3rd June 2009

Dear Investor,

Where to for house prices in Australia?

Saul Eslake, Chief Economist at the ANZ Bank, recently issued a paper discussing this topic. In his report, he notes that despite the undeniable similarities, there are nonetheless some important differences between the Australian and US housing and mortgage markets.

First, Australia does not have a physical excess supply of housing. The US does, because unlike Australia, it actually built more new dwellings that it required to meet growth in underlying demand. In Australia, the reverse has happened: we haven't built enough dwellings to meet underlying demand, which has been pushed up by rising levels of immigration. As a result, we actually have a significant backlog of unmet demand for housing.

Secondly, Australia does not have a huge supply of existing dwellings for sale at any price hanging over the market because of the huge increase in foreclosures that has been the primary source of downward pressure on US house prices. One reason is that there has been far less imprudent lending here than in America. 'Non-conforming' loans (the closest thing that Australia has to 'sub-prime') represent about 1% of all mortgages outstanding in Australia, as against around 15% in the US; while 'low-doc' and 'no-doc' loans account for around another 7% in Australia compared with about 15-20% of US mortgages being 'Alt-A' which is its equivalent of 'low-doc' and 'no-doc'.

Thirdly, mortgage lending in the US is typically 'non-recourse'; that is, in the event of default, the lender can take possession of, and sell the property against which the loan is secured, but cannot make any claims against any other assets or income which the defaulting borrower may have.

By contrast, in Australia the generally applicable legal position is that lenders can seek to recover against a defaulting borrower's other assets and income, if any, in order to make up any shortfall remaining if a mortgagee sale results in proceeds which are less than the outstanding debt. That, together with the generally greater social stigma which the Australian culture attaches to default, provides a powerful incentive to Australian home buyers to avoid default if possible.

Because there are proportionately far fewer dwellings subject to mortgagee sale, and thus 'on the market' for whatever price someone is willing to pay for them in Australia than in the US, there has been far less downward pressure on house prices here than in the US.

And provided (and this is an important proviso), unemployment in Australia does not spike sharply higher, this is likely to remain the case.

There are two good reasons to believe that unemployment won't rise by anything like as much as it did during the recessions of the early 1980s or early 1990s.

First, Australian employers are under much less pressure from high levels of business debt and high interest rates, or from steeply rising real labour costs, than they were on either of those two occasions.

And secondly, employers are aware that, as a result of demographic changes, one of the biggest challenges they are likely to face over the medium term is a shortage of labour, rather than an excess of it.

Together with appropriate reductions in interest rates, relatively low unemployment will likely help ensure that Australian home-buyers are able to continue to service their mortgages, thus reducing the risk of rising mortgage delinquencies and defaults, and minimising the risk of sharp and destabilising falls in house prices.

Best regards,
Chris Andrews


> Home
> About Us
> PDS - Want to invest?
> FAQs
> Subscribe Free
> Independent Ratings
> Mortgage Shopping List

Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

* La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
(2) Withdrawal rights are subject to liquidity and may be delayed or suspended.
(3) As at 30/11/10 the La Trobe Australian Mortgage Fund had received a Morningstar RatingTM of 5 stars. The Morningstar Rating is an assessment of a fund's past performance - based on both return and risk - which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. © 2010 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf
(4) 3.75 star rating out of a possible 5 star rating indicates that Adviser Edge believes that La Trobe has performed in line with its peers and exceeded its peers on some fronts.
(5) The Standard and Poors rating of 4 out of 5 stars indicates that S + P has high conviction that La Trobe Financial will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers.
(6) The award was given to the La Trobe Australian Mortgage Fund, Pooled Mortgages Option.
Research Ratings are subject to change. To view the latest research information please visit www.adviseredge.com.au or www.standardandpoors.com.au. Ratings issued by Adviser Edge Investment Research AFS Licence No. 236783 and Standard & Poors Information Services (Australia) Pty Ltd AFS Licence No. 258896 are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. The ratings are only one factor to be taken into account in deciding to invest. Research Houses receive a fee from La Trobe for rating the product. The Adviser Edge rating is generally a measure of the rated entity's capacity to meet its repayment obligations in all market circumstances.
IMPORTANT: This message, together with the La Trobe Financial website (www.latrobefinancial.com.au) and all its contents have been prepared for general information only and should not be taken as legal or financial advice, and as such the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the La Trobe website.