Worlds Apart - The Difference Between the Australian and American Property Markets

27th Oct 2008

Many people subscribe to the fact that what happens in the USA affects all of us (which it does) and, if property prices slump there, the same must happen in Australia. This however, is not the case.

Firstly, the financial systems of the two countries are vastly different and the pitfalls of the US financial system have been uncovered in recent months. The USA’s lending system includes non-recourse loans where if property owners default on their mortgage, the banks will take the property as security and not chase the value of further outstanding debts. By contrast, the Australian financial system has recourse lending where the bank will repossess the house and they will also chase borrowers for the outstanding balance of the debt should the sale of the property not cover their cost of debt.

Secondly, the US market has had a much great occurrence of sub-prime lending. This is where banks lock borrowers into a home loan at an initial low rate, say 2%, and after a set period the rate gets increased, usually to above the standard interest rate. The people borrowing in this way can be generalized as being a higher risk: generally those with nil or low incomes and essentially they have little chance of fulfilling the repayment once the interest rate is lifted. In Australia, there are laws which prevent this kind of lending and the fact that the country has recourse loans means that people are more wary of these types of arrangements as most borrowers realise that if they can’t afford the repayments they may lose much more than just their property.

Ongoing value growth in Australia’s property market is driven by a shortage of supply. This is best highlighted by residential rental vacancy rates. Over the last 10 years, the USA has had an average residential vacancy rate of 9.1%. Over this same period, Australia recorded a rate of no more than 3%. Importantly, as at the end of June, the USA’s vacancy rate was 10% whilst in Sydney it was 1.1%, Melbourne 1.0% and Brisbane 2.2%.

At the same time, between 2002 and 2007, the USA commenced work on more than 9 millions dwellings whilst at the same time the population grew by 13.7 million with the average household being 2.6 persons, highlighting the dramatic oversupply of housing. In contrast, Australia is estimated to be building around 50,000 too few dwellings.

The oversupply of housing in the USA, coupled with a poorly regulated financial system has led to the downfall of the USA property market. The Australian market is undersupplied with population growth the highest on record and dwelling commencements remaining flat as well as having minimal rental vacancies. Australia is also recognized as having one of the world’s best banking systems designed specifically to ensure that what happened in the USA does not happen in Australia.

Article Source : RP Data: 17 October 2008