.

However as I have mentioned often in this blog, all the local investment banks have a different view. They have all concluded that there is no speculative “bubble” in the local property market.

Ishac explains that even if you subscribe to the view that Australian housing is relatively expensive, the sequence of events that would need to occur to spark heavy prices falls is unlikely.

During the global financial crisis Australian property suffered only a 4 to 5 per cent fall in price.

In the US, the 30 per cent fall in property prices was driven by subprime home lending, and the typical oversupply that accompanies high levels of speculation.

In Britain a similar size fall in prices was driven by a domestic bank credit crunch that was a result of a global credit crisis. Both led to a combination of a collapse in demand and distressed selling.

In Australia we have no subprime lending sector to talk about and a significant undersupply of new housing.We have interest rates at levels higher compared with other international economies, so the Reserve Bank could respond to any overseas credit rationing by dropping interest rates again.

Even in the extreme event of another economic storm which would force banks to withhold new lending, it is unlikely to lead to a wave of distressed selling.

Recently the CBA bank reported that its average home loan to home-value ratio is only 43 per cent and that 70% of customers are paying their mortgage in advance, and are an average of nine payments ahead.

The article published in Domain explains that Australia has an undersupply of housing because of the natural increase in population and immigration. We have an economy where unemployment is approaching historic lows and incomes are set to rise strongly.

If we also take into account strong gross domestic product, retail sales and consumer sentiment indicators, and low mortgage arrears and delinquency rates, doomsayers will continue to be off the mark when it comes to predictions of house price collapses in Australia.

And that’s great news for property investors isn’t it?



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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