Tuesday April 28 2009

In my neck of the woods, the NSW Southern Highlands, land prices have dropped by nearly half compared to five years ago. The outer western suburbs of Sydney and Melbourne are replete with stories of plummeting values, negative equity and foreclosures. Holiday homes are proving highly dispensable. All is woe...

Or is it? Should those of us with most of our eggs in the property basket be sobbing into our schooners about our investment decisions? The reality is that while some pockets of real estate have been performing very badly, the overall picture is more cheerful.

In Australia, property is performing considerably better than in many other countries. Although the market peaked in 2004, established house prices – on average – continued to climb until a year ago. In 2008, house prices in most capital cities did fall but, according to the Australian Bureau of Statistics, only by a modest average of 3.3 per cent. Had you put your money somewhere else, such as equities or managed funds, you’d probably be doing a lot worse.

The decline in values was exacerbated by the Reserve Bank’s raising of mortgage rates from 8 per cent in mid-2007 to 9.6 per cent in mid-2008. This factor has now been dramatically reversed, offering some hope of recovery.

Contrast our situation with the US, where home prices dived by 25 per cent last year, or the UK, where they were down by 13.5 per cent. The reason Australia is faring better is that while the US has an oversupply of housing and both the US and UK have suffered high default rates and bank failures, we have an undersupply of homes and our banks remain strong. The current shortage of homes across the country is estimated by Westpac at 140,000. This undersupply is putting a price floor under low- and middle-priced housing.

What about the prospect of rising unemployment and its impact on home prices? According to Christopher Joye, Managing Director of research group Rismark International, this may not be such a worry to homeowners still in a job. “In the 1990-92 recession, unemployment hit 10.9 per cent yet house prices rose by two per cent a year,” he says. Joye offers even more good news when he predicts mortgage rates could fall below five per cent this year, which would make them the lowest since the 1950s.

So wipe your eyes and enjoy that schooner. Bricks and mortar may not be so bad after all.