20% Correction in Property Market

[Bazza]

Hi All,

I was watching Nightline (I think) on the ABC the other night and they had a number of experts predicting a 20% correction in property values in the near future. I would have to agree that properties seem overvalued at the moment and that a down turn or flatting is likely although it probably won’t happen until interest rates rise.

How will this affect investors? Obviously, the IP’s will be devalued reducing the potential to borrow and once fixed term rates have expired repayments will increase.

How do you combat a downturn? Does anyone have a strategy for such an event?

Cheers,

Bazza

[Aceyducey]

Bazza,

a 20% 'correction' in property prices basically means that they flatten out, not that they decline.

May sound strange, but there's another thread about it somewhere round here...

If property prices actually decline they will do so slowly, over months and years - it's not like a stock market bubble where things go down faster than up.

This gives investors plenty of time to set up LOCs over the spare equity in their properties.

Then you wait until the market is low enough to buy into (or starts climbing again) and use the LOCs (which banks cannot erode value from) to buy more property!

Same if interest rates climb - lots of time to fix them & as people are squeezed back into rental housing there will be lots of bargains to buy.

Remember also that property investors are capable of doing other things - working, investing in shares, etc....so if property gets slow for six months or 5 years, serious investors just wait until they are ready to keep buying.

Frankly I'd like property prices to decline by 20% in real terms - would create a lot more positive geared property deals & reduce the number of investors (cause they won't see quick money in real estate), thus making it easier to buy places at discount :)

As with stocks, you can make more money when prices are going down....

Cheers,

Aceyducey

[Gill Bates]

>>>> Then you wait until the market is low enough to buy into (or starts climbing again) and use the LOCs (which banks cannot erode value from) to buy more property!

Most banks have clauses in their loan contracts that say they can call in ur line of credit or loan for just about anything they feel like. If ur highly geared , ur loans will be more closely monitered. via "reviews"

[frenzy]

there are two points here

1 20% down turn is really no rise in CG for 2-3,, yrs seen that before and guess what there are still areas that are under valued

2 returns will improve for some ares if CG stays and rents go up.. not that this is likely to happen but if CG stays flat for 6-8 ys in a area it will help returns and guess again bang... sharp rises in CG

so if you worry about a 20% fall look at the past

[Aceyducey]

Originally posted by Gill Bates
Most banks have clauses in their loan contracts that say they can call in ur line of credit or loan for just about anything they feel like. If ur highly geared , ur loans will be more closely monitered. via "reviews"

Gill,

True, but if your loans are being serviced properly & you stick to the 80% level it will take a long time before the bank gets round to a review when lots of the 110% geared new investors are going into default :)

Cheers,

Aceyducey

[Bazza]

Thanks AceyDucey, your right it would be positive. I didn't look at it from that point of view. Bargains, positive cash flow and less competition in the investment market.

Thanks,

Bazza

[brains]

In this low inflation time, wouldnt it take a lot longer for no rise in growth to equal a 20% correction? I think 2-3 years might be more suitable for high inflationary times.

If inflation is at 10% it would take 2 years of no growth to equal a 20% decline. At 5% inflation it would take 4 years.

Besides that, you should be thinking long term, so dont worry about a correction. Unless the bank calls in your LOC and the way to get around that is to put it in an offset account.




Originally posted by frenzy
there are two points here

1 20% down turn is really no rise in CG for 2-3,, yrs seen that before and guess what there are still areas that are under valued

2 returns will improve for some ares if CG stays and rents go up.. not that this is likely to happen but if CG stays flat for 6-8 ys in a area it will help returns and guess again bang... sharp rises in CG

so if you worry about a 20% fall look at the past

[Bear924]

Hi all,

I find it very interesting how different all the experts opinions are to each other. At the end of the day markets may go up or down and therefore it's up to the investor to determine what a property is 'worth'. I believe the trick to being a good investor is determining how to value a property and/or any other investment.

[Bill.L]

Hi all,

I suppose we need all the gloom and doomers so that the property market can climb a wall of worry. The strategy of most on this forum is to still BUY as they think that prices will continue to rise. Let's look at WHY property prices may fall, and compare to what's happening now.

1- Rising interest rates makes holding property too expensive.

At present we have low interest rates that are predicted to fall further, holding property at present is relatively cheap compared to late 80's.

2- Falling demand for property due to oversupply, high vacancy rates and therefore lower yields.

Yep, sure this is happening in some segments of the market(ie inner apartments that 90% investor owned), however overall there has been a population increase of 255,000 in the last year and housing stocks are predicted to be in shortfall by up to 8000 by june of 2004.

So what will make house prices FALL ????

bye

[brains]

Bill

Your point one is true but you forgot to mention that property is so much more expensive relatively now than it was the late 80s and people are more highly geared, it wont take any thing like the same rate rise to worry people this time around. Besides that applying to owner occupiers, rental rates are much worse for investors now compared to then and that at 6% interest rates!

And rates wont go down forever.



Originally posted by Bill.L
Hi all,

I suppose we need all the gloom and doomers so that the property market can climb a wall of worry. The strategy of most on this forum is to still BUY as they think that prices will continue to rise. Let's look at WHY property prices may fall, and compare to what's happening now.

1- Rising interest rates makes holding property too expensive.

At present we have low interest rates that are predicted to fall further, holding property at present is relatively cheap compared to late 80's.

2- Falling demand for property due to oversupply, high vacancy rates and therefore lower yields.

Yep, sure this is happening in some segments of the market(ie inner apartments that 90% investor owned), however overall there has been a population increase of 255,000 in the last year and housing stocks are predicted to be in shortfall by up to 8000 by june of 2004.

So what will make house prices FALL ????

bye

[l00kin4]

The Economist printed a survey on property in the 31st of May edition forecasting a 20% price drop over the next 4 years for average house prices in Australia . You can view it on the web but unfortunately not for free. It is worth reading.

For those arguing that land shortage drives prices, think about Hong Kong - 65% decline in 5 years! One key point of the article is that a price decline could be triggered by a change in sentiment as much as any other factors.

[Bill.L]

Hi all,

lets see; If Australia changes from free-market economy to communist controlled state, then there would be price falls in property.

In 1980's house prices ROSE as interest rates went from 15% to 18%, then faltered then fell. Yields on mid suburban houses were around 6-7%(we had one at the time). Yields currently are a much higher proportion of outlays.

bye

[dantheman]

The economist article:

http://www.economist.co.uk/displayStory.cfm?Story_id=1794899

quite interesting.

Other links are on the page.

It did scare me a bit all the doom and gloom. I might stay out of Sydney and stick with Canberra where there is a good rental market, or maybe the share market is the answer?
Or buy regional like the south coast of NSW?
The future is a mystery, opinions?

[brains]

Hong Kong is controlled by a communist state but is run as an autonomous free market economy. That has nothing to do with the decrease in property prices, they have gone down across Asia and other parts of the world and its got nothing to do with land shortages.

Land shortages are the reason property will rise at an average of 10% over a long time (say > 20 or 30 years) but nothing to do with the peaks and troughs in prices within that time frame.

House prices & rates rose in the high inflation environment of the 80s. Just as you were saying in a previous post that you could have bought the same Melbourne property in 1996 as in 1990, that is actually a pretty dramtic fall in price considering the higher inflation then compared to now.

What do you mean by:

"Yields currently are a much higher proportion of outlays."


Originally posted by Bill.L
Hi all,

lets see; If Australia changes from free-market economy to communist controlled state, then there would be price falls in property.

In 1980's house prices ROSE as interest rates went from 15% to 18%, then faltered then fell. Yields on mid suburban houses were around 6-7%(we had one at the time). Yields currently are a much higher proportion of outlays.

bye

[NIF]

Are they the same experts that in late 2000 predicted a 10 to 20% fall in 2001 ?

(like many of the people on this forum did)

[beech]

What were the reasons for Hong Kongs declining prices over the past 5 years?

Darren

[Bill.L]

Hi all,

Brains, what I meant by "yields currently are a much higher proportion of outlays" is illustrated in the following example;

In 1990 at the peak of the boom in Melbourne, The house we sold was purchased by someone for $115,000. The rent we were receiving was only $85pw a little lower than the true market rent of about $110pw at the time. With an interest rate of 17%(if you were lucky!) the annual cost was $19,550 interest + rates and insurance of around $800. Total cost was $20,350pa. However the gross return was only $5,720(at $110pw) or put another way 28% of outlays.

Skip forward to 2003, virtually the same house is now worth about $230,000 and rents are about $200pw in that area. Using the same rough calculations you get a cost of $13,800(interest at 6%) plus $1400(rates and insurance) total $15,200. The gross return $10,400 is 68% of outlays. In theory if rents and rates and insurance stayed the same then house prices would have to go up 250% from where they are now to be as crazy as they were in 1990.

My opinion is that many middle suburban houses may still be way underpriced compared to where they MIGHT go given conditions of continued low or lower interest rates. I'm not saying that it is rational for prices to go way higher, but it is more likely than a 20% fall.

bye

[brains]

Bill

Rental yields have dropped because property prices have risen. Is that what you are saying?

[Bill.L]

Hi Brains,

What I'm saying is that it is CHEAPER to hold the property now than in 1990 on 100% borrowed funds.

At the 1990 price the cost of our property to hold was $20,350 before any rental was taken into consideration. Today the same property would only cost $15,200 to hold before rental. So even an owner occupier would be paying less in inflated dollars. Because rents have risen during that time the equation gets much better for the investor NOW as compared to 1990.

If interest rates stay at there current level then I would not be surprised to see property prices more than double in the next 2-3 years. If interest rates continue to fall then property prices may double and then double again in the next 5-6 years. If that scenario unfolds then the fallout in a few years time will be horrendous irrespective of what interest rates do, a la Japan.

bye

[JFEWSTER]

Bill.L

I remember having trouble making my loan repayments back in 1990. But dont forget, interest rates didn't stay that high for very long.

Its not realistic to compare that period to now.

Back then, house prices didnt drop due to high interest rates. They dropped due to a change in sentiment and the lack of jobs in the following recession. And drop they did.

I dont believe that we need rising rates to create the same situation. You can still have a recession (or worse- deflation) with 2% interest rates.

I recently sold my PPOR and felt pretty happy with the result but now find myself competing in a frenzied market with other people who are clearly paying too much for no other reason than the fear of missing out.

The agents are loving it and are feeding the frenzie by advertising properties with wide ranges in the asking prices. A 70k range on a 350k house is becoming common.

When you make an offer, even if it is above mid range, you usually miss out.

So if everyone is being forced to pay higher and higher prices, what happens to their disposable income levels as a result?

With prices rising 20% per year for 4 years straight (albeit from a low base) and wages only rising at 4.5%, disposable income levels are clearly dropping.

Isn't this going to slow the economy eventually?

[Aceyducey]

Originally posted by JFEWSTER
IWith prices rising 20% per year for 4 years straight (albeit from a low base) and wages only rising at 4.5%, disposable income levels are clearly dropping.

Isn't this going to slow the economy eventually?

JFEWSTER,

Which % of households buy property each year & are therefore affected by the current housing prices?
.....if on average people buy a home every 7 years, that would indicate around 15% of households buy a home in any particular year.

If home prices go out of the reach of people they will hold off on new purchases, potentially pushing out the cycle to 9 years or more before home purchases and freeing up their cash for consumer spending....
Rather than buying a new house, they redecorate, renovate, or buy nicer appliances.

If home prices aren't out of reach, then you still only have 15% on average of the population buying at today's prices.
85% of the population's disposable income is unchanged and actually increasing due to rising wages.
It is true they will buy in future years, but as only an average of 15% of them will at a time, this has less overall impact.

Changes in interest rates have a much larger impact on economic conditions as they change the disposable cash from EVERYONE who owns property (and is on a variable rate) simultaneously.

Thus the potential decrease in interest rates can be considered as an extra income increase for 100% of the home owning market and would more than offset the impact of sustained rising housing prices on a yearly 15% of the home-owning market at this time.

Consumer confidence is at a nine year high, there are limited indications that property is climbing beyond the reach of the average punter, and an excess of rental housing where it is (thus making Sydney & Melbourne have lower rental returns and removing some of the impetus for further price rises).

I would anticipate that without a significant rapid increase in interest rates to 8% or higher, that sustained increases in property prices of 10% or more over the next 3 years is entirely feasible.

Note that depending on the housing markets you watch, your mileage may vary....Some areas are going to stall, some streak ahead - the investor's job is to identify which are which :)

I discount investors in this analysis as they are making a different kind of spending decision. If they were not buying property they would likely would be placing their funds in another form of investment rather than purchasing consumer goods.

Another point to remember, a rising tide lifts all ships....

Unless you are a new home buyer you are also selling a property at today's prices. Thus the real impact is the difference in prices between your sale and purchase adjusted for your lending capacity, not the full $ amount of the purchase.

First home owner numbers are down due to population figures (less people entering the market), the distortion caused by the $14K grant which prompted a lot of people to enter when otherwise they would have held back and an increasing tendency to stay at home a few more years and sponge off the folks (wish I had done this for longer).

Cheers,

Aceyducey

[Bill.L]

Hi all,

JFEWSTER, When interest rates went to extreme levels in 1990 they rose off a very high base with rates being 13-15% throughout the 80's. At the time you had to consider that the high rates were the norm. My point is that outlays today are still MUCH CHEAPER now than in 1990 for the same type of house. Granted that during the last 4 years houses have become less affordable, the reality is that there is a long way to go, to get to the extreme levels of 1990 at current interest rates.

When looking at the inflation rates between then and now you see that in the late 80's "official" inflation was around 7-8% and has fallen away since then. For interest rates to go back to 9-10% , we would have a period of higher inflation beforehand. I suspect the conditions would be more like late 60's that we now have, and look at what happened in the early 70's.

bye

[Garry K]

Hi Bill

Originally posted by Bill.L


I suspect the conditions would be more like late 60's that we now have, and look at what happened in the early 70's.

bye

Please expand.

I was around then, but too busy listening Deep Purple & Black Sabbath (Ossie Osborne) to notice what property was doing.

Geekay

[Bill.L]

Hi Garry,

I know the similaraties are not exactly the same or in the same timeframe but late 60's to early 70's we had low interest rates, low inflation, a peak in the sharemarket behind us, and a war in vietnam. By the mid 70's we had had a period of high inflation(oil shock), rising interest rates(but still below inflation rate), and continued deterioration in sharemarkets. Also had stagflation(recession and inflation together).

The early to mid 70's were a brilliant time for property investors as house prices skyrocketed and so did wages(easier to pay mortgages) and rental returns. Interest rate rises lagged the inflation rate as the economy was still in recession. It was a bad time to have large sums in cash.

bye

[Garry K]

Thanks Bill.

I know we shouldn't count on the past repeating itself, but historical trends do tend to indicate how markets will react, given a set of particular circumstances.

When it does, we look back with hindsight and say it was obvious.


Geekay

[silversands]

bump!

Interesting thread I pulled from 5+ years ago. it seems back then some folks were concerned about a 20% drop. Okay so it didn't eventuate. I notice that some of these posters are still around. (sure wish I was here back then :D )
Did this gloom forecast scare any of you off of buying in back then? If not, will it be different for you this time with talk of 40%?

Regards Jodie

[Bazza]

bump!

Interesting thread I pulled from 5+ years ago. it seems back then some folks were concerned about a 20% drop. Okay so it didn't eventuate. I notice that some of these posters are still around. (sure wish I was here back then :D )
Did this gloom forecast scare any of you off of buying in back then? If not, will it be different for you this time with talk of 40%?

Regards Jodie

Yes silversands I'm still around.

I've keep buying IP's and never worry about all the doom an gloom as it all picks up again anyway. If you never sell then the value this week is irrelevant. What concerns me is interest rates and rent. When interest rates go down and rents go up (like now) it's the best time to buy.

I bought another IP about three months ago to beat the herd.

Cheers,

Bazza

[Blue Card!]

a 20% correction? from what value? 03 peaks? 07 prices?

welcome to 6 months ago!