A crash in property prices? Don't bet on it

[Propertunity]

Probably one of the more sensible articles I have seen written on the Australain property market recently:

A crash in property prices? Don't bet on it

Read more: http://www.smh.com.au/business/a-cr...t-bet-on-it-20111005-1l9nz.html#ixzz1ZwpANZLt

Sydney, however, has bucked the trend. Prices have risen strongly over that two-year period, and in the past year they have remained barely changed against drops of between 4 per cent and 7 per cent in the other capital cities.

Perhaps because I have confirmation bias, I also liked one of the comments posted:

All those "crash" religious sect characters are simply sickening. I have hundreds of them on my rental roll and they range from "old school" from 70s who seen $7,000 - yes seven thousand dollar houses in Sydney as "overpriced". These have lost a bit of their aggressiveness - those who realise that they pay three times rent now than it would have cost to own a house back then.

But the new Gen Y fans of Ed Karan are simply despicable. Barking up this "crash" myth since 2003? The promised " housing market tipping point " in 2008 turned out to be another 40% increase in prices - which has gone largely unnoticed by this bunch. But there is so much trumpeting of 3.2 % "slump" - it is unbelievable.
What you have actually expected - price increases in the straight line? Sorry - never happens. There are always fluctuations.
And as to Sydney and Melbourne - auction clearance rates are at the boom levels. Watch what happens when interest rates start to crash down, dragging down Australian dollar.
There will be plane loads of foreigners who have no other place to dump money deinvested from crashing share markets around the world. Brace yourselves for the second stage of the longest property boom.

Michael | Sydney - October 06, 2011, 8:39AM

Shadow would be pleased with the last line.

 

[evand]

I looked for one speck of truth in Michael from Sydneys comment but couldn't find one.

As for Ians article, nothing new there, I think few expect a crash in prices, but most do expect a gradual decline for years. Ho hum.

 

[HomePage]

Probably one of the more sensible articles I have seen written on the Australain property market recently:

...

Perhaps because I have confirmation bias

Indeed you do.

 

[whitegoodman]

the author lost me when he said all of US resi is non-recourse loans...

hard for me to give rest of the article credibility

 

[hobo-jo]

Shadow would be pleased with the last line.

Given the number of online identities he uses, it probably is Shadow.

From the article:

But then there's good old Aussie bricks and mortar. It has held up well during a time of almost unprecedented economic uncertainty.

They held up due to intervention by the government and RBA in the banking/funding/housing sector. Over the period of the First Home Buyer Boost there were something in the order of 65,000 more transactions by this buying group than was the norm in years prior. To give an idea of scale, this is around 13-14% of all residential property transactions in an entire year. Now imagine what property would have done without this unprecedented intervention... and that was only one change...

Look back two years, and in almost every capital except for Perth, home values are steady or slightly below 2009 levels.

So basically the group that were roped in with the government incentives (and borrowed at historically low rates) are the ones now most at risk... I wonder what the demographics will be of those first to be laid off if unemployment does increase...

Ignoring that America is in recession and we are not

Maybe not technically, but anyone who looks around with an unbiased eye would suggest we probably already are.

in the US, they are non-recourse

As pointed out above, not all US states were non recourse. As I recall it is around 50/50.

That means fewer houses on the market during a recession, which means less pressure on prices.

Has this guy looked at recent stock on market figures?

When the housing bubble burst in the US, an already soft market was flooded, causing home prices to slump by more than 50 per cent.

Last I checked the Shiller Index was showing around a 30% fall. Not more than 50%. http://www.nytimes.com/interactive/2011/05/31/business/economy/case-shiller-index.html#city/IND20


I wouldn't bet on a crash either, rather a slow/longer deflation of the bubble, but most of this guys arguments are pathetic or plainly wrong.

 

[Aaron_C]

It is a cultural thing. Aussies value their houses and would do anything to keep it from going into default. In America, it is common place to live in caravans/trailers....who cares about a house?

 

[lizzie]

They held up due to intervention by the government and RBA in the banking/funding/housing sector.

Not flexing one way or the other - will see what happens - but Keen was shouting "unfair" as the government intervened and stopped his over-predicted 40% fall.

It would be crazy to think that when the poop hits the fan again that the government won't intervene with incentives - again ... for consumer spending, housing and businesses.

That's their job - to intervene and try to establish economic stability.

 

[hobo-jo]

It is a cultural thing. Aussies value their houses and would do anything to keep it from going into default. In America, it is common place to live in caravans/trailers....who cares about a house?

You sure make a lot of jokes for someone I would assume is trying to maintain a professional presence on the forums

Not flexing one way or the other - will see what happens - but Keen was shouting "unfair" as the government intervined and stopped his over-predicted 40% fall.

Keen's 40% over 10-15 years hasn't yet had a chance to playout one way or the other.

It would be crazy to think that when the poop hits the fan again that the government won't intervine with incentives - again ... for consumer spending, housing and businesses.

That's their job - to intervine and try to establish economic stability.

Do they have the political clout to waste more tax payer $ (throwing good dollars after bad) after the backlash they are already facing for poorly managing the Australian budget??

Even if they did intervene in similar ways to last time I doubt it would be to the same magnitude or nearly as effective a second time around.

By the way suggesting that it's "governments job" to intervene in the markets = , that sort of attitude widespread will land us in the same place as the US soon enough, let's hope that's not the attitude of our politicians!

 

[Sunfish]

That's their job - to intervine and try to establish economic stability.

Governments THINK this is their job but many disagree. Privatizing profits and socializing losses was never a good idea, even if those losses are home buyers'.

 

[Aaron_C]

You sure make a lot of jokes for someone I would assume is trying to maintain a professional presence on the forums

So disagreeing with you is considered joking? Culture of a society is important to explaining everything from houses to business. If you can't see that I'm afraid you are the joker, not me.

 

[hobo-jo]

So disagreeing with you is considered joking? Culture of a society is important to explaining everything from houses to business. If you can't see that I'm afraid you are the joker, not me.

What evidence do you have of Americans not valuing their housing? What specific observations lead you to believe that we value our housing more?

Keeping in mind that we are not in the situation seen in the US where around 1 in 4 are underwater on their mortgage (e.g. mortgage is more than the value of their home). If it were the same here and the rules in some states were as lax (e.g. you could walk away from the responsibility of paying the mortgage) do you think Australians would be any more committed to staying in the home? I very much doubt it.

And suggesting that it is "common place" for Americans to live in trailers and caravans?

Number of families or primary individuals who live in mobile homes or trailers: 6.8 million. (U.S. Census Bureau, American Housing Survey, 1999)
Population then = 273m

2.5% = common place??

 

[Aaron Sice]

that article was bunk. nothing but a bunch of permabull crapola.

 

[Aaron_C]

2.5% of the Australian population of ~22m is about 550,000 people. If there was ever 500,000+ people in Australia living in trailer parks it would be all over A Current Affair and you would be seeing demonstrations for the lack of public housing. It is ingrained in Australian society to strive to purchase and own your own 'home'. In America the culture is to live the American Dream of success and prosperity. Very different priorities - and that is what you fail to see.

 

[Sunfish]

Even if they are "underwater" on their mortgages, most would stay if they could. Unlike here it isn't cheaper to rent than own.

 

[willair]

And suggesting that it is "common place" for Americans to live in trailers and caravans?

I don't know about the US,but there seems http://www.youtube.com/watch?v=1a73jQsQ7wcto be a a lot in Canada..

 

[lizzie]

Governments THINK this is their job but many disagree. Privatizing profits and socializing losses was never a good idea, even if those losses are home buyers'.

Sorry, didn't say I agreed with it ... perhaps I could've worded better.

I personally think stimulus in dire times is good - I just totally disagree with how the stimulus was spent last time around.

It was this knee jerk spending on short lived results - rather than bringing forward future benefiting infrastructure in the pipeline - that was poorly executed (imo).

 

[investor2009]

Onya' Prop. I congratulate you on your great investor mindset and always value your input here.

To (possibly) end all the arguments. Houses go up. then houses go down. But don't be afraid! The houses go back up again

 

[Peter 14.7]

Hi All

I posted a comment on SMH as Frequent Flyer and yes the Non Recourse Loan Comment was an error but IMO a big factor in any crash is fear and panic and supply ...and for property supply and demand and on that call, the article got it right.

We had and are still having crashes and jumps in Shares due to fear and panic and the dreaded margin call.

Property is not easy to sell in fear and panic, hard to panic when it takes a minimum of 45 days to make a sale and very importantly.....Banks don't Margin Call property when it dives.

To those who say they might or will, I have seen many dives in investment lifetime and even in the great drop of 1990 and the simple fact is banks do not want the property back.

Why take back an asset worth 25% less and lose an income stream? You don't make money doing that.

Anyone who rode the boom of 87 to 1990 then sold in 1990 still made money but had the keep it they would have seem a lot more in 2011.

Peter 14.7

 

[tom32]

I can remember back in the very early 90s having to study the play death of a salesman in english classes.

I remember being taught that the American dream is rather different to the Australian dream while studying this.

Americans want wealth and power and for example a successfull American plays tennis, golf and other conspicuous ways of consuming things but above all is entrepreneurial and wants to be powerfull and rich. (No doubt some just like golf too and further most Aussies would take being rich and powerfull on the chin putting homeownership to one side if they had a choice...)

I was told then and to a degree believe it is the case that many Australians really strive for their family home with a backyard above all else. This is the extent of the Australian dream.

I know this is a generalisation and I don't believe it will have that much effect on a forced sale as ultimately it is called forced for a reason but I would have to agree we put more value in owning ones own home than yanks do, who don't care if one rents their home as long as they belong to the right country club.

Lets face it, I am a renter and I fell like a second class citizen often, I am glad I am at least moderately successful in life or it would probably make me quite depressed in Australian society.

I know all of that is anecdotal and in most peoples eyes not worth two bob, as perhaps it is one of those images like the australian bushman being a symbol of who Australians are when it has little to do with most modern Australians. Nonetheless I do think there is some truth to the idea that Australians do value home ownership above what a yank does as Aaron C says, where for them they are just as likely to start a business and take on other pursuits with less consideration to owning their own home.

All that aside what constitutes the Australian dream should not in isolation make a significant difference to our market evidenced by the majority of last century.

For the main the article is pretty ridiculous and I am certain a lot of agents would not be considering the current time a good time. The question is, is it going to be like this for a long time? If it remains as is even for another 12 months with current levels of stock I suspect forced sales will be a fairly common feature of the Australian property market whether we like the idea of losing our home or otherwise.

 

[tom32]

To those who say they might or will, I have seen many dives in investment lifetime and even in the great drop of 1990 and the simple fact is banks do not want the property back.

Why take back an asset worth 25% less and lose an income stream? You don't make money doing that.

Agree 100%.

The banks all have hardship provisions to try to avoid possessing homes. As you say what interest is it in theirs to realise an loan asset value at less than the loan is.

The problem for banks is as the market has become illiquid they are becoming the market makers.

You may have seen a thread today where an individual bought a home from a bank and was saying they got it well below the market value around BNE.

This is not uncommon but when the market is this illiquid (I am not talking Sydney here btw) this is the result, when you need to sell. Those few who need to sell are making the market.

Banks need to sell. Equally with taking possession of colateral assets they also don't fancy holding vast swathes of assets other than loan assets; their business and their capital in deposits with other insitutions and other liquid assets, not houses and shopping centres.

The default rate climbs and they are under even more pressure to sell these homes to prevent increasing default rates. Once a house is sold by a bank it is off the books and they decrease their default rate. The default rate is actually the difference in flow sold v flow possessed. You can have increasing possessions and a lowering default rate if the banks are able to offload props quickly like in a booming market. In an illiquid market they become the market maker and no matter how many people want to hold out for better days there are some including banks who don't have this option. This is why defaults rates can spike before unemployment does.