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What the American housing market crash can teach Australia

The global financial crisis has had a significant impact on the way Australians view American society. When I first visited the United States around 15 years ago they thought we wrestled crocodiles, called prawns shrimp and rode kangaroos to work. Their view of Australia was driven by the media they were consuming. 

We all laughed at the simple attitudes of the American public and how naive their view of Australia was, but we have to be careful not to fall into similar traps. 

If we were to believe the media, we would be under the impression that America is one massive foreclosure sign and every property has lost more than half its pre-GFC value. While there is no doubt many property markets in the States are in serious trouble, there are some markets that have held their ground. 

Take, for example, this one-bedroom apartment in New York City's Greenwich Village.

 greenwich

It was purchased in 2007 just before the GFC for $1.2 million. Five years later it came out with its head held high and sold for a respectable $1.15 million. 

Similar examples can be found on the west coast of America. In San Francisco this four-bedroom family home sold for $2,879,000 in 2007 and was sold again in Jan this year $2,725,000.

sanfran

Yes, they both slipped back by a small amount, but even during one of the worst economic environments ever seen these properties protected the majority of their owners’ capital. 

So why does this happen, and what can we learn from it?

Both these properties are located in major cities with strong employment centres, infrastructure and schools. Further, they are in areas where there is a shortage of land, and both are period-style homes that are almost impossible to replace today.

In short, these properties have consistent underlying demand from a large number of people and a limited supply. The laws of supply and demand indicate that regardless of the market conditions these properties are more likely to retain their value during down times and grow well when times are good.

These laws of supply and demand do not have a nationality and will apply to any property market all across the world. They were in full flight on Saturday when a massive crowd turned out for the auction of 154 Hutton Street, Thornbury (pictured below).

huttonst

During the campaign for this run down timber Edwardian more than 3,000 people viewed the listing online. This translated into more than 360 people turning up to the open for inspections. Impressive numbers in any market.

The property ticks the boxes of limited supply and strong demand. It lies within seven kilometres of Melbourne and sits on around 600 square metres of land. It was also well located to shops, transport, parks and schools. To top it off, the property was seen by many buyers as affordable, as the agent was expecting it to sell for around $800,000.

The scene was set for a big auction as multiple buyers viewed this property as "the one". With the exception of a few under-bidders, the auction did not disappoint anyone. It was declared on the market at $835,000 and when the hammer fell it had exceeded this point by almost $100,000, selling for $933,000.

In a strong market all property looks good, but it's not until the market turns south that the cream rises to the top. As the market heats up into 2013 buyers would be wise not to lose sight of the laws of supply and demand.

Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.

Mark Armstrong

Mark Armstrong

Mark Armstrong is a director of ratemyagent.com.au, Australia's number one real estate agent rating website.

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