House prices in freefall

[MarkB]

I think the reality is that there are only 3 members of the RBA Board who wield any real power when it comes to the economic destiny of Australia:

Ian Macfarlane - Governor of the RBA

Glenn Stevens - Deputy Governor of the RBA

Dr Ken Henry - Secretary to the Treasury

These are ex-officio positions - they are members of the Board by virtue of the positions they hold - this is legislated under the RBA Act.

The first two are, of course, the top two positions in the RBA.

The third is, by any measure, chief adviser to the man who is Chief Financial Officer of Australia Incorporated (Peter Costello). Ken Henry is very much Peter Costello's man on the ground (or at least his man on the RBA Board).

The others are really just there to make up the numbers.

I'm not saying that certain other members of the Board aren't extremely powerful in other areas, just that I doubt democracy in the that Board works the way that it might in others.

As a general rule, the non statutory members tend to come from business and academia.

Warwick McKibbon (ex - RBA) is currently the academic on the Board. Previous academics have included Professors Adrian Pagan and Bob Gregory. It is interesting that the three all come from ANU (maybe not that interesting, it is the best economics school in Australia).

MB

 

[Aceyducey]

I'm with Tibor here.

I prefer to have decision-makers have a stake in the outcomes than be totally uninvolved.

I've heard it said that only academics can afford to be totally ruthless and inhumane because they are not concerned with people but with theories. (with apologies to all the non-ruthless and humane academics out there)

Business people may be perceived as acting in their corporate best interest, but they have a much longer-term view than politicians and take more ownership of their actions, unlike public servants....CEOs are rarely elected based on a popularity contest, put their reputations on the line daily with no party machine to hide behind & are in office for as long as they can prove they are doing a good job.

In terms of freefall property prices....Mirvac is putting it's money where it's mouth it, buying a new development area in Sydney....they believe the home owner market is still very strong & that people will continue to pay market prices for well-located housing....


From the Australian Financial Review today:

Mirvac managing director Bob Hamilton acknowledged yesterday that the investor market had slowed but said he believed the owner-occupier market was as strong as ever - hence the purchase of a Department of Defence site in Auburn.

"The investor market is quieter but this is infill housing," Mr Hamilton said. "At [nearby] Newington we're still selling houses as fast as we can build them."

Although another interest rate rise could affect the market in the short term, Mr Hamilton believes strong fundamentals - primarily immigration numbers and smaller households - will continue to support the housing sector.

The Auburn development will be marketed mainly at owner-occupiers and average prices will be $500,000 to $600,000.

Mr Hamilton said the owner-occupier market remained strong and there was evidence of continued strong demand for second homes. Mirvac has sold 18 townhouses in the Victorian holiday mecca of Torquay in the past two weeks, primarily to second home buyers.

Mr Hamilton is also optimistic about the investment market and believes it should bounce back within as little as six months given low vacancy rates in most markets.

"We genuinely believe the underlying demand is still there," he said. "Yes, there has been a lot of talk and interest rates have slowed investors, but they will be back."

Cheers,

Aceyducey

 

[MarkB]

Originally posted by Aceyducey
I'm with Tibor here.

I prefer to have decision-makers have a stake in the outcomes than be totally uninvolved.

Business people may be perceived as acting in their corporate best interest, but they have a much longer-term view than politicians and take more ownership of their actions, unlike public servants....

Are you saying that they should be involved in the RBA's decision making?

Or that they ARE involved in the RBA's decision making?

MB

 

[Aceyducey]

Pitt,

That they are involved at the level they should be - a consultative role

Cheers,

Aceyducey

 

[Peter 14.7]

Mirvac comments

Hi All

First, thanks for your post Pitt St. Must have taken some time to find all the graphs. I read with interest.

Re Mirvac

In terms of freefall property prices....Mirvac is putting it's money where it's mouth it, buying a new development area in Sydney....they believe the home owner market is still very strong & that people will continue to pay market prices for well-located housing....

I don't believe a major player buying land reflects the OA IP market position as:

1. Mirvac are a development machine (multiple staff, offices etc.) so they must buy and trade as overheads are still grinding along on the background.

2. They have very deep pockets and a long term focus well into the next boom. DA process alone for that deal with take 2 years.

3. From my professional contacts I understand Mirvac is very active at the moment because of the downturn. Why? Downturn has taken a lot of its competitors out and they now have the upper hand to some extent in price negotiation.

As evidence of this Counter Cycle Approach by Big Developers.

I remember in the last purported down turn (about 2001) Meriton bought the massive ACI site in Waterloo for $20M and all and sundry said Harry (Meriton owner) had finally lost it. He later sold a 25% portion to Toyota for their premier showroom in Sydney at $13M. Harry wins again.

The site is now only half full with literally thousand of units, most only half full, but so what? Meriton cash reserves probably mean he has not debt on the remaining 75% and with all this doom and gloom his subcontractors won’t be leaving for better deals in a hurry. He will simply sell enough to break even and wait for demand to return in say 3-5 years to make the big $$S.

So, I write to highlight, that as someone who works in Property Development I don’t believe the actions of big players as being true of the IP market health. A lot of companies cannot afford to stop even though all pointers say they should.

But as Acey does highlight ….. is that Mirvac is diverting its efforts from units to essentially normal homes which are always in short supply in Sydney and not the average investors’ choice. Perhaps they see the unit market as being bad business for the next 3 years or so?

Regards, Peter 147

 

[Aceyducey]

Here's a little quote from the latest Residex report:

RESIDEX NEWSLETTER - January, 2004

THE BUST THAT NEVER WAS

Do you remember the headlines over the last 12 months? During 2003, it was commonly reported in the media that the property market would bust and that we would see falls in property prices. At the same time, we stated: "[We] do not believe there will be a significant fall in values in this segment [property] for a number of years and perhaps ... it won't happen at all." (December 2002 Residential Property Return Report)

At the time, this was an uncommon view of what was likely to happen in the market. But, now, lo and furthermore behold, we've hit the end of 2003 and we have not seen the bust.

Enjoy!

Cheers,

Aceyducey

 

[Peter 14.7]

Hi Acey

Whilst I'm still in the "correction to happen" camp I did notice this article in Thursday 22/1/04 Fin Review which made me think.

TITLE "Safe as houses..... for a while" p45 by David Bassanese

Essentially article goes on about how property tax lurks are too generous and therefore bust may not come and quotes this data submitted by RBA to productivity commission

In Box 2 of its submission the bank considers the case of a high-income earner who uses existing home equity to borrow another $400k for an IP. Let’s assume $13k for SD and PP of $387k. Assume further an allowable depreciation deduction of 2.3% and fully tax deductible running exp agents insurance etc. of 1.2% of IP value.

Then it goes on

Then assume 6.6% loan rate and 3.5% rental yield (close to national averages), the RBA shows that the after tax weekly cost to out investor is $81. That equals $4200 cost over one year………………………given a CGT rate of 25% after being held 1 year then appreciation in value only has to be 1.4% to break even ….even at interest rate of 7.25% CGT only raises to 1.8%...............Either way these crude calcs show how our lucrative tax benefits have been working their way through the housing system.

So it seems provided if you get some minor or virtually flat growth you still break even in what appears to be a bust.

Regards Peter 147

 

[Tibor]

Peter,

This is where people are grossly misled. in your example the person gets back 47c on every dollar lost!! What a deal!!

Is anyone would like to play negative gearing game with me?

You give me $10 and I will give you back $5 (if you are earning more than $60,000, bit only $3 if you are under $50,000) and promise that you might get a capital appreciation of 40% over 3 years on the $10. So 3 years later I will give you back $14 (or maybe $11 only as the appreciation did not occur??!!!), you pay cap gain tax on the $4 or $1(less expenses) and take out inflation the rest is yours. Just calculate how good ROI it is. Also you may pray that the negative gearing will not be severely curtailed during that period of time. If it happens you are a bity of a sucker and I will be interested to buy when you will be very desperate to sell.

It is gambling.

Whoever is interested good luck, I prefer to invest and do not pay attention what non active investing academics and other people say.

Yes, I know in Oz 1985 negative gearing was abolished / curtailed / whatever!!! Then in 1987 has been brought back. What is next time it will not be brought back. It has happened in the US (similarly not exactly) and it has not been changed back since the, just the composition of owners changed.

2c


Tibor

 

[perky29]

From John Edwards this morning on 2UE:
"Median price figures over December were a little skewed. 62% of sales were BELOW the median price average for Sydney"
This is the point I tried to make a little earlier in this post.
Many more sales BELOW the median price (than normal) would help bring the median price down.
Oh - and John Edwards predicts moderate rises of around 7 to 9% this year.
Hardly what I would call a bust .

 

[Peter Parker]

Originally posted by perky29
From John Edwards this morning on 2UE:
"Median price figures over December were a little skewed. 62% of sales were BELOW the median price average for Sydney"
This is the point I tried to make a little earlier in this post.
Many more sales BELOW the median price (than normal) would help bring the median price down.

Agreed.

The median is defined as the price where 50% sell above and 50% sell below.

Thus I cannot see how 62% of sales can be below the median price.

Maybe John was trying to say that 62% of sales were below the median price for the month before? And as perky29 points out, this trend would result in a lower median price for this month.

But no matter what happens, my iron-clad guarantee that 50% will sell above the median and 50% below the median will remain!

Regards, Peter

 

[Lilith]

Where do you guys think A$ will be moving?

If the Aussie realty market were to be reliant on new migrants and visitorsto rent and buy (since most established Aussies are owner occupiers anyway), A$ has to soften for the A$ denominated realty to keep going up.

Most people, prior to getting a visa or PR, won't swap their home currency into A$ in large amounts. With A$ at a 10-year high, I am afraid new migrants may cut back on their A$-denominated budget.

 

[DaveP]

Spiderman
I think you be confusing median price with average price.
Median Price is the middle of the range. IE (Upper + Lower)/2
This has nothing to do with how many houses are above or below this value.
Average Price is Total Value of All Houses For Sale/No Houses For Sale.
On a perfectly balanced set of numbers they are the same however I tend to feel in the house market they are skewed.

Hope this helps

Dave P

 

[abcdiamond]

[/QUOTE] median

adj 1: (statistics) relating to or constituting the middle value of an ordered set of values (or the average of the middle two in an even-numbered set); "the median value of 17, 20, and 36 is 20"; "the median income for the year was $15,000" [syn: median(a), average] 2: dividing an animal into right and left halves [syn: medial] 3: relating to or situated in or extending toward the middle [syn: medial] n : the value below which 50% of the cases fall
Source: WordNet ® 1.6, © 1997 Princeton University
................

arithmetic mean - Also called average .

n.
The value obtained by dividing the sum of a set of quantities by the number of quantities in the set.
Source: The American Heritage® Dictionary of the English Language, Fourth Edition

 

[Aceyducey]

Originally posted by Lilith
Where do you guys think A$ will be moving?

If the Aussie realty market were to be reliant on new migrants and visitorsto rent and buy (since most established Aussies are owner occupiers anyway), A$ has to soften for the A$ denominated realty to keep going up.

Most people, prior to getting a visa or PR, won't swap their home currency into A$ in large amounts. With A$ at a 10-year high, I am afraid new migrants may cut back on their A$-denominated budget.

Lilith,

I do not believe that Aussie residential property markets are highly reliant on migration at this point in time.

Australia accepts roughly 110,000 migrants per year at the moment. (43,200 Family Stream, 60,700 Professional Stream, 12,000 Humanitarian)

This equates to a need for about 40,000 NEW dwellings each year assuming 2.7 persons/household. These households are probably a bit larger than this on average & so the number of properties required may be slightly less.

If migrants choose not to buy they are likely to rent - thereby increasing the need for rental properties by the same amount!

The only ways in which they do not increase the demand for property is if they stay away (do not migrate), live in hotels or move in with family.

In either case, after establishing themselves in Australia migrants tend to buy property. In fact according to the ABS a higher % of migrants tend to buy PPORs and invest than 2nd and later generation Australians (can't find the link on short notice, sorry)

Also bear in mind that a significant % of migration to Australia is family related (roughly 40%). These people are not coming because they necessarily have lots of money (in their own currency), but because they wish to live close to their parents/kids/spouse or other relations. They are joining often already established family groups and quite often (in my experience) have their family in Australia even buy them a home before they arrive.

For more information on immigration to Australia see: http://www.immi.gov.au/facts/02key.htm

Cheers,

Aceyducey

 

[Lilith]

Aceyducey,

I'd have to say most migrants don't arrive in Australia empty-handed. Coming from Hong Kong myself, I know most HK and Taiwan migrant families come to Australia with more than a million AUD networth, and used to pick up realty left and right, all-cash, when the exchange rate was around 0.5 on a dollar. However, almost all of them scaled back significantly on purchase, or even on rental budget due to the sharp surge of AUD.

Even for those who come from Britain, the biggest source of immigrants, quite a few of them sold off their UK homes to swap for a bigger piece of property down under. However, they are subject to the same currency risk as the rest.

My point is, Australian dollar will have soften for the migrant effect to remain the same as before. AUD has to, first of all, adjust downwards against Sterling, and second, against NZ and Asian currencies. Or else, it will be hard pressed for a migrant to keep the same AUD-denominated rental or purchase budget.

 

[Aceyducey]

Originally posted by Lilith
I'd have to say most migrants don't arrive in Australia empty-handed. Coming from Hong Kong myself, I know most HK and Taiwan migrant families come to Australia with more than a million AUD networth, and used to pick up realty left and right, all-cash, when the exchange rate was around 0.5 on a dollar. However, almost all of them scaled back significantly on purchase, or even on rental budget due to the sharp surge of AUD.

Even for those who come from Britain, the biggest source of immigrants, quite a few of them sold off their UK homes to swap for a bigger piece of property down under. However, they are subject to the same currency risk as the rest.

My point is, Australian dollar will have soften for the migrant effect to remain the same as before. AUD has to, first of all, adjust downwards against Sterling, and second, against NZ and Asian currencies. Or else, it will be hard pressed for a migrant to keep the same AUD-denominated rental or purchase budget.

But Lilith none of what you say actually affects the point that all migrants need to live somewhere.

They don't need to rent/buy at the top of the market for the Aussie RE scene to operate effectively - the market isn't pulled from above.

When they buy/rent below median price - other people are forced to buy/rent at a higher level thus pushing the market from below.

AND in any case, there are 8-9 million households in Australia EXCLUDING the 30-40,000 new households from migrants each year.....the net effect of migrant purchasing is miniscule - except at the very top of the market (movie stars buying $20m houses)....and this top has always, in every country, been highly subject to swings in price which are not reflected in the main bulk of housing prices.

Cheers,

Aceyducey

 

[Lilith]

We all know that Australia has the highest home ownership among the western countries (85%?). Therefore, in order to sustain the rental market, you need new blood to RENT places so that the property investors can get their cashflow, so I'd have to say immigration (along with the birth rate of domestic population) are the key factors pushing up the realty price.

Now, let's focus on the migrants for a while. If the market is perceived as overheated from Sterling, USD, HKD, Yen etc. point of view, instead of renting or purchasing a piece of realty that will suit their expected lifestyle, they may just stay with their friends and relatives longer, or rent a less desirable place to suit their budget. An overseas student, instead of renting an one-bedder, may now have to share a three-bedder with two friends. In the last couple of years, AUD has gained more than 60% against USD, still the most popular currency in which people hold their personal networth. I seriously doubt if that doesn't have ANY negative effect on the realty market sector of the migrants and visitors.

Therefore, my argument is, the migrant piece of the realty market growth can only be sustained if AUD starts to soften, or doesn't strengthen further to say the least. Of course, we can't forget the fact that it's exactly the high-yield of AUD that pushed AUD to a 10-year high. So if there is another round of interest hike, AUD will go up further, leading to the evaporation of both migrant purchasing power and domestic lending power.

 

[Bill.L]

Hi all,

Lilith, I think you have missed Acey's point entirely. The 110,000 immigrants each year HAVE to live somewhere. Do you agree???

Their very presence means that SOME type of accommodation will be needed. They will not be living with family indefinately(I know this from experience). Many purchase or build, some rent.

Once they are here they start earning $A. Therefore they can pay rent in $A, just like everyone else.

bye

 

[geoffw]

There are also a LOT of people who do come here, who do not fall in the guidelines of $1M + assets.

Apart from family members, professionals who meet up with the requisite points from a number of criteria (eg, language, skills, profession, family associations- not parent/child, and desired location) can be admitted, and these people add to the demand for housing. These are not usually people who quality under the business program migration. For these people, a rural location qualifies for extra points- and Canberra was, the last time I checked, a rural location.

These are people who will rent average places- but not in SYDMELBRIS.

It's not a big market maybe- but just another one to be considered.

 

[Jamie]

Hi Lilith,

Im struggling to understand your rationale...

First of all, the home ownership rate in Australia isnt 85%+.. its just on 70%:

http://www.somersoft.com/forums/showthread.php?s=&postid=80003#post80003

Secondly, new arrivals to our country make up around 0.5% of our population.. or around one in every 200 people in the country .... these are the subset that control our rental market?

And lastly,

I know most HK and Taiwan migrant families come to Australia with more than a million AUD

The majority of people who move here from those Asian nations are millionaires? Im just wondering if you can give us the source for those stats...

Each of your posts seems to focus on a new reason why property in Australia will underperform in the next few years... Its almost like you're looking for a self fulfilling prophecy to justify not investing at the moment...

Im intrigued as to why

Best wishes,

Jamie.