The real lesson from Australia’s property slump

The Australian housing market's hallowed 'soft landing' is starting to look like wishful thinking, says John Stepek. And that's not good news for the future of our own housing bubble.

The economic outlook for the UK isn't getting any better.

Yesterday, doorstep lender Provident Financial reported that bad debts jumped by 5% in the first half of this year, and now stand at £106.4m. The group's customers who are undoubtedly at the sharp end of the credit market - are clearly feeling the squeeze from rising energy and food bills.

Meanwhile, despite Tony Blair's tip to the TUC that unemployment would fall, it actually hit a six-year high in the three months from May to July, of 1.7m. Clearly, Mr Blair was talking about the number of people claiming unemployment benefit, which dipped by 3,900 in August but most experts expect the figure will be revised at a later date.

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None of this is good news for the property market. But rather than focus on our own little bubble, we'd like to take another trip Down Under this morning, to find out what the state of the Aussie housing market can tell us about the future of our own

Many people thought the Australian housing market had achieved the holy grail of a soft landing'. But thats looking more and more like wishful thinking. Stories are emerging of negative equity and of houses in Sydney being sold at well below prices fetched in 2004.

One particular tale that has been enthralling Sydney-siders is the story of a house in the city's western suburbs. It was bought for A$450,000 (about £180,000) in 2004. But the unfortunate owners ran into trouble making their mortgage payments, and the home recently sold again - this time for just A$260,000 (£104,000), a 42% drop over two years.

That's pretty hefty. And so compelling was the tale that the Sydney Morning Herald recently revisited the street to interview neighbours about their housing plans.

Unsurprisingly, most are planning to stay put. Several have had valuations from estate agents that have put their house price below what they paid for it.

But what was far more telling was the way the residents were talking about property. Here's a quote from local homeowner Judith Marshall: "Our house was valued two years ago at about A$330,000 [£132,000] and since the market has come back we're thinking it would be about A$300,000 [£120,000], maybe less. Bricks and mortar is supposed to be the most solid investment of your life, but for many people these days, I think you're better off renting."

Those are words to strike terror into the heart of any estate agent. No more talk of how "you can't go wrong with property." No more "renting is just paying someone else's mortgage," or "renting is dead money." Now it's the homeowners who look like they've wasted money while the canny renters have avoided the millstone of negative equity.

And this is the most important thing to learn from the Australian property experience - forget about how well their economy reflects our own, or the minutiae of how UK and Australian interest rate paths differ. The key lesson is that sentiment changes. And once it changes, it takes a long time to change back.

In our own property market, we're at the point where the greatest of the greater fools are still climbing on the ladder. Tales of 40-year interest-only mortgages and complete strangers (apparently) clubbing together to buy and share over-priced housing proliferate.

But when these stories start to spread around, it's a sure sign that a market's in its final spasms before the turnaround. It won't be long before the typical person starts to think - "you'd have to be daft or have money to burn to buy property in the UK today."

In fact, even the people who really do have money to burn think UK property is poor value. Chelsea's Michael Ballack, who earns a mere £130,000 a week, has been widely reported as saying: "London is extremely expensive. It is better to rent."

Now we wouldn't normally advise taking economic advice from a footballer but in his case, we'll make an exception.

Turning to the stock markets

After a day of volatile trading, the FTSE 100 closed 3 points lower at 5,892. Retailer Next cheered investors with strong first-half earnings - boosted by its directory business - which saw its share price rise by 7.5% on Wednesday. However, fears of further interest rate hikes weighed on sentiment. For a full market report, see: London market close

On the Continent, the Paris CAC 40 ended the day 11 points higher, at 5,137, with gains led by Gaz de France. In Frankfurt, the DAX 30 closed at 5,906, having risen 32 points.

Across the Atlantic, US stocks rallied in the afternoon to take the leading averages to their best closing levels since May. The Dow Jones Industrial Average was 45 points higher, at 11,543, and is now within range of its record high close of 11,722 attained on 14th January 2000. The S&P 500 closed at 1,318, a 4 point gain and its best close since 10th May. The tech-heavy Nasdaq ended the day 11 points higher, at 2,227, its highest since 16th May.

In Asia, the Nikkei 225 tracked Wall Street's strong performance, gaining 192 points to close at 15,942.

The price of crude oil was on the increase again this morning, last trading at $64.55 in New York. In London, Brent spot was at $63.39 a barrel.

Spot gold hit its lowest level since 29th June yesterday - $578.60 - but had climbed to $590/oz this morning.

And in London, the UK's largest insurer, Aviva, announced that it was to axe 4,000 jobs at its Norwich Union unit in order to cut costs and increase profitability. 1,000 positions will be moved to India and 500 contracted out to third parties. In other news, shares in water utility AWG climbed by as much as 12% this morning on news that the company, which runs Anglian Water, had received an approach which could lead to a takeover offer.

And our two recommended articles for today...

Look East for investment opportunities

- MoneyWeek editor Merryn Somerset-Webb's top prediction for 2006 - that the US housing bubble would deflate and the US consumer lose confidence appears to be coming true. So what next? To find out where to grab a bargain during the likely slowdown, read: Look East for investment opportunities

Why the Fed is wrong on inflation

- The US Federal Reserve is counting on the headline rate of inflation coming down again soon. But, argues Niels Jensen of Absolute Return Partners, they're playing with fire. So how has the Fed managed to get its figures so wrong? For all the facts in the inflation debate, read: Why the Fed is wrong on inflation

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.