**2.2. Australian real estate market compared to the rest of the world**

The analysis presented in the previous section shows that Australia is fundamentally different to the US when it comes to the residential housing market. But, how does Australia compare to the other countries in the world? New research conducted by Lloyds TSB [27] - International Global Housing Market Review, shows that Australia just made it into the top 10 list of countries with the highest house price increases over the past decade (Table 3). Four of the six top performing housing markets since 2001 were in the emerging economies of the world. India with a booming real estate market tops the list - house prices rise by 284% over the last decade; Russia coming second - house price increase of 209% over the same period. China faired only marginally when compared to other major economies ranked 14th with a 47% growth rate since 2001.


Source: Lloyds TSB International [27]

372 Risk Management – Current Issues and Challenges

of all the financial institutions are regulated [21].

In the US, the non-conforming housing loans represent 13% compared to 1% in Australia [21]. Negative amortization loans are common in the US but no such loans existed in Australia at the time of the crisis. In Australia the mortgages are "full recourse" lenders and hence the incentive that is offered to households to take out loans they cannot repay is reduced. This is also deters financial institutions from offering risky loans. These primary differences stand out to support and contribute to a relatively strong performance of the housing loans in Australia when compared to the US. It is important to note that the share of non-performing loans in Australia were less than 1.5% even during the financial crisis.

Another fundamental difference is that there is no government sponsored enterprise (GSE) in Australia while they exist in the US. The GSE in the US holds a guarantee of the loans that are offered. This potentially provides an impression that bad loans offered to borrowers with poor repayment capacity would be covered by the Federal Government [23]. This is not so in Australia where commercial banks provide 90% of all housing loans. The commercial banks are mainly funded by the bank deposits, short term and long-term wholesale debt [24]. The absence of the so called Federal guarantee restricts Australian banks from any excessive risk taking behavior. In 2007, at the beginning of the financial crisis, GSE's possessed 90% of these securities. The shadow banking system in which the financial institutions have a greater participation and the GSE's can be said to have led the excessive risk taking behavior and practices in the US [21]. In addition, according to the RBA [21], the regulation level of financial institutions in Australia is about 80% while in the US only 50%

**Figure 7.** Non-performing housing loans Source: Real estate Institute of Housing America

The Loan to Value Ratio (LVR) refers to the amount of money borrowed against the total value of the property in a home equity loan. For example, a \$50,000 loan against a home worth \$200,000 has a Loan to Value Ratio of 25%. In Australia, loans with an LVR exceeding 80% require mortgage insurance - the risk of the borrower defaulting is far too great for the lender. The value of the property is determined by the lender and is often significantly less

**Table 3.** Real house price changes – A global comparison.

According to the findings of the report Australian house prices increased by 76% and had the ninth fastest growing house prices during 2001-2011. During the same period house price declines were seen in the world's largest economies such as Germany, Japan and the

United States. Japan registered the largest house prices fall of 30%, while house prices in Germany and US were down 17% and 2% respectively during the same time. Other major findings of the research include:

Importance of Risk Analysis and Management –The Case of Australian Real Estate Market 375

Source: ABS

substantial.

Source: ABS

0

200

400

**'000**

600

**Figure 8.** Australian annual house price change in the last decade

May-2007

Oct-2007

Mar-2008

Aug-2008

Jan-2009

Series1

**Established house price change: weighted average of eight capital cities, Quater (percent)** 

Jun-2009

Nov-2009

Apr-2010

Sep-2010

Feb-2011

Jul-2011

Dec-2011

0

1

2

3


**percent change from previous** 

**quarter** 

Dec-2006

*2.3.1. Trend of net population increase and net overseas migration increase* 

**Figure 9.** Trend of natural population increase and net overseas migration

House prices have been underpinned by a chronic housing shortage in Australia. This was brought about by an ever increasing population and constraints placed on housing supply over time. Figure 9 shows the increase in population growth from both natural growth and migration since 2006. From 2006 to September 2010 natural population growth has only seen a marginal increase, but during the same period the net overseas migration growth has been

2006 2007 2008 2009 2010

Growth population growth %

NOM Natural increase

**NOM and components of population change**


The performance of the established house prices in Australian housing market provided by the Australian Bureau of Statistics (ABS) is presented in Figure 8. The Australian housing over the past five years has seen some corrections. The period can be divided into pre-global financial crisis (GFC), during GFC and post GFC. Prior to GFC, there has been a considerable growth in the established housing prices. This growth pattern however changed course and reached the worst levels in August 2008 when the GFC was setting in. However, the prices of established homes climbed steeply during the peak of the GFC when markets around the world were playing havoc. This defiance could be mainly attributed to the management initiatives taken by the RBA [21] and government of Australia. The RBA drastically reduced the interest rates to a record low of 3.25% supported by the federal government incentives such as economic stimulus plan, which included substantial increase in first home grants among others.

This financial incentive was "too good to miss" for anyone considering their first home purchase. This led to flood of first home buyers entering the market that drove the prices up against all odds. Since the time the incentives have been wound back, and the market and investor sentiment took over. This led to a fall in the growth when compared to the preceding three years and has been mostly in the low sentiment in the past two years. Therefore, although Australian market prices are influenced by the global events, a collapse similar to that seen in markets elsewhere seems appears a distant possibility. This can be attributed to the underlying government incentives to manage the risks during the crisis. Other micro-economics aspects also helped manage the downturn.
