Forums / Property Investing / General Property / Australian Property Bubble (article on Associated Press)

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  • Profile photo of TKlineTKline
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    Excellent article about the Australian Property Bubble

    This does pours cold water on most spruiker claims about  how it's supposedly different here — reading this article shows how much Australia has similar to every other bubble, and they've all burst, all but one! Tick tock tick tock…….

    Will the 'greater fools' listen or ignore the advice? Public sentiment is turning. As more people see the wisdom behind these theories, it's a matter of time, that's all!

    Quote:

    Are Australian House Prices Overvalued?

    The question of whether Australian house prices are overvalued has been an extremely polarising issue for some time. Many observers believe property values in Australia are severely overpriced relative to other countries, relative to historic trends, relative to incomes, and relative to rental yields. Such observations have led some people to believe that a speculative housing bubble may be growing in Australia…….

    Australian Property Bubble

    All the best,

    Tom Kline.

    Profile photo of StingrayBirkeStingrayBirke
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    Not a bad write-up on the bubble. I like where he said…..

    "Sadly, the exponential growth of property related debt in Australia has created nothing positive for most Australians. While the explosion in property credit may have boosted GDP figures, it has not manifested in any real production or productivity gains. Instead, it indicates wasteful consumption, as the vast majority of property related debt is funneled into the trading of existing dwellings, rather than the development of new housing stock. Apart from providing basic shelter, housing offers little of benefit to an economy (beyond the initial construction boost). On the other hand, business investment, which furthers technological advancement and creates
    employment, does provide long lasting economic benefits. The vast capital flows that are currently directed towards the trading of existing dwellings in Australia could be allocated much more productively to other sectors of the economy.
    "

    That nails it for me. Can anyone write for the Associated Press or is this bloke a known journalist???

    Daniel.

    TKline wrote:
    Excellent article about the Australian Property Bubble

    This does pours cold water on most spruiker claims about  how it's supposedly different here — reading this article shows how much Australia has similar to every other bubble, and they've all burst, all but one! Tick tock tick tock…….

    Will the 'greater fools' listen or ignore the advice? Public sentiment is turning. As more people see the wisdom behind these theories, it's a matter of time, that's all!

    Quote:

    Are Australian House Prices Overvalued?

    The question of whether Australian house prices are overvalued has been an extremely polarising issue for some time. Many observers believe property values in Australia are severely overpriced relative to other countries, relative to historic trends, relative to incomes, and relative to rental yields. Such observations have led some people to believe that a speculative housing bubble may be growing in Australia…….

    Australian Property Bubble

    All the best,

    Tom Kline.

    Profile photo of devo76devo76
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    @devo76
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    Nice post . Nice FIRST POST. Can I just ask why you bother on a property forum.
    You know what. I hate golf but you will not find me on a golf course telling people.
    So why are you here I’m honestly interested.
    Do you want to save us …. Not likely.
    Do you want to start crap…. maybe.
    Are you angry about house values and feel that by pushing negative articals you might play a small part in inducing a property crash that you can proudly come back and lay claim to…. That’s the one I think.

    Good luck with your predictions. Thanks for the heads up.

    TKline wrote:
    Excellent article about the Australian Property Bubble

    This does pours cold water on most spruiker claims about  how it's supposedly different here — reading this article shows how much Australia has similar to every other bubble, and they've all burst, all but one! Tick tock tick tock…….

    Will the 'greater fools' listen or ignore the advice? Public sentiment is turning. As more people see the wisdom behind these theories, it's a matter of time, that's all!

    Quote:

    Are Australian House Prices Overvalued?

    The question of whether Australian house prices are overvalued has been an extremely polarising issue for some time. Many observers believe property values in Australia are severely overpriced relative to other countries, relative to historic trends, relative to incomes, and relative to rental yields. Such observations have led some people to believe that a speculative housing bubble may be growing in Australia…….

    Australian Property Bubble

    All the best,

    Tom Kline.

    Profile photo of looking tolooking to
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    @looking-to
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    Do not agree in big price drops, however as seen in the Brisbane market in the mid 80's to early 90' very soft growth if any at all may be where we are heading again. We in South East QLd for the last 5 yaers have been hearing about the falling rate of rentals yet with the huge drop in building approvels over the last 2 years' this has seemed to have gotten no worse, looks like Matusik was right. May have of been all up beaten up hype, I am looking further afield, any thoughts on this.        

    Profile photo of thomsonthomson
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    The first couple of posters are so transparent with their real motives that I actually laughed out loud when I read them, good stuff fellas.

    However, I suppose that doesn't by default make them wrong, they may have it right, even if only by accident.  I personally would like to see a soft or even a flat period for a while.  I think that would help to stabilise the market, and allow savings/income for first homers to catch up a bit. 

    And in the interests of full disclosure, I'm currently in the process of a 3 lot subdivisiion and build.

    thommo

    Profile photo of Magpie2010Magpie2010
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    Hi Looking to,

    I'm just about to sign an IP contract for a Unit at Deception Bay with uninterupted water views. Do you have an opinion on the redcliffe/Deception Bay area (not sure where you are exactly located) in general. I'm pretty confident my buy is good value, and I'm banking on the water views as the key to capital growth. (I live in Melbourne -so am using internat to get all my knowledge!)

    any thougths appreciative

    Tim

    (I have no pearls of wisdom)

    Profile photo of devo76devo76
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    I agree thommo. A soft or flat market for a while would be great. I actually believe this is what’s happening. Some interpret this as an impending crash. Time will tell. Looking long term but ,the game hasn’t changed at all.

    Profile photo of benofbrisbanebenofbrisbane
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    hey Tim – Deception Bay is a pretty dodgy area.  Redcliffe and Deception Bay are not the same market. Redcliffe has come a long way in the last decade but not Deception Bay.  I know Deception Bay is cheap and does have water, but it really is a long way from turning around.  I would probably recommend coming to the area before buying.  Sorry to be a downer. But Depression Bay as it is called up here is a very low sociodemographic area.  Of course that does not mean that there are not good buys, but just be wary.

    Ben

    Profile photo of Dan42Dan42
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    When articles start using 'average income' instead of average household income', as this article does, it shows they are willing to bend the truth just to try and prove their point. They lose all credibility. Sure houses are more expensive now when compared to average income. Maybe because more households are now dual income? Didn't think of that, ey? Geez….

    And Tom, great first post and thanks for the 'greater fools' line. Classy.

    Profile photo of DWolfeDWolfe
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    Oh no.

    Well that does it for me, I think I'll quit investing in property based on that. I don't want to be a fool, so I'll follow the crowd and do nothing.

    I'll stop building new dwellings and make sure that I try and stop as many others building houses as possible because TKline your proof is irrefutable.

    Dya ever think that people on a property INVESTING forum maybe quite intelligent and may be able to see through flagrant spooking?

    I'm DEFINITELY NOT going to stop investing in property or building until the sky really does fall on the property market and hell freezes over.

    Thanks for your input though random posters, it brightens our day.

    D

    DWolfe | www.homestagers.com.au
    http://www.homestagers.com.au
    Email Me

    Profile photo of itsandrewitsandrew
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    I like a part in the article where they present a supposedly informed group of experts … "The U.K. and Australian housing bubbles may be unimportant to U.S. investors, but to bubble historians they look extraordinary."

    I'd never heard of a 'bubble historian' before!  I'm so sheltered.

    Although things are softening I dont think anything is going to burst any time soon (despite the views of bubble historians).

    Andrew

    itsandrew

    Go as far as you can see and you will see further.

    Profile photo of thomsonthomson
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    that bubble historian isn't Robert Langdon is it?

    Profile photo of fWordfWord
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    Property in Australia is OVERVALUED?! Have you seen the RE prices in Singapore? "Average incomes" are lower over there, BTW, just seeing how my same-age relatives are struggling even to earn as much as I do, even though they've been at it for a few years longer than I have. And for the record, my remuneration is actually BELOW the national "average" in Australia.

    Property is expensive. That much I agree. However, so is that Audi RS5 that I'm hoping to own in about 20 years time. If the property crash is coming, I say, 'Bring it on'. It isn't possible to 'read' the stock market, let alone the property market. I agree with Thomson. If anybody predicts correctly, they do so only by chance. Of course, we can expect slowdowns and even downwards price trends. But a 'bursting of a bubble' with price drops of more than even 15% on average doesn't sound likely to me.

    Profile photo of god_of_moneygod_of_money
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    I am tired about people taking about Bubble, Burst, Overvalue, bla bla bla for the last 7 years….!!!!!!!
    That is a very long prediction….still awaitng to happen…   

    mattnz
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    As you can see TKline you are preaching to the unconverted.

    I am a strategy manager working in a major bank and the more I read, the more concerned I am about house prices in Australia’s capital cities.

    I am a property investor, (currently have 3 IPs) but have been very selective in my purchases. I live in Sydney but would never be crazy enough to purchase at the stupid prices that properties go for here, nor let myself get close to what the banks tell me I could afford to borrow.

    Not sure how to post a graph here, but there is a great one that demonstrates that from 1978 to 2010 the Australian workforce participation rate (i.e. male and female workforce participation) increased marginally from 57.1% to 62.5%. Over the same period Mortgage debt increased from 24% of Disposable income to 141%!! This certainly can’t be explained by more women in the workforce, but rather relaxed credit from banks. If banks were still tight with lending, average house prices would be much lower, it would take longer to save to buy a house BUT the time taken to pay off the house and all of the debt would be much much less and everyone would be much better off financially. Unfortunately we live in a debt heavy society which artificially drives up house prices.

    Lets take as an example…. assume that the rules of the sharemarket stated that you couldnt borrow money to buy shares and the index trades at 10,000. Then they change the rules, allowing people to purchase with a 50% deposit, and the bank can lend them the rest so more money floods into the sharemarket, as everyone feels they can suddenly afford more shares. Half the people purchase twice as much value in shares and the market index rockets to 15,000, due to extra debt. Is the intrinsic value of the companies that people have invested in actually any greater than it was before? No! Just credit was relaxed and people now have more debt. That is exactly what has happened in the Australian housing market (and every other market in the world…. until recently that is).

    The lack of housing supply argument is also a fallacy, the same was claimed in the UK and didn’t save their housing market, even California, one of the epicentres of the US housing crash was claimed to have a housing shortage, hence the high prices that were being reached at the peak.

    Just as an aside – It amused me recently when Steve McKnight provided his regular market update. He started by telling us how all the pricing pressure would come from the mining sector where there is huge job growth and associated pay increases…. then continued to tell us how the Sydney market was going to have the best growth of the major cities….. huh? Sydney, the mining capital of Australia, I don’t think so. Thats why my investments are in places like Gladstone, where capital growth is much more likely.

    Profile photo of xdrewxdrew
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    What are the relevant conditions to cause a bubble?

    (1) Overvalued properties and the lack of available funds to contribute to it.
    (2) The lack of supportable tenancies or income to provide for supporting the loan.
    (3) A rapid rise in interest rates forcing marginal buyers to offload their properties ALL AT THE SAME TIME

    What are the actual current conditions?

    (1) Properties remain at a proportionate rate to incomes. An average property still remains in the 400k-600k zone despite price rises. Thats proportionate to the average household income of 10x that .. (gross) of 35-60k per person (dual income) in the house. Which means its still damn affordable.
    (2) Rents are still approaching the near 0-1% vacancy in most capital cities with little room for flexibility. There are still queues of up to 30-40 people attending a house for rent in most suburbs. That signifies not only rental demand .. but still growth.
    (3) In Australia we have had much tougher conditions on borrowers since the 2008 crisis in america for lending. This in itself has prevented a possible downturn or marginal seller release reaching the market. We also have had slow movements on rates .. a factor which has allowed for a slowing rather than a rapid sell. It helps not to have a Keating in charge of running the show this time around.

    There are still basic pressures on standard commodites. Building expenses are up, which makes older housing more valuable to upgrade rather than build new. Raw foodstuffs are all rising rapidly .. putting pressure on wages and inflation. But if you have a folio geared for growth as well as a slight downturn, none of this should affect you badly. However .. tight margin lending at high borrowings should be actively discouraged at this point.

    Barring all that strategy .. its still a market. Just like a fishmarket there is always a fresh fish and always a stinky fish. So .. grab your rod and go fishing where the fishing is good! (or will be good?)

    Cheers.

    Profile photo of thomsonthomson
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    I grew up in the UK in a regional town called Colchester, just over an hours commute from London, actually scarily similar to Geelong, where I live now.  About the same size, commute in to the city, strong but lower house prices (than london/melbourne) etc.

    Just yesterday I wa schecking house prices in Colchester and comparing 3 bed houses in similar suburbs to places in Geelong, actually house prices were pretty similar.  If you use the current exchange rate then they look cheaper but that is a reflection of the weak pound/strong dollar at the moment, which will change.

    If I look at my earning power in London compared to Melbourne and then at the house prices actually they seem about the same as here.  I'm in IT by the way, not mining :)

    I guess what I'm trying to say is that, yes the UK has had a price crash, and perhaps was therefore subject to a bubble prior, but in my simple comparo really prices have just come down to where we are now in Geelong at the current time.

    for what it's worth,

    thommo

    Profile photo of Dan42Dan42
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    mattnz wrote:
    As you can see TKline you are preaching to the unconverted. I am a strategy manager working in a major bank and the more I read, the more concerned I am about house prices in Australia's capital cities. I am a property investor, (currently have 3 IPs) but have been very selective in my purchases. I live in Sydney but would never be crazy enough to purchase at the stupid prices that properties go for here, nor let myself get close to what the banks tell me I could afford to borrow. Not sure how to post a graph here, but there is a great one that demonstrates that from 1978 to 2010 the Australian workforce participation rate (i.e. male and female workforce participation) increased marginally from 57.1% to 62.5%. Over the same period Mortgage debt increased from 24% of Disposable income to 141%!! This certainly can't be explained by more women in the workforce, but rather relaxed credit from banks. 

    141% of disposable income? Do you have a link to that information. 141% sounds extremely high. Depends on how they calculate disposable income, I suppose. I notice they haven't used 'income', or 'household income'.

    Without seeing your graph, it's interesting that they have used average workforce participation. I'm not sure why they would use that, then use disposable income.

    My point about dual income households is that reports using 'average income' are misleading. They use this statistic rather than average household income, because of the dramatic effect of using a higher number.

    I agree with what you are saying about relaxed credit. If it becomes harder for banks to borrow offshore to fund home loans, and then banks become more selective with their loan criteria, home buyers will be able to borrow less and prices could drop. This to me is a major concern for the property market..

    Profile photo of god_of_moneygod_of_money
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    Dan42…
    60% of the properties are owned by top 25% of income earners in Australia (forgot the source)..
    It does not make sense using 'generalised'single income to compare the house price.
    i.e. sydney house price c.f. single income (australia-wide)

    Profile photo of casanovawacasanovawa
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    yeah obviously some sudden big shifts in certain areas could definitely precipitate a crash in the market ie increases in interest rates, rising unemployment, lack of availaiblity of credit…   but for me the other thing is just general confidence (or lack of it) in the the market….    i have bought shares before and learnt the hard way how slowly the price can go up and how quickly they can drop once confidence evaporates…     and there is no common sense to it, no lets stop and do some rational thinking once investors get spooked and that slide starts, its pure herd mentality and a flight for the exits….  and unless you are 100% confident that there are some underlying fundamentals to the market  AS WELL AS have the resources (eg support of lenders) and time and all to hold on during the down turn your often forced to join the rush to the exit as your asset will be worth less tomorrow and less the day after that…

    its the reverse of how it has been over the last few years that although buying into property had just gotten crazy in many ways, the only way to justify it was that if you didn't buy in at crazy price today, it will be crazy price plus 10% in 2 months and crazy price plus 40% in 6 months time…  snap decicions, buy now or you'll be locked out forever…     on the other hand you could rationalise it because everyone who wanted to make a buck was thinking i'll pay pay crazy price now and i'll sell it for crazy price plus 50% in 2 years etc….   but the rise bit i don't think that is going to happen now in many places…

    with some quite large increases in costs of living occurring around the country across a range of essentials, doubts about several countries in the eurozone, the US still in the doldrums, several stories about China tightening lending criteria/raising interst rates to control a potential bubble/inflation over there, several more interest rate rises forecast by the RBA/extra bank initiated ones, seemingly most peoples pay rises still being held down after GFC and now 6-9 months of stories of house prices stagnating if not actually dropping in major markets around Australia, how many people would feel comfortable at the moment in punting on paying top prices any time soon that sound crazy in general and will come close to putting them in debt stress???

    There's a housng shortage?   well maybe there is or maybe its jsut affordable housing….  9 months ago i know i was paying quite a bit of my income on rent which made it hard to save up for a deposit for a house that i thought i had better try and get (that was Feb when the thinking was get in now or land prices will go up like 10% a month etc adn you'll never own a place) so i moved out of my rental and in with a mate and pay $130 a week rent so have my deposit saved up already…    i think many people will find ways of doing this (stay home, share with friends etc), so its not a simple two option people must pay crazy mortgage or pay crazy rent on your own as its sometimes made out to be….

    I was on the point of signing the loan agreement but have now backed out…   couple of reasons, i no longer felt comfortable buying into a market of rising interest rates and dropping house prices in Perth…  i had orginally been planning to build a 4 bed/2 bath house for just me to live in as for resale they are usually more appealing than a 3/2 (remember crazy hosue price justified by 20% growth when sold to next sucker)    i have now decided i will relook at all options and may buy in next year than right now as who wants to be the last one to buy in at the top of the bubble (if we are in one)???   if market is going to be flat for a bit and RE not a great money maker for a while, maybe i will just downsize to 3/2, comfortable enough for me and less of a hit on my single wage each fortnight leaves money to enjoy life…   what i will wait for is to see how the market softens some more….  one of those things about why buy today or tomorrow when it could be cheaper next week…    i think others will probably start holding off to see if the market will fall, or sellers will offload for less than what they are asking so they don't get caught having to sell for less later… 

    i expect to see building companies throwing in more freebies, their list prices may or may not drop, but i already see more trying to entice people with cash prizes or throwing in air cons and solar panels and nicer kitchens and all…   so the longer the market softens who knows how much more i might get for my money???

    these are just some of the thoughts that people who might be a bit savvy about the market might be pondering, i don't think it will be necessarily huge unemployment or other big shocks that could suddenly depress the market, but a bunch of small things working together to reduce confidence and expectations of the market i think could cause some dropping, although probably not 40%….

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