THE GREAT PROPERTY CRASH

Hello all,

I just wanted to get people's thoughts and opinions on where the residential property market is going to go in the near future.

To me it makes sense that a boom of the magnitude that Australia's just had must surely be followed by an equal and opposite crash.

So how low will prices go in say Sydney?

Also, when will prices hit rock bottom? IMHO I think that the market is now only at the beginning of the downturn and there is still at least 2 more years of price dropping.

What are my reasons? I think that the government will continue to control inflation by raising IR, which will continue to scare investors out of the market leaving a number of vacancies. This is already happening in Sydney and will soon be more apparent in Brisbane, followed eventually by a huge crash in Perth.

What do other people think?

Dan

Hi Dan,
Im not a stats guy but I do remember last year everyone said prices will remain relatively flat, they also said that the year before and the year before that. Actually I think that has been the prediction for about 5 years for Sydney.

I was concerned too, but I beleive with the stength of the economy (exports), low job vacancys, etc. I cannot see how prices can fall. Everyone still has too much money.

If rates rise maybe 2-3 more times I think that will trigger falls in property and make life hell for PPORs

My logic is probably totally flawed, but thats my opinion

Mathew
www.arrttt.com
Custom Oil Portraits

Michael Yardney would have something to say on this topic having been through 4 property cycles but I am sure each cycle has had its own peculiarities. The person who knows the answer to your question would be a very wealthy person.
Buyers agents and real estate agents in general tend to talk the market up whatever the state the market is in.

N. Brown

When the media talk of the markets crashing or correcting etc, they are usually quoting across the board, median and average prices.

The problem with these stats is that a sudden spike in sales of properties, or decline is sales of properties either side of the median and average affects the figure, giving a distorted result.

For example, the median price may be $300k in say, Melb. This is the cost of the house exactly half way between the total number of sales for the city - there may be 1,000 sales; the 500th sale house is at $300k.

But then you get an interest rate rise, the first home buyers disappear, but the cashed up wealthy buyers don't get affected by the rise so the sales above the $300k mark increase.

The total sales are still 1,000; but the 500th sale is at $400k now due to all the higher end sales. The median has risen.

In a nutshell; forget about these stats - real estate is driven by micro markets, which fluctuate within and also outside the market trends.

You can find deals in any climate if you look. Having said that, I think 2007 will be mostly flat around the main traps - especially if another interest rate rise occurs in the first half of the year.

Look for the micro markets, undervalued suburbs near more expensive ones, look to add value through subdivides and renos.

I don't think Perth will crash - just slow down an awful lot. Flat for a few years maybe.

Here's a good case in point; in L.A the boom has ended, prices are dropping, but they are still so high that people are forced to move out of the city to cheaper areas and commute. The cheaper areas are now booming as the herds move in to buy up while the prices are still affordable - a boom within a bust! Australia is no different.

Cheers,
Marc.
erardent@hotmail.com

"we get sent lemons; it's up to us to make lemonade"

Hello again,

Thanks for those comments.

I agree with you LA in that the figures that are produced by the media can be misleading.

The superannuation policy that's available till July might bring some Mum & Dad investors out of the market as well thus bringing prices down.

Just a thought. Difficult to predict this property stuff

D

Hello,

Maybe I'm one of the few forumites outside capital cities, but the Far North Queensland market is still pushing ahead strong (sure not like the boom times of 30-50% gains p.a. a few years ago, but that's probably like everywhere else in Australia). Cyclone Larry has had an upturn effect for the real estate market with prices jumping up. The thing I see is that the market here is playing catch up with the capital cities & I think it'll keep going for the next 3 years, then possibly fall.

Col

Capital growth, rent returns and interest rates all go hand in hand. They are all relative to one another. i.e - property prices become unaffordable, investors stop buying due to poor returns, rental shortages occur, rents go higher, investors re-enter the market...... What will change the balance is if a large amount of land is released to the masses by the govt, which will not happen in the next few years. They have proved they can't handle the current market situation with issuing titles and managing infrastructure growth so I don't see it as an iminent concern.

The economic conditions of this country are still robust thanks to China and other nations buying our raw products - and with India now becoming a world player. Price growth may slow due to affordability issues but we are now in the grip of a rental supply crisis which will keep up demand for rental props. With the current interest rates and inflation, so long as you can achieve around 8% p/a growth on your portfolio, you can make a LOT of money from property investing - thanks to leverage and compounding.

Brad Samers
ProDev Network
www.prodev.com.au

I think that the current property boom will end with some potentially catastrophic results. Many Australian investors are geared up to the hilt (particularly the mums and dads players with the one property, representing a high proportion of investors) and the clouds are gathering for these and many thousands of home owners with large amounts of debt.

 

Much of the individual wealth created today is on the back of asset booms. Unprecedented consumer spending (and debt) has been driven by borrowings against equity in property. As we move into a relatively precarious situation with a US recession looming we are going to see consumer spending drop leading to a drop in demand for product. The likelihood of a US recession impacting on the rest of the world is very strong, particularly in Australia where lower global consumer demand for goods will result in a slowdown in the Chinese and Indian economies (although interestingly Japan is out biggest trading partner) impacting on our resource-driven economic boom.

 

How will this affect us? A slowdown in the economy, coupled with an increase in the cost of borrowing, will result in fewer jobs, higher interest rates and a rise in defaults (this includes business bankruptcies since business borrowing is at an all-time high also). With the glut of property and a potentially sustained period of recession it’s unlikely that the market will recover for some years.

 

So what to do? I have a problem with the notion that the market will keep on rising as required by most property investment strategies. They say time is the essence, and so long as you can afford to stick it out for at least 7 – 10 years (the usual property cycle) you’ll be fine. This has 2 pitfalls: 1) it assumes that you can afford to see the cycle through and 2) a cycle is going to be like any other cycle.

 

The only thing that is hard to predict is how bad the recession will be. If it’s only a mild cold we all catch from the US, then you may be able to ride it out. If we catch pneumonia then the smart money will sell up now in a market that is still reaping silly prices, sit on your cash and buy when there are a ton of houses up for mortgagee sales in about 2-3 years time.

 

I know this is very pessimistic but there are predictions of a “perfect storm” on the horizon. Whilst a recession is very hard to predict I would not be betting on a winning horse if the vet is telling me his heart could go at any time.

 

But I could be wrong! 

And i just bought a boat. BUGGER.
Personaly i have only seen one cycle and therefore cant add to this discussion without it being based soley on my opinion but i will say one thing.
I just finished a conversation with a family friend who to say the least, earns more in a week than i do in a few years. There investment life has seen many cycles. They have lost millions in bad choices and have made tens of millions in good ones.They are a sucess story to the letter.When i talk about the doom and gloom they LAUGHED.
They had these pearls of wisdom.
All down turns come to a end.
The market always recovers and then some.
People are always convinced that the current downturn is  worse than the one before it.
Dont over expose yourself,stick it out and you will be fine.
If you lose everything, start again.It takes one cycle to make money.
They went on to say that its very sad when people lose everthing but they then say they shouldnt have had everthing at risk.
So i guess the  general idea is like what has been said above. Be prepared but not scared and things will improve for the long run.
PS They went on to say that they are picking up ther boat in the next few weeks. Cost 1.75 million. HOLEY CARP. I have a long way to go.

I have spent a whole lot off time reading investment books and watching property investment DVD's lately to learn how these people succeeded in becoming financially independant. The one thing all these people have in common is they are positive people, they walk the talk. If you want to be succesful in any chosen field in life surround yourself and learn from positive people. If you listen to negative, pessamistic people guess what that's what you become. Stay focused, educate yourself always continue to learn and surround yourself with inspiring people and you have more chance of getting it right than hanging around doomdayers. An most of all if you want success you have to step out of your comfort zone and have ago.

Don't worry be happy

Hi all, I read all comments on this subject with interest. Each contribution in isolation appears to make sense. However the one thing I cannot reconcile is how far can house prices really fall when the cost to replace them continues to grow? When I talk to my tradie friends they all tell me about increased expenses such as materials, labour, vehicles, fuel and compliance (OH+S etc). Then on top of this there are gov't charges, land cost and many other development expenses (eg where I live the council has just lifted all its charges by 6%). The way I see it, if I'm in the market to buy a home I have 2 choices. Firstly I can have one built (or buy new) or I can buy from older housing stock.  Sure i would like to buy new but when I do my sums I find that I can buy from existing housing stock cheaper than what I can build for. Only problem is every one else has realised the same therefore there is a high level of competition for the houses I'm interested in buying so the price gets pushed up to just below that of a new one. I guess in short, my question is, how far below the cost of replacment can an item fall? Particularly when then is demand for the product (every one keeps saying more homes are needed)  I'm sure not to many investors/builders will continue to build new ones if they are worth less than what they actually cost to put there??? 
Hallg

Dreaming, it's not necessarily about being negative, it's about being smart and picking the right time in the market to get in, or out if need be. 

Badgers I found your original post very pesamistic, I was just putting my observations forward. See I believe we are in a once in a life time resource boom like no other seen before. China, India are waking giants they want what the rest of us have. They want a nice house a car and a good job.
This resource boom will go on for years and Australia will benefit greatly.
I'm not suggesting for one bit that we won't have a few bumps on the way but every one has to live somewhere, and Australia will increase it's migration numbers 10 fold before the last baby boomer has retired. See the baby boomers aren't going to disappear off the planet when they retire so they will need houses still along with hundreds of thousands of migrants to keep the country ticking along.
But then I've always had a positive attitude to life.

Don't worry be happy

Hi Millions, I would buy in Bendigo Vic if any where, but my post was more a theoritical question. In my own way I was trying to say that house prices in most areas really can't fall (crash) very far because the cost of producing them has risen considerably over tha past few years. I read some comments suggesting doom and gloom (I assume that means large drops in property prices) but i pose the question, if the cost of building the average house is, let's say $250,000, that means that when no one is willing to offer $250,000 for the average house, production will cease. These basic economics therefore put some type of floor under the value of exist house stock? Sorry if I'm not explaining myself very well.

Hallg

I agree Hallg,

and another thing; people need to live somewhere.

So while there is a basic demand for housing from a necessity standpoint by average people, for the average house, in the average street, housing will never go down in value by much (if at all).

The biggest fluctuations in house prices seems to be after an hysterical buying spree/boom when silly people buy anything at any price simply because they can afford it and they wqant it before someone else with a hot cheque book gets it.

But, many of those people don't ever need to sell afterwards; it's just that small group of people who get into financial trouble for one reason or another, then are forced to sell at a loss to escape their trap.

This is only ever a minority of the sales cycle, but of course; it makes great press and ratings when the individual disasters are displayed in the papers and on tv.

In reality, what happens is that the boom ends, prices stay flat for a time until affordability improves, then they start to go up again.

I suspect this will happen now for a time, especially in the middle price range, while the cheaper end will continue to do well as this is all there is left that the millions of average people can afford.

There will be pockets of higher end which will still do well, as there are a number of people who are immune to interest rates and high prices due to their wealth/income, but these pockets will be the better parts of the higher end.

Cheers,
Marc.
erardent@hotmail.com

"we get sent lemons; it's up to us to make lemonade"
www.whydoislice.com - for all the golfers out there!

 I just find these kinds of responses so hackneyed, unoriginal and not particularly insightful.  In fact having an overly positive attitude and being happy all the time is a mental condition, much the same as someone who is depressed and down all the time. The only difference is that the former condition is regarded by society as being agreeable and therefore it is not considered to be a problem. Nevertheless, overly positive and happy people are just as mental (you know the kind, the ones who just have to be smiley all the time and always see the positive in everything, and have to spread the word – you know the kind, the kind you want to just smack in the face sometimes). 

Interestingly studies have shown that overly positive people are unable to properly assess risk because they have a tendency to only consider the benefits and overlook the negatives.

  Can you imagine how World War II would have proceeded if such people were heading up the Brits.  

“I say, those Germans are looking a little bit aggressive “.  

“Well, they’re just being negative. I say ignore them.  How about a cup of tea” 

Further, overly positive and smiley people have been shown to be less able to cope with disappointment or failure.  In one study they likened these people with religious zealots, suggesting it was much like any other kind of blind fundamentalism, often coupled with a need to evangelise.

  Property investing, like any other investment type, is about risk taking. Sound investing is about understanding risk. And sometimes the sky does fall in and if you do not consider the downside then you're a fool.  Anyway, there are a number of financial instruments that make money out of being bearish.

the song goes

dont worry

be happy

Many victorius generals when interviewed after WW2 about what was going through there minds and what they were going to do if they had been defeated during their respective campaigns said that they never "counselled thoughts of defeat and only focused on victory".

I am a GLASS IS HALF FULL kinda guy not half empty. Although i am well aware that you may only be a couple of mouthfulls away from a empty glass.

Be aware of the negatives but work towards the positives.
Now im going to the pub, my  all seeing third eye is thirsty.

Where do you lot get these mantras from. It's like you've been brainwashed by Tony Robinson or someone. Do you all get together on a Friday night for drinks at The Jonestown Bar and think them up?  

Don't you love it?

I am always amazed to see that successful people are positive and focus on what they want to have happen.

Expect the best, but prepare for the worst.

Cheers,
Marc.
erardent@hotmail.com

"we get sent lemons; it's up to us to make lemonade"
www.whydoislice.com - for all the golfers out there!

Well the opposite could be said for you. Do you sit at home scouring the doom and gloom web sites afraid to leave home becouse the sky is going to fall. You may think some people are overly positive but it might be you being overly negitive.As far as tony robinson goes, i would never go to that crap. I dont need someone to tell me to be positive.Positive thinking is a way of life.You keep on being negitive if you want. I know how i would rather live my life.
The people on this forum can often be split into the negative and positive, The doom and gloom and the optimistic. Regardless of who has the most success. Why be a negative person. They normally lead a lesser life regardless of ther financial position.