"We consider Australia's banking system to be one of the strongest globally."
That was the assessment of S&P, on 21 September, when it not only confirmed Australia’s AAA credit rating, but also upgraded its outlook from negative to stable.
Australia’s high-quality banking system is linked to its high-quality property market.
The banks make it hard to qualify for mortgages - which forces would-be buyers to become responsible savers. And the banks won’t finance properties unless they have resale value - which forces developers to build decent homes.
Those are two of the reasons that explain the strength of Australia’s property market.
A third reason is Australia’s high population growth, of 1.6% per year. Australia is the fifth-fastest growing country in the OECD, after Luxembourg, New Zealand, Israel and Iceland, according to the World Bank.
Australia has historically been a high-immigration country - 28.5% of the population was born overseas, according to the Australian Bureau of Statistics (ABS). Obviously, all those new arrivals need somewhere to live, which helps drive demand for property.
Australian property prices went up during the GFC
Did you hear about a recent 60 Minutes story that claimed prices could fall by up to 40% in the next 12 months?
If so, you might be confused. How could Australia’s property market be about to crash if its fundamentals are so strong?
Here’s the answer - Australia’s market is not about to crash. The 60 Minutes story was astonishingly inaccurate. It wasn’t a serious analysis; it was just a classic example of tabloid TV designed to win ratings.
For proof, just look at what happened in Australia during the Global Financial Crisis.
Between the September 2008 quarter (when the GFC began) and the March 2009 quarter, residential property prices in Australia’s eight capital cities declined by just 1.6%, according to the ABS. By the June 2009 quarter, prices were already 2.5% higher than when the GFC began! By the September 2009 quarter, prices were 6.8% higher!
So in the year after the biggest financial catastrophe since the Great Depression, Australian property prices went up, not down!
Why property stayed strong during the GFC
Wait a minute - how could Australian property prices do so well during the GFC? Well, there were three reasons:
- Australia’s strong banking system - no banks collapsed
- Australia’s strong population growth - all those new arrivals needed somewhere to live
- Australia’s strong economy - that allowed the government to introduce emergency stimulus measures
One of the stimulus measures was financial incentives for home buyers - and, as the statistics show, Australians responded.
The only scenario in which prices could fall by even 10% - let alone an absurd 40% - would be if there was another GFC. If that happened, no government would calmly sit back and let the economy crash and prices collapse. Instead, the government would again introduce emergency stimulus measures - which is what you can do when you have a AAA credit rating.
Of course, one obvious part of any stimulus would be incentives for home buyers. The government would know that stimulating the property market would also stimulate a range of other important sectors, such as finance and construction. If the incentives worked before, why wouldn’t they work again?
Australia is smart, not lucky
It’s no accident that Australia is one of only 10 countries to have a AAA credit rating with all three major ratings agencies. Namely Standard & Poor's (S&P), Moody's, and Fitch Group.
“Along with its strong institutions, a credible monetary policy and floating exchange-rate regime, Australia's public finances traditionally have been a credit strength for the sovereign rating,” S&P recently explained.
“Australian governments have demonstrated a willingness to implement reforms to sustain economic growth and ensure sustainable public finances, and have a strong track record from managing past economic and financial crises.”
Australia has a stable government, a robust economy, a strong banking system - and a healthy property market.