All Topics / General Property / Property bust not here yet … worse to come

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  • Profile photo of Jamie MooreJamie Moore
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    nguli wrote:
    As Warren Buffet once said; "Be fearful when others are greedy, and greedy when others are fearful."

    He was talking about the stock market but I think it applies to most investment options…

    Totally agree. It’s times like this that offer opportunity.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of ALF1ALF1
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    The authors of these blogs and websites who advocate the property bubble is about to burst see themselves as guerrilla cells working to detonate Australians' warped obsession with property, which they see as fuelled by low-rent property spruikers and a hopelessly conflicted media empire that makes money out of selling property advertising.

    Somewhat undermining their argument, it is the media that periodically causes a spasm of alarm about potential property price falls by reporting the results of international surveys suggesting Australia is home to the most overvalued housing in the world.

    The Economist magazine recently published yet another of its surveys estimating Australian houses are ''overvalued'' by 56 per cent – the highest in the world – on a historical ratio of rents to house prices. (The so-called Economist Intelligence Unit manages to routinely overlook the different tax treatment of investment housing in Australia, which encourages landlords to chase capital gains and treat rental returns as secondary.)

    Less sophisticated bubblers simply compare the rise in house prices over the past few decades to the rise in wages to make the ''overvalued'' claim, pointing out that the former vastly outperforms the latter.

    But this overlooks the historic boost to household borrowing capacity that occurred in the 1990s with the halving of nominal interest rates. This, in effect, doubled the amount households were able to borrow against a certain income. The relaxation of lending standards by banks in response to financial deregulation also increased the amount banks were willing to lend against that income. These two factors are largely responsible for the increase in household debt between the mid-1990s and 2000s.

    Sophisticated bubblers acknowledge this, but are convinced that debt levels are unsustainable. Some shock will happen, they say, such as high unemployment that will lead to forced sales and falling prices. The bubble, by definition, must pop.

    You see, house prices only fall when people are forced to sell their homes. Otherwise, households choose to simply remain in their home and wait things out. Property investors are loath to realise their capital loss.

    A true collapse in house prices would indeed require some large external shock – a doubling of unemployment or interest rates – to trigger the wave of forced home sales that it would take to provoke house price falls.

    With low joblessness in Australia and the big surge in national income created by the mining boom, it is hard to see the trigger for such an event.

    That does not mean, however, that housing in Australia is not expensive compared to other countries. Economists such as HSBC's Paul Bloxham have pointed out that there may be good reasons for Australian houses being expensive. Compared to the rest of the world, we have high quality housing stock, with a high proportion of solidly constructed houses on big blocks. Most of the population is concentrated in a few capital cities with often marvellous water views. The dire state of public transport in big cities such as Sydney only increases the premium on properties located close to the CBD.

    The Reserve Bank has also sought to dispel fears of a bursting property bubble by pointing out that the rise in debt levels has been concentrated in the hands of those who can most afford it. In a Bulletin article last week, RBA staff analysed data from the Melbourne Institute's household, income and labour dynamics in Australia survey to show how by the end of the noughties, 73 per cent of the value of home loans were in the hands of the top 40 per cent of households by income, up from 69 per cent at the turn of the century. The article also found that about half of households are ahead of schedule on their loan repayments, giving them something of a buffer should they lose their income temporarily.

    Finally, those predicting big house price falls should also recall the recent experience during the global financial crisis when policy makers, confronted by an external shock capable of puncturing house prices, acted quickly to cushion the economy with interest rate rises and fiscal stimulus.

    The Reserve Bank governor was asked recently whether the prospect of house prices falling kept him awake at night. ''I worry about a lot of things at night,'' the governor confided before admitting that falling house prices were not among them.

    Because here is the surprising thing: house prices, in Sydney at least, have been falling relative to incomes for some years. The great house price deflation is already happening, just very slowly and in an exceedingly calm manner. That's the slowly deflating hiss of an over pumped air mattress you can hear, not a bubble bursting.

    Profile photo of ummesterummester
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    ALF1 wrote:
    A true collapse in house prices would indeed require some large external shock – a doubling of unemployment or interest rates – to trigger the wave of forced home sales that it would take to provoke house price falls.

    Here is a recent article on this:

    http://macrobusiness.com.au/2011/05/unemployment-and-house-prices/

    As the article says, there is inconclusive evidence for a direct correlation, but UE often raises after house prices fall not before.

    ALF1 wrote:
    Finally, those predicting big house price falls should also recall the recent experience during the global financial crisis when policy makers, confronted by an external shock capable of puncturing house prices, acted quickly to cushion the economy with interest rate rises and fiscal stimulus.

    They may and if they do it will keep prices steady. Flipside is, they are kind of out of money.

    ALF1 wrote:
    The Reserve Bank governor was asked recently whether the prospect of house prices falling kept him awake at night. ''I worry about a lot of things at night,'' the governor confided before admitting that falling house prices were not among them.

    Could mean he doesn't care or he wants them to fall. He is on record as saying he wants his children to be able to afford their own house.

    ALF1 wrote:
    Because here is the surprising thing: house prices, in Sydney at least, have been falling relative to incomes for some years. The great house price deflation is already happening, just very slowly and in an exceedingly calm manner. That's the slowly deflating hiss of an over pumped air mattress you can hear, not a bubble bursting.

    Yea, it has been deflating, or trying to deflate , since 2007. With stimulus offerred along the way to stop it deflating faster – on this we totally agree.

    There will likely still be a panic satage in the coming year where the average punter/investor realises this and tries to sell – this will seem like a crash for a little while.

    And, if it's slowly deflating, why buy? Better to save or invest in other things than a deflating asset class.

    Profile photo of harbharb
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    realestateedu.com.au wrote:
    Hi Garb, This will b my last communication with you.

    Yeah, whatever.

    Quote:
    … I have done the hard yards including 4 corporation licenses and 3 diplomas but to someone like u that makes no difference because u will always find a way to put others down to make yourself look or seem larger that what u r. The only difference between u and me is that I have done it, including my first 50 lot subdivision at 28 years old …

    and you felt the need to brag about it because ? ……….

     

    Quote:
    OK go reply but I won't you r a tall poppy in my view. 

    insecure much ?

    Profile photo of harbharb
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    ummester wrote:

    There will likely still be a panic satage in the coming year where the average punter/investor realises this and tries to sell – this will seem like a crash for a little while.

    What would you say will likely cause the average punter/investor to panic , rising rental returns ?

    I believe that your average punter/investor would be unlikely to have purchase a property post GFC for a quick CG so as long as rents continue to go up they would have little reason to panic.  Anyway, that is assuming wages and inflation remains under control which up to now was helped by a rising AUD. What do you suppose would happen to inflation if the AUD starts falling back towards $0.75 over the next 2-3 years ?

    Profile photo of ummesterummester
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    harb wrote:
    What would you say will likely cause the average punter/investor to panic , rising rental returns ?

    I believe that your average punter/investor would be unlikely to have purchase a property post GFC for a quick CG so as long as rents continue to go up they would have little reason to panic.  Anyway, that is assuming wages and inflation remains under control which up to now was helped by a rising AUD. What do you suppose would happen to inflation if the AUD starts falling back towards $0.75 over the next 2-3 years ?

    Rents aren't going up – they are stagnant and going down in some places.

    The dollar likely will drop back to 0.75 over the next few years. I missed my chance to short it (only hit 1.10 for a single night of trading).

    Likely outcome will be fiat inflation, verging on hyperinflation, like America.

    Profile photo of emptyvesselemptyvessel
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    Well, all my rents have gone up and they are still under the market rate.

    I want the dollar to stay high until I have invested my US funds in some good bargain basement US property with high yields.

    Then I want it to crash like a lead a lead balloon. Clean up and catch the up cycle over here.

    Profile photo of ALF1ALF1
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    In the fifties we said the price of property could never go up because we’d lost half the

    male population due to World War II and a recession, yet prices doubled. In the sixties

    they said property prices would never rise again because of affordability and wages

    couldn’t keep up, but prices doubled. In the seventies they said prices couldn’t increase

    due to the oil crisis… yet prices doubled again. In the eighties they said prices couldn’t

    increase due to the introduction of capital gains tax and high interest rates which

    reached 22 per cent at one stage, but prices doubled. In the nineties they said prices

    wouldn’t increase anymore due to low inflation and wages not keeping up, but prices

    doubled. In the noughties they said prices couldn’t increase due to the introduction of

    GST, but they doubled.

    “In 2003 when the property boom was full-on and the stock market had bottomed and

    was losing lots of money, I had clients coming to see me in a panic and wanting to sell

    out. I told them the same thing I’m telling everyone now: just hang tight.

    “All I can say when people make claims of gloom and doom is ‘yeah, yeah, yeah I’ve

    heard it all before’. So why am I so calm when everyone panics?   “One must understand

    the fundamentals first before you can make a sensible analysis of what is happening.

    “We’ve experienced world wars and depressions and recessions and high interest rates

    and low inflation and high unemployment etc. but we’ve managed every time to move

    through this and come out the other side stronger and wealthier.

    “As long as the human race is wanting to ‘improve their lot’ then we’ll ride through the

    economic ups and downs. A simple way of explaining this is if you’re uncomfortable in

    your seat, you’ll move around until you’re comfortable again. This may happen straight

    away or it may take some time but you will get comfortable again. This is the same as

    economic conditions.

    “As we bring more people into our country to maintain our standard of living we have to

    provide more housing. In New South Wales alone there is a high building shortage and

    the demand will continue to push the prices of properties upwards like it has done since

    1901.

    Profile photo of simplesimple
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    That was optimistic :)
    Property valuation in fiat currency is very misleading. Rate property growth in ratios like minimal wage or your yearly grocery bill or barrels of oil or gold/silver. Those provide more accurate gauge over the mid/long term.
    Fiat currency is manipulated fairly aggressively, therefore saying "property doubled in 10 years" means little if min wages doubled as well. Meaning it's gained zero.

    If property prices would grow at any rate higher that wage/inflation over any significant period of time then all OLD cities in the world like Rome, Paris, Madrid would be far outside the rich to buy due to accumulated gain over what 500 years or more?

    RE value cycle like any other asset or commodity. If one to gamble on it, they would switch at the top of the cycle to other asset or commodity that is to rise next. Staying away from fiat currency is good, it's your enemy, it's got hidden TAX build in called inflation.
    And again: Do Not Measure Value with Fiat Currency. As you would get PRICE, not VALUE. This is misleading.

    My 2c.

    Profile photo of EPI_DenEPI_Den
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    I tend to agree with ALF1.

    There seem to have always been reasons why property is about to crash in value, yet this has never really happened across the board in Australia. It certainly hasn't happened after such a considerable period of sideways movement.

    If you're going to buy a property, the number one consideration is that the property you buy is not costing you an unsustainable amount of money NOW. Property is for the long term! Make sure the rent you get NOW is enough to manage the debt costs you have NOW. Of all of my investment properties, none have reduced in rent in the past two or three years. Some people may have had reductions but this is surely the exception rather than the rule, so as long as you can sustain your properties right now you should be fine.

    In the long run, I can't see how property will decrease in value over time, in real terms. Put simply, population increases over time and available land doesn't. This causes demand to increase and with it price does as well. This, coupled with the fact that the average person now has more disposable income than ever before (and this trend of increasing amount of disposable income over time doesn't look like abating), means that people have more money to spend on property, underpinning its value. Furthermore, most current reports suggest that the projection for numbers of new properties is below the number required – further increasing demand. As long as demand is strong it is unlikely that prices will drop significantly.

    So basically what I'm saying is that property might be moving sideways now and it might not be the best investment for a quick buck. But in 2011 what is?

    In the long term, however, I still reckon property is a worthwhile investment. Just make sure you can sustain it's sideways movements now and it'll repay you in the long term.

    And good luck!<br /:)” title=”>:)” class=”bbcode_smiley” />

    Profile photo of simplesimple
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    EPI_Den, it appears to me that property market is getting saturated at this stage. Even RP data that is usually very late, indicates now that there is an steady increase of supply due to less buyers.  So this makes one to think if it's worth waiting to see what will happen 2011-2012. I live in Brisbane, few people I know invest in RE, few try to sell recently. Getting like 1 offer in 3 months. No way to sell unless you discount about 10-15%.

    Property is NICE investment when it generates you profit ABOVE what you get in the bank. At the moment 99% properties out there return around what, 5%(at today purchase price)? Bank gives you 6.5%. Makes it at the moment poor investment.

    And as for investment for 2011, try few: silver 70% gain, oil, grain, base metals, interest in the bank 6.5%. What about property?

    Profile photo of xdrewxdrew
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    ummester wrote:
    Rents aren't going up – they are stagnant and going down in some places.

    The dollar likely will drop back to 0.75 over the next few years. I missed my chance to short it (only hit 1.10 for a single night of trading).

    Likely outcome will be fiat inflation, verging on hyperinflation, like America.

    I assume someone pays you for this garbage opinion? Because as someone who invests across most markets .. I sure wouldnt.

    The core reasons for the dollar boost is because at this stage the collapsing factors that the rest of the world has arent present here. America is STUFFED now. The call came for it to do something in March .. and it … extended to resetting its debt line which it did this may. The dollar in America is going to inflate .. and inflate badly. I'd be expecting anything from 30%-50% inflation for a period of up to two years. Anyone investing in America is going to feel their dollar value just collapse under them. And for your knowledge .. i've been riding the dollar upwards since it was 92 cents.

    As far as the Australian market goes .. we have more money being generated in key exports to China and Vietnam than any value in our dealings with the US. Since the great Keating (barf) we havent been tied to the US or UK in any major way. Our major dealing are with East Asia and the Middle East.

    With the boost to our economy with an unnecessary stimulus, we've gone and plumbed ourself for inflation whether we like it or not. We inflate normally with regular increases … we shelve a downturn of major proportions. We dont inflate … we risk devaluation of our dollar because of its buying power loss. For anyone who earns in AUS dollars .. that would be bad new indeed.

    The rental scenario? Across the board in my area (dont know where you are) rents are tight .. approaching less than 1% all over again. This places significant pressure and eventually will boost rents again to even out that pressure. Leading …. to greater housing prices. I'm dealing with whats being presented to me .. not stats sheets .. not presentations of doom.

    The average punter will panic when the ideal low interest climate we are now in .. lets face it .. anything under 9 is still historically low, becomes a higher interest level. Leading to the NEED .. (read that word NEED) for the property to be sold. THAT IS PRESSURE. Until then .. as long as rents are being placed under pressure … property will .. again .. go up. Sad for the doomsayers .. huh?

    And as far as fiat .. dont abuse the word. Currency has been fiat either since 1929 when we left the gold standard or .. 1966 when we abandoned silver in our currency. Its a word thats been floated around alot .. but basically means that people lose trust in the currency. I dont think anyone is running for the banks in this country … and people arent tossing their dollars into the street. So stop using the word fiat for what everyone KNOWS is a fiat currency. It induces unnecessary panic and its just crap anyway.

    Profile photo of ummesterummester
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    xdrew wrote:
    I assume someone pays you for this garbage opinion?

    Why?

    xdrew wrote:
    The core reasons for the dollar boost is because at this stage the collapsing factors that the rest of the world has arent present here. America is STUFFED now. The call came for it to do something in March .. and it … extended to resetting its debt line which it did this may. The dollar in America is going to inflate .. and inflate badly. I'd be expecting anything from 30%-50% inflation for a period of up to two years. Anyone investing in America is going to feel their dollar value just collapse under them.?

    I agree.

    xdrew wrote:
    As far as the Australian market goes .. we have more money being generated in key exports to China and Vietnam than any value in our dealings with the US. Since the great Keating (barf) we havent been tied to the US or UK in any major way. Our major dealing are with East Asia and the Middle East.

    With the boost to our economy with an unnecessary stimulus, we've gone and plumbed ourself for inflation whether we like it or not. We inflate normally with regular increases … we shelve a downturn of major proportions. We dont inflate … we risk devaluation of our dollar because of its buying power loss. For anyone who earns in AUS dollars .. that would be bad new indeed..

    So we are still on the same page – I don't get what you are debating here?

    xdrew wrote:
    The rental scenario? Across the board in my area (dont know where you are) rents are tight .. approaching less than 1% all over again. This places significant pressure and eventually will boost rents again to even out that pressure. Leading …. to greater housing prices. I'm dealing with whats being presented to me .. not stats sheets .. not presentations of doom.

    I'm in ACT. My rent hasn't gone up in over 3 years. There are a lot of vacant rentals around me, asking a lot more than what I am paying and they are remaining vacant. Crazy, when we are talking $100 PW difference. It's $2500 they are chasing on $10k they have lost over the last 6 months. Their choice but I am sure the places would rent for $100 less PW, they just can't find tenants for $450 or so PW.

    xdrew wrote:
    The average punter will panic when the ideal low interest climate we are now in .. lets face it .. anything under 9 is still historically low, becomes a higher interest level. Leading to the NEED .. (read that word NEED) for the property to be sold. THAT IS PRESSURE. Until then .. as long as rents are being placed under pressure … property will .. again .. go up. Sad for the doomsayers .. huh?

    Anything under 9 is kind of low but I don't see it working like you describe – glad you do. Like I've noted, I see rents under pressure to be lowered. Rents are and have always been based on what wages can support week by week. Wages are too stretched (generally) to afford any more – unless banks start giving rental loans, they can't go up much more without wages increasing and food/petrol etc stagnating.

    Before this is said and done, IRs will be slashed (atleast by the RBA) but once its starts happening even that wont convince people to buy houses.

    xdrew wrote:
    And as far as fiat .. dont abuse the word. Currency has been fiat either since 1929 when we left the gold standard or .. 1966 when we abandoned silver in our currency. Its a word thats been floated around alot .. but basically means that people lose trust in the currency. I dont think anyone is running for the banks in this country … and people arent tossing their dollars into the street. So stop using the word fiat for what everyone KNOWS is a fiat currency. It induces unnecessary panic and its just crap anyway.

    yea, I know the history. I wasn't trying to induce panic, just find a descriptor quickly. It's simple, really simple.

    Houses costs as much as what debt our wages and their growth will allow. Rents are as much as wages will allow. There is no shortage of houses. The rest of the world is starting to distrust our banks finances and are charging more for credit. Bank IRs will go up, no matter what the RBA does. But, when house prices slide too much, the RBA will lower the cash rate, devaluing our dollar and causing internal hyperinflation. The speed at which this occurs is dependant on China's residential property bubble popping. We are little America and we are just late to the party.

    Profile photo of simplesimple
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    Profile photo of emptyvesselemptyvessel
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    I love the fact that this  doom and gloom thread started way back in 2006. I may have missed something, but I didn't witness a collapse of any description in our local property markets in that time. A few specualtive areas have gone down, so has the high end of town, but that was always going to happen. Dunno, maybe I am blind.

    Yes, Yes, I know the 2011 situation is different to 2010,2009,2008,2007 and 2006.

    On a related tangent;
    I recently went back to some "hotspot" predictions in API from Feb 2009 to see how the hotspots faired up until the latest figures. From what I can see, 70% of them grew at around 4.5-5% p.a. based on median house price comparisons. 10% grew at around 7.5% p.a. and 10% fell less than 2-3% p.a.
    Out of interest, I randomly compared suburbs out of the indexes at the back  of the API over the same time period and found almost identical figures.

    For the record, I am perfectly happy if my property portfolio grows at 5% p.a. As long as I can keep an 80% LVR and sustainable cashflow while I wait for the occasional, largely unpredictable 8%+ growth spurts that push me along faster. Super bonus points if I get the occasional random 10%+ boom.

    I feel sorry for those folks that cite bank interest rates of 6.5% as a comparison to annual growth of 5% in property. I ain't gonna try explaining it to people that have already made their minds up. And vice versa, of course.

    Profile photo of simplesimple
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    In 2006 this thread was started as a early warning. We discussed unbalances what where believed to cause RE prices to decline. Time frames where guessed by few, and manipulated by government interventions.

    Overall this thread was on the money, nice and early to. Scale and time frames are not possible to guess accurately, getting the trend right and early is an gift by itself.

    As to the actual % of the median prices drops, well let's wait few more years. I am not in the hurry anywhere, this thread was around for 5 years and can wait few more :)

    Some thought: the Australian property prices did started to loose value significantly since 2006 if measured in oz of GOLD not fiat
    my 2c

    Profile photo of emptyvesselemptyvessel
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    Here is are a couple of early warnings in 2011;
    Property prices will go down somewhere, property prices will go up somewhere at the same time.
    Gold will go up.
    Gold will go down.
    AUD will go down.
    AUD will go up.
    Commodities will go down.
    Commodities will go up.
    etc etc.

    There we go. I am the ultimate predicting machine. An oracle, if you will.

    I love the alarmist arguments going around about fiat vs gold and the "inevitable" super cycle repeating. I don't buy into it, but I do know I am going to get wealthier either way.

    Some thought; Chicken Little thought the sky looked dodgy from the first time he could see. His mum and dad should have given the poor little chook some rose coloured glasses.

    Profile photo of simplesimple
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    brisbanehousinggoldsilv.png

    An chance to buy house with 50% discount anyone? :)

    Profile photo of fWordfWord
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    So…who's already bought gold?

    Profile photo of simplesimple
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    Better than gold, can be only SILVER
    Problem is you need a trailer to move it around, bloody heavy in significant QTY's.

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