Alan Moss isn't buying a 2brm apartment in Double Bay, or Armadale, or a single fronted Victoria terrace in Paddington or Albert Park - he's buying a $10 MM mansion wherever the hell he wants!
This is the 'prestige property' market!
GSJ
The Wrong Type of Boom
- Thread starter keithj
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Alan Moss isn't buying a 2brm apartment in Double Bay, or Armadale, or a single fronted Victoria terrace in Paddington or Albert Park - he's buying a $10 MM mansion wherever the hell he wants!
This is the 'prestige property' market!
GSJ
Re interest rates, have to also say I believe they are one of the strongest determiners of property prices/demand.
However, other factors have grown in influence.
95-105% lvr
40 year mortgage
shared equity loans
looser lending criteria for friends partnering on a purchase.
Let's be real- credit availability will always determine demand for a high priced commodity bought by the majority on credit, and subject to restricted supply.
Of course, a great portion of the market can absorb 1-1.5% interest rate rise. Get up over 2% and things will be different. Though I doubt the RBA would ever let rates go above 9%. Besides, I doubt there are the economic pressures to drive economic growth higher and push cpi higher. Oil price might be the only curveball.
However, other factors have grown in influence.
95-105% lvr
40 year mortgage
shared equity loans
looser lending criteria for friends partnering on a purchase.
Let's be real- credit availability will always determine demand for a high priced commodity bought by the majority on credit, and subject to restricted supply.
Of course, a great portion of the market can absorb 1-1.5% interest rate rise. Get up over 2% and things will be different. Though I doubt the RBA would ever let rates go above 9%. Besides, I doubt there are the economic pressures to drive economic growth higher and push cpi higher. Oil price might be the only curveball.
So when interest rates go up, in your opinion it has no direct effect on property demand? Given that interest rates is the biggest factor in determining how much people can borrow? Yes, prices are determined by supply and demand. However wouldn't you say that interest rates has a VERY big impact on demand (as well as supply, since developers have to borrow as well)?
If interest rates went to 12%, say, a large chunk of the buyer market will disappear because they can't afford the payments. This has a rippling down effect. People start defaulting, and new buyers can't pay as much as they used to. More importantly, a price fall changes market sentiment.
In hindsight the 90s were a great time to buy. Efficient market theory tells us that those opportunities shouldn't exist because people would find out. Yet there were a few years when fundamental value (arguably) was higher than market price (i.e. a great time to buy). What happened? My theory: sentiment. People thought property was a crap investment because of their experience in the early 90s.
If interest rates did fall to 2%, I can GUARANTEE you demand will go up. EVERYONE will move their budget up, and people who couldn't borrow before will buy the entry level properties.
Yes, I use the internet to research and find properties. It's certainly made things easier, but it still doesn't mean anything if I can't find a bank to lend money to me! I'm constrained by serviceability too. The net and so on are TOOLS. The internet certainly doesn't affect property demand in the way interest rates do.
If interest rates do not affect how you buy, you either have a much friendlier mortgage broker than I do or you have a LOT more income and serviceability than I do. Either way, congrats! The rest of us mortals have to watch interest rates. While I budget for a 3% increase in interest rates, the vast majority of the people (your demand pool) doesn't and interest rate rises WILL affect prices. Will I fold if rates go up? Not really, but I (and the rest of this forum) certainly doesn't represent the norm and the bulk of property demand out there.
Alex
Heck, let's put the question out there. I don't know how to do a poll, but I can guess the result:
Question: do you think an interest rate increase will affect (specifically, decrease) property demand and hence prices (negatively)? Especially in THIS environment?
Note I'm not saying it means you shouldn't buy property. While interest rate rises can hurt property prices, if you have the serviceability and you plan to hold for the long term, periods of rate rises can create opportunities (distressed sellers).
The yield curve has been moving upwards a bit lately as inflation starts to rear its head again. The ECB just raised rates and the BOE might do so. The RBA hasn't ruled it out, and the recent falls in the Dow are associated with expectations that the Fed may not drop rates further. However, the yield curve is still pretty flat, so the market doesn't expect double digit rates in the short or medium term (guessing long term rates is sorcery).
So even if rates rise you can lock in a long-term rate that you can service, and you'll still do very well. However, I for one think interest rates has a VERY big effect on property prices.
Alex
Question: do you think an interest rate increase will affect (specifically, decrease) property demand and hence prices (negatively)? Especially in THIS environment?
Note I'm not saying it means you shouldn't buy property. While interest rate rises can hurt property prices, if you have the serviceability and you plan to hold for the long term, periods of rate rises can create opportunities (distressed sellers).
The yield curve has been moving upwards a bit lately as inflation starts to rear its head again. The ECB just raised rates and the BOE might do so. The RBA hasn't ruled it out, and the recent falls in the Dow are associated with expectations that the Fed may not drop rates further. However, the yield curve is still pretty flat, so the market doesn't expect double digit rates in the short or medium term (guessing long term rates is sorcery).
So even if rates rise you can lock in a long-term rate that you can service, and you'll still do very well. However, I for one think interest rates has a VERY big effect on property prices.
Alex
I vote yes! Most definetely. Interest rates are a very powerful tool and are used by the RBA as a mechanism to fine tune the economy.
Interest rates are closely aligned to property prices. They influence the amount of money that people with mortgages (which is a significant % of the earning aged population) have to spend. When interest rates are low, consumers have the capacity to spend more as they do not need to contribute as much money to their mortgages. When interest rates are raised, even by a small degree, this influences the amount of money that people with mortgages have to spend on consumer items.
Interest rates therefore affect the amount of money that people spend on consumer items. As an owner occupied house may be considered to be a consumer item, when interest rates are low, more people can afford to buy a larger house or a house in a better location. If interest rates are raised, then less people can afford to buy the larger house, or a house in a better locaton. Therefore, over time the rules of supply and demand will cause house prices to fall.
If few people can afford to buy into a certain location, then the demand is limited. Furthermore, people who may have larger mortgages may have difficulty meeting their commitments with the increased interest rates, and may need to sell out. This creates a further supply of properties and less demand. Therefore, as the situation snowballs property prices become lower and lower until such a time that the imbalance between the supply and demand of properties falls back into correlation with one other.
My point is that the higher end of the market is booming due to likes of him - it was only an example. There are literally thousands of guys in investment and numerous other sectors that are making more than a million a year, grad students getting over 200k salary, ex-pats coming back from HK, Japan, Singapore, UK flush with cash due to global boom. Mergers, acquisitions, private equity buyouts, record IPOs, lawyers (for mergers acquisitions) etc etc. All these guys live in the higher end burbs, and yes these are the type of people that buy "2brm apartment in Double Bay, or Armadale, or a single fronted Victoria terrace in Paddington or Albert Park".
The truth is go back few years and the finance sector was struggling. Back in 03 the number of managed funds were dropping, IPOs were low, and there wernt many jobs in these high-flying sectors. Also, the upper endof the Sydney market was actually stagnant or falling in late 02 - 03 (west sydney was booming - 20%). Also have a look at the effect of 90s recession on prestige and blue chip suburbs. They didnt fare much better than lower end of town.
So my point is that all markets are dictated by simple rule of supply and demand. At the moment there is DEMAND for high end of the market thus prices are rising. That demand is not constant and can change in coming years. Justlike demand for lower end market can increase.
Agreed.
Interest rates represent cost of borrowing money, hence affect the demand and supply of money. This supply of money is directly correlated with assets of prices including property. If IR are low there are more people with more money, hence cometing for the same asset causes proces to rise. There are other factors too including popluation growth, etc, but the supply of money is a major factor.
RP Data general manager for product and marketing, Kris Matthews, tipped Melbourne as a great location for homebuyers.
Commenting in a recent edition of BRW magazine (24 May, p.51) he said: “Melbourne’s median house price is $170,000 lower than that of Perth and the Victorian capital’s price growth in the past year has been relatively subdued,’’ he said.
“There’s clearly room for price growth, given the underlying factors of population growth, solid economic performance and low residential vacancies.’’
Mr Edwards agrees: “It is time to seek out investment in the two major markets, Sydney or Melbourne.’’
Commenting in a recent edition of BRW magazine (24 May, p.51) he said: “Melbourne’s median house price is $170,000 lower than that of Perth and the Victorian capital’s price growth in the past year has been relatively subdued,’’ he said.
“There’s clearly room for price growth, given the underlying factors of population growth, solid economic performance and low residential vacancies.’’
Mr Edwards agrees: “It is time to seek out investment in the two major markets, Sydney or Melbourne.’’
I agree with GoAnna (and the quoted source by rpdata)
There are broad/ general assumptions about the overall state of play within prop market in general and then there are niche areas which still represent excellent value for various reasons.
Assuming that the broad indicators are unhealthy, hence anyone who purchases now is doomed (or something to that affect) is very naive approach in my opinion.
I have bought a number of times, when according to all stated key performance indicators, it was not the right time to buy (interest rates climbing up, capital cities prop market stagnant, going backwards, share market on the way up after a long time in doldrums, global economic outlook being poor, high vacancy rates etc etc) and still doubled my investment within 2 years.
Waiting for the ideal time to purchase hoping for all the ducks to line up is more of a gamble for me than buying in areas which represent good value and offer solid long term growth prospects.
The biggest advantage I have is the leverage of time to increase my portfolio value and hence would not waste that precious leverage waiting for everything to fall in place.
Cheers
Harris
There are broad/ general assumptions about the overall state of play within prop market in general and then there are niche areas which still represent excellent value for various reasons.
Assuming that the broad indicators are unhealthy, hence anyone who purchases now is doomed (or something to that affect) is very naive approach in my opinion.
I have bought a number of times, when according to all stated key performance indicators, it was not the right time to buy (interest rates climbing up, capital cities prop market stagnant, going backwards, share market on the way up after a long time in doldrums, global economic outlook being poor, high vacancy rates etc etc) and still doubled my investment within 2 years.
Waiting for the ideal time to purchase hoping for all the ducks to line up is more of a gamble for me than buying in areas which represent good value and offer solid long term growth prospects.
The biggest advantage I have is the leverage of time to increase my portfolio value and hence would not waste that precious leverage waiting for everything to fall in place.
Cheers
Harris
Keith
2.5% is a bit extreme, maybe some parts of Sydney but overall I think you could do alot better than this. 5% isn't too difficult in middle ring suburbs. Considering you could fix your rate for around 7.5% for 10 years (if you were so inclined). This would cost around $60 p/w to hold on a 60k salary? Let’s not forget the nice rental increases flowing through at the moment, so this will only become less over time.
For those building a portfolio over at least 10 years I would argue you are better off buying as you can afford to, sometimes over analysing can definitely lead to DOING NOTHING. This is the risk people face when trying to time the market. Some people constantly say now is a bad time and never do anything…….. Yet I’m lucky for buying at the right time, go figure…
But I’m definitely keen to invest in the city/suburb etc which offers the best fundamentals at the time.
I bought one IP in 2003 and it’s still done 6% p/a for 4 years. Nothing fantastic but could be a lot worse. This place is almost neutral now.
You only have to see the current situation to see that an increase in interest rates dont mean a drop in prices or demand in property.
buyers will only stop buying when the yields or prices of property does not increase.
obviously there will be a time when increases in rates will stop people buying, but the past few int rates hike just means some sectors of the market wont buy, but there are plenty of investors out there that will.
what do you think another hike might do? Yes there will be more people losing their houses, but if there is a demand for rental and yields go up investors will come in. Thats what has been happening in Victoria.
buyers will only stop buying when the yields or prices of property does not increase.
obviously there will be a time when increases in rates will stop people buying, but the past few int rates hike just means some sectors of the market wont buy, but there are plenty of investors out there that will.
what do you think another hike might do? Yes there will be more people losing their houses, but if there is a demand for rental and yields go up investors will come in. Thats what has been happening in Victoria.
All i am saying is that you cannot look into history and say that year ** had 11% interest rate, thus compared to the current interest rate of 7.5% and conclude that Real Estate prices was flat or on the decline. Vica Versa a low interest rate does not necessary mean the market is booming.
Obvioulsy the RBA is trying to increase and decrease demand with their policy, but it doesnt mean it will work. Of course there will be a tipping point at how much you increase and decrease int rates will effect prices but until that point you cannot predict.
Obvioulsy the RBA is trying to increase and decrease demand with their policy, but it doesnt mean it will work. Of course there will be a tipping point at how much you increase and decrease int rates will effect prices but until that point you cannot predict.
don't know about Alan Moss, but not all high profile CEO's on Mega salaries go a round buying expensive cars and mansions.
My son is friends with the children ( same school ) of one such CEO and my son has commented on how normal ( for the north shore ) their house is.
Some of these people believe in not going over the top so they don't give their children false expectations of how to live life , similar to what is portrayed in The Millionaire next door.
Cliff
Yes, that's true, I was just plucking figures out of the air here.
Mark,
Interesting graph. Might be a few different ways to interpret it.
The red line peaks at about '80, '89, '03.
In '80 the real interest rate was comparatively low.
In '89 the real interest rate was comparatively high.
In '03 the real interest rate was comparatively low.
So, what do you get from all this? Not sure, maybe that interest rates mean stuff all?!
I'm not very good with graphs, economics etc...so does anyone else have any interpretations?
GSJ
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Which is why I kept my mouth shut!
Different people will see different things when they look at it.
You've highlighed the peaks in 19880, 1988/89, and 2002/03 and observed that real interest rates were 2-3%, 9-10%, and 4-5% respectively.
Look at 1973 - 1975 - negative real interest rates and yet property tanks it. Of course, the economy was up crap creek at the time, but that wasn't the question (the question was the inverse relationship between interest rates and property markets).
Imho one thing is abundantly clear - a consideration of interest rates alone does not adequately explain the behaviour of property markets (but we all knew that).
M
In this climate i expect that both interest rates and property prices will go up in the near future or at least int rates to stay the same. In fact i would be more concerned if there is an interest rate drop.
Thanks for the Graph Pitt st.
