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Posted on 22 Aug 2017 by Gareth Brown

West Oz Property: As Bad as it Gets?

West Oz Property: As Bad as it Gets?

 

For long-term sceptics of Australian property markets, this week’s Four Corners program—Betting on the House—didn’t add much. Scary, but little you didn’t already know.

For those of us living in the other two-thirds of the country, it was a reminder of how tough some currently have it in Western Australia. A resources and property boom has given way to hangover. Nominal house prices have been flat for more than a decade, real rents have fallen, mortgage stress and delinquencies have risen.

According to reporter Michael Brissenden:

The mining downturn has hit hard here but Western Australia is an example of what can happen to property when a highly leveraged economy gets hit with an unexpected economic shock.

For sure, it is bad. But even after all this pain, houses still don’t look particularly cheap.

Butler, a suburb in the northern reaches of Perth, featured prominently. The show marked it as one of the epicentres of mortgage stress in the west. The interactive map on the ABC website, put together by Digital Finance Analytics, suggests that a whopping 69% of Butler’s 3,242 mortgaged households are in stress ‘at current interest rates’.

West Oz Property: As Bad as it Gets?

Now imagine a world of higher mortgage rates. Then take a look at the achieved sales prices of 4-bedroom houses traded in Butler over the past few months. One traded as low as $310,000. But most traded in the high $300,000s to mid $400,000s range. Quite a few sold for more than $500,000. To anyone living on Australia’s east coast, that might sound like a bargain. A relative bargain perhaps, but an absolute one?

US example

I’ve spent a lot of time looking at freestanding properties in the US over the past 18 months. The Forager International Shares Fund formerly held Silver Bay Realty Trust Corp, which owns more than 9,000 such freestanding homes. Attractive 4-bedroom, 2-bathroom houses in decent neighbourhoods of big fast growing southern cities like Atlanta, Tampa and Phoenix, rented out for an average of A$340 per week. Those properties were valued just last year at an average of US$165,000 (A$208,000), a bit higher in Phoenix and a bit lower in Atlanta. That’s nearly a decade after the US housing market went pop, and well into the recovery.

Compared with those numbers, Butler still looks like a rip-off. Maybe this is as bad as it gets in the west. But is there any valid reason to be confident that the rout bottoms with 4-bedders going for $400,000? On the fringe of the world’s most remote city, just a few stone throws from turf farms, where mortgage stress is already a big issue despite interest rates being at record lows?

Western Australians can rightly take solace that they started taking their medicine much earlier than most of the rest of the country. It will serve them well.

If anyone watching that Four Corners episode is basing their worst-case analysis on current examples like Butler or Mandurah, they’re being more realistic than most. But they’re still living in Dreamland.

West Oz Property: As Bad as it Gets?
West Oz Property: As Bad as it Gets?  West Oz Property: As Bad as it Gets?  West Oz Property: As Bad as it Gets?  West Oz Property: As Bad as it Gets?

19 thoughts on “West Oz Property: As Bad as it Gets?

  1. Atlanta and Tampa have populations between 300k and 450k people. Phoenix has one of the largest populations of people living in poverty in the US. Perth is wealthy, has 2m people, and none of the profound social problems cities like Phoenix have.

    Take a look at the median prices in San Diego, Boston and LA. They are all more expensive than Perth in comparable currency. Not sure this is a fair price comparison.

    • My point wasn’t to say Perth prices should trade at Atlanta prices, merely to point out that today’s level of pain might not be the bottom and the US experience since 2007 might be a worthwhile case study. There seems to be a lot of pain in pockets in Perth and yet house prices still don’t look outright cheap. The bust in the US saw houses trading well below replacement value and on 10%+ gross yields. Might not happen here it’s not impossible either.
      For what it’s worth, Atlanta is more than 3 times the size of Perth on an apples-with-apples basis. It’s bigger than Sydney. The Greater Tampa metro area is also significantly larger than Perth. Americans measure city size in a very different way to us.

    • A 5 min google search for these numbers but certainly in line with what I expected.

      Atlanta Median Household income $55K , Average property price $211K
      Perth Median Household income $73K , Average property price $535K

      4 times income – Atlanta
      7 times income – Perth.

      On these measures alone Atlanta is either 43% undervalued or Perth is still 75% overvalued.
      Anyone can come up with arguments why Atlanta should be cheaper. Similarly there are just as many arguments for why Perth should be cheaper.
      In the long run prices revert back to their historic income multiples.

      • ‘On these measures alone Atlanta is either 43% undervalued or Perth is still 75% overvalued.’

        Or “value” is somewhere in between, or maybe not; we don’t have to be at either end of that spectrum.

  2. Atlanta, Tampa and Phoenix are Battler cities. Coupled with this, you have minimum wages of US$7.25 per hour, poor or no social security benefits, poor or no affordable health care, expensive universities and cheap prefabricated home builders that can build you a brand new home from US$69K (https://www.claytonhomes.com/why-clayton).

    A cheap prefabricated home in Australia would cost about $300K to build – excluding land, finance cost, on-site costs and council/DA costs. Like most industries, it’s hard to buy something lower than replacement cost.

    Our minimum wage laws mean our Battlers earn double than those in the USA cities you mentioned. We have a good Medicare system and affordable universities which enables people to shove more money into housing.

    Many Aussies view WA as the Wild Wild West. Any person with half a decent knowledge of mining cycles knows that WA’s property prices will fluctuate with a commodities boom and bust.

    It’s unlikely the inner-city of Sydney / Melbourne will have a significant price correction unless there is a significant spike in retail interest rates (say over 10% pa) or a significant rise in unemployment (say over 10%). That said, if interest rates and or unemployment spike above 10% – most asset prices will be toast.

    • Replacement cost is a very valid way to think about property valuation in the long term, and investors buying below replacement tend to well over the long run. It doesn’t, however, provide a floor to where prices trade in any forced liquidation event. Those houses I mentioned in Atlanta are nice, at least the equivalent of an Australian build and nothing like a Clayton Home. What’s interesting is you can buy them on the market for sub-$200k today, but there’s no way you could build them new for even $250k today. They’ve been trading below replacement cost for the better part of a decade. Again, not saying this will or should happen in Perth or elsewhere in Australia, but it could.
      You make an interesting point about the wage differential, it’s something I think about quite a bit. People in the bearish camp for property need to consider whether it could all be resolved with a much lower Australian dollar rather than lower nominal house prices. Australian wages vs rest of world have rarely looked as out of whack as they do today.

    • I couldn’t disagree more…a spike in retail rates above10% you say…&/or unemployment above 10% you say! The Sydney & Melbourne markets would get absolutely smashed well before then with where household debt currently sits.
      I hear that type of loosely worded complacency too often & it makes me particularly uneasy right now- as much as I was in 2009.

      The world is a very different place now than during previous property booms & that’s lost on many people.

      “Toast”? No- your talking financial armageddon.

      • Prior to the GFC, retail home loan rates hit nearly 9% p.a. (https://www.commbank.com.au/about-us/news/media-releases/2007/091107-news-raterise.html). Note that in the late 80s / early 90s, retail home loan rates peaked at approx 20% p.a. So, my wish of a 10% retail home loan interest rate is not that unfathomable.

        The GFC barely caused a dent in Sydney, Melbourne and Brisbane home prices (within 5km of CBD). It went a bit sideways. Suburbs 10km plus from CBD might have dropped -10% to -20%.

        I can’t comment on other states and regional towns as I don’t follow those markets. Personally, I don’t think they have a strong moat. Might be a great place to live but I’m not too sure they’re blue-chip enough for me.

        Whilst household debt is at record levels, it’s only about 20% higher than the past decade https://tradingeconomics.com/australia/households-debt-to-gdp.

        However, during the past decade, blue-chip property prices in Sydney, Melbourne and Brisbane have doubled. Rent and wages (except for those working at 7 Eleven or Dominos) have increased by approx 50% . Home loans rates have decreased by -50%.

        In short, it’s gonna take a lot to bring these prices down. Hence, my forecast of 10% plus retail home loan rates and or unemployment to bring prices back to equilibrium.

  3. I’m not sure comparing prices in west aus to USA is too relevant. Shouldn’t we be looking at replacement values. Suspect it is much more expensive to build in Aus.

    • Hi Michael, see my comments above for more on replacement value. It’s an important anchor for value, for sure. I also think it’s a surprisingly flexible thing over the medium term, Australia wasn’t always a high cost place to do business. In a world where every talented tradie is offered great money to go to the Pilbarra, replacement costs are likely to be higher than in a world of 10% unemployment.
      It’s also an area ripe for technological shift, robot bricklayers have already been developed.
      Again, I’m not saying the US is the right comparison, just that it’s something people might want to consider as being in the realm of possible.

  4. Gareth, The same thing happened in QLD in the Rockhampton to Townsville coastal stretch. A lot of drive-in drive-out workers lost their jobs or contracts and moved on. Interesting in places like the Whitsundays, Airlie Beach and Cannonvale for example house and unit prices dropped from say 2013 through to now. It was compounded by a fall in domestic and international tourism brought on by high AUD. Less in bound and more Aussies going OS. Things were starting to pick up in tourism in 2016/17 when Cyclone Debbie struck early this year. But things should be picking up as tourism will recover and coal prices have stabilised higher and mines have removed a lot of costs. Expansion of existing mines as well as the new Adarni mine is happening.
    I took advantage of that and bought a couple of properties in 2015 with the aim of riding the recovery whenever that occurs. Example was residential property at 3/4 value of 10 years earlier and a vacant block of land 1/2 price of 10 years earlier both bought for a relative song compared with a capital city, 5 minutes walk from town and swimming lagoon and great views over the Coral Sea. Only in QLD 🙂

  5. Gareth, in the USA non-recourse loans and jingle-mail should have reduced debt levels and allowed a faster recovery. In Australia we have bankruptcy which is not an effective pressure release valve. WA may have a property overhang for more than the 10 years that you are seeing in the US.

  6. Complete polarity between Perth and the Sydney/Melbourne markets. I appreciate mobility is challenging in this big country of ours, but I wonder if there will be some equalization effects. Especially if the Syd/Melb markets keep muddling onwards and upwards. You could have more “rentvestors” buying in these cheaper cities and renting at home. Retirees selling up to live like a king in the West. People who can work from flexible locations aided by technology. Companies relocating to a cheaper city on the same timezone as SE Asia, etc, etc. Also the mining sector is in considerably better shape than it was a few years ago, as highlighted by the trajectory of miner and mining service share prices, and BHP’s report yesterday. Last but not least, Perth is a pretty nice place to live, all things considered!

    Everyone seems bleak on Perth property but I’m not so sure, maybe it can bounce back faster than people are expecting.

  7. It’s a very helpful insight Gareth.
    I’m sure someone has done it but it would seem there must be some benchmarks of common denominators to enable a realistic or perhaps legitimate comparison to be made between house prices in different economies such as the US and Australia. I would think % of household income that goes on mortgage payments would have to be one to include.

    • Cheers Brett. Another even more important one would be the susceptibility to changes in interest rates. US mortgage holders mostly very long term fixed rate. Australians nearly all floating. Can’t even fix longer than 5 years. Higher rates in Australia blows up the family budget very quickly.

  8. Has anyone seen any analysis of Australian mortgage debt that excludes or isolates offset accounts?

    I’ve heard some bank CEO’s mentioning that the stats aren’t nearly as bad as they look on the surface as many people park a lot of money in their offset instead of paying down their loan. I know this was true in my case where I had several property loans fully offset for many years. Stat’s just looking at the mortgage to house value would be showing I was highly leveraged whereas the reality was I had no leverage. I’m not saying this is always the case as I know anecdotally there are (and always has been) people who are borrowing to the hilt. But it’s also true that a lot of people use their offset and common financial advice thrown to people is park your savings there. So I’d be keen to know if anyone has studied this offset effect really is and how much it reduces the levels of household leverage / mortgage stress that get reported.

    • Pete Wargent’s blog is probably the place. I’ve seen some analysis which offsets all cash balances, but I have no idea how that accounts for corporate deposits or SMSF deposits etc. I’m sure there’s data somewhere netting off the offset accounts only.
      That overall debt data will be useful, for sure. But what matters is what % of mortgageholders are susceptible, and how susceptible are they? People who have just taken a 30-year mortgage for 6 times their combined salary don’t tend to be the ones with large offset balances.

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