Australia Avoided Real Estate Crash of 2008, is it Now Impending?
May 17, 2018
The housing market crash in the United States in 2008 led to a financial crisis that affected pretty much every asset market in almost every developed country in the world. As countries were fumbling around and proposing a wide range of policy initiatives that focused on stabilizing the real estate market Australia’s housing market seemed to remain stable.
While the Aussie stock market did take a 59% loss and some jobs were lost it is widely accepted that Australia had the easiest time during the recession had was the first get out of it. How did Australia avoid the real estate crash of 2008 when virtually every other developed country couldn’t?
Banks Remained Calm
Australia banks were able to be a lot more resilient during the crisis since they had not exposed themselves to the unrealistic debts that other nations financial institutions have incurred. Australia has four main banks (Westpac Banking Corporation, Commonwealth Bank of Australia, Australia and New Zealand Banking Group and National Bank of Australia) and all of those combined wrote down less than $4 billion worth of assets, stayed profitable and maintained top credit ratings. In the year before the real estate crash the country only had 0.2 percent of their loans labeled non-performing which was far better than the percentages seen in other countries that experienced the housing bubble burst (Germany 3.4 percent, U.S. 1.1 percent and UK 0.9 percent).
Australian banks face very little competition when it comes to customers shopping for loans since the countries population doesn’t even reach 25 million. In fact, non-bank lenders during their highest mark only accounted for about 20 percent of all loans in Australia. These banks are consistently landing virtually all of the new home loans by using cross-selling techniques with their inexpensive bank accounts, credit cards and insurance that tell the consumer “the more you buy the more you save.” This was key to keeping the homebuyers from shopping outside of their banks for mortgages that have lower costs and no documentation.
Many economist point to Australia’s economic ties to China as being the main reason for the country quickly escaping the 2007-2009 recession but their population growth has proven to be an even bigger factor. The Aussies tend to have a different, if not opposite, strategy than most other countries when the economy is in trouble, they start bringing on more people. During the first quarter of 2009 the country experienced a net growth of 97,000 immigrants which is the highest number in a single quarter in the last 25 years. This influx of people led to a 2.1 percent population increase which was quite a difference from what other countries were experiencing as far as population growth with the UK at just 0.28 percent and the U.S. at 0.88 percent during the sametime.
Real Estate Shortage
The higher than average increase in population means the higher demand for housing but Australia’s real estate development market could not meet the demands. It was estimated that in 2008 there were only about 100,000 new dwellings built which is less than a third of the number of families estimated to have migrated to metropolitan areas around the country that year. This shortage of housing resulted in real estate prices staying buoyant throughout the recession and beyond. In fact, since 2007 the average Australian home has increased about 6% in value after taking inflation into consideration. This is great news for the Aussies since as a group the family home is the largest single portion of their wealth.
The Reserve Bank of Australia (RBA) was able to keep interest rates relatively high in the years leading up to the financial crises. The housing bubble that crashed in 2008 was fueled by inexpensive money but in Australia the houses were never cheap enough to attract the huge number of buyers from any and every income class. Australians were paying 6.3 times their household annual earnings to purchase a home compared to just 3.6 times in the United States during 2008.
Is the Real Estate Crash Impending?
While the ability to avoid the real estate crash in 2008 may seem amazing it is going to be extremely hard to maintain. What goes up must go down is the old saying and eventually everything becomes normalised. The Australian dollar is declining as a result of the US and Europe markets recovering which is forcing the RBA to increase their interest rates to avoid deflation. The increase in interest rates leads to higher monthly payments for investors since most Australia loans are the adjustable type which will lead to more mortgage delinquencies. Banks will have to respond to the increase in delinquencies with tighter lending standards. Combine all of this with the highest unemployment rate in the last 15 years and it looks like a very tough road ahead for Australians to avoid a real estate crash.