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’.
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?
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.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.