Are Australian property prices going to crash?

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Property has crashed in the US, but it has not crashed at all in Australia. On average rental yields in Australia are 3-4%. This means that it is almost always cheaper to rent than to buy. I think if it's a little bit cheaper to rent than to buy then maybe that's ok, but if it's 50% cheaper to rent, that's a dangerous sign for the property market. I certainly wouldn't be buying any investment property that returns only 3-4% return. That's a really low return investment. Will take 33 years to get your money back at 3% return. And that's not counting inflation. Anybody read about japan in the 1990s? The Market has gone down in Japan for 20 years since then. Australia is not Japan because we have population growth and they don't but it's still a big risk that values will fall when property gets too high.

Obviously it depends on the individual property and there are always good buys. And if you are buying to sell within 6 months it's not so much of a risk. Also if you are buying in a location that is totally prime (for example walking distance to Sydney beaches) the lack of supply may hold up prices permanently and keep them going higher.

Most people say that the reason Australian prices are so high is an imbalance of supply and demand. Maybe but as the prices go higher, supply will adjust. It becomes more profitable to build and so you will get more and more supply until there is an oversupply. That's inevitable if prices get out of whack.

I'm not saying it's definitely going to happen, but I am saying that it's dangerous to buy property when it has really low net yields of 3-4%.
 
On average rental yields in Australia are 3-4%.

The places i have been buying are giving me between 7 - 8.5% return. You just have to look a bit further afield.


I'm not saying it's definitely going to happen, but I am saying that it's dangerous to buy property when it has really low net yields of 3-4%.

Then look somewhere else where the yields are higher. Simple solution really.

You are quoting the average yields - look beyond the average.



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Returns

7-8.5% returns are much safer because even if property prices crash you are still making money.

Most people buying property in Australia are not buying with these high yields, but obviously you are buying smarter than average.

Actually I'm not saying it's going to crash, but I am saying that buying property with 3-4% yields is a dangerous investment
 
No crash.....corrections, softenings, pullbacks, maybe

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Property has crashed in the US, but it has not crashed at all in Australia. On average rental yields in Australia are 3-4%. This means that it is almost always cheaper to rent than to buy. It is usually cheaper to rent in the location you wish to live than to buy. That implicates a residence and not an investment. Those who rent in this manner, and there are a few on this board, usually invest the funds they would have otherwise allocated to purchasing a PPOR. I think if it's a little bit cheaper to rent than to buy then maybe that's ok, but if it's 50% cheaper to rent, that's a dangerous sign for the property market. I certainly wouldn't be buying any investment property that returns only 3-4% return. There are ways to improve yields by doing soft/cosmetic reno's and having a vigilant PM who is prompt with rent reviews and rises. That's a really low return investment. Will take 33 years to get your money back at 3% return. Agree, however we in Australia are traditionally speculative in our investment decisions and consider property as an investment whereas other countries see it only as a place to live and invest moreso in shares/stocks/bonds.And that's not counting inflation. Anybody read about japan in the 1990s? The Market has gone down in Japan for 20 years since then. Australia is not Japan because we have population growth and they don't but it's still a big risk that values will fall when property gets too high.

Obviously it depends on the individual property and there are always good buys. And if you are buying to sell within 6 months it's not so much of a risk. Respectfully, the most risk (unless one is extremely apt at purchasing below value and flicking with or without a value add reno) is in short term property trading. Slippage with transaction costs and no CGT discount if in own personal name is significant. Also if you are buying in a location that is totally prime (for example walking distance to Sydney beaches) the lack of supply may hold up prices permanently and keep them going higher.

Possibly, however picture another stock market correction and the subsequent business implications. My suburb (in bayside Melbourne) dropped 30 % in less than a year in 2008. This was a softening/correction due to business and corporate conditions. It has recovered and more, and albeit a temporary glitch, these things can recur. Timing in this instance plays a role unless transactions of buy/sell are occuring very close in terms of time frame

Most people say that the reason Australian prices are so high is an imbalance of supply and demand. Maybe but as the prices go higher, supply will adjust. It becomes more profitable to build and so you will get more and more supply until there is an oversupply. That's inevitable if prices get out of whack.

I'm not saying it's definitely going to happen, but I am saying that it's dangerous to buy property when it has really low net yields of 3-4%.

Just like the stock market can have a pull back, so too can the property market, even the upper end stuff that has scarcity factor. Then there are markets within markets also that are running at different times and at different speeds.

I agree yields are not spectacular, however these would apply to more growth oriented assets within CBD's and with good amenity. The price of land is much higher the closer one buys to a CBD hub hence affecting yield. Indeed, even on a commercial and retail front, here in Melbourne at least, I've seen shops go for around the 2 % mark. Insane in my eyes for the risk of asset class also.

I don't see a crash with the fundamentals here, however the lower end will feel it with another 0.5 to 1.0 % rate rises to come (by early to mid 2011, I reckon) and the upper end can still experience a corrective softening.

I am no bear, however I am also a realist and understand that pull-backs occur depending on market sentiment and that credit conditions by banks and other global events are going to control us from here for some time yet.
:(

Welcome to the forum :)
 
On average rental yields in Australia are 3-4%. This means that it is almost always cheaper to rent than to buy.
It almost always is cheaper to rent than buy.....except when prices have come back a bit after a boom and rents are increasing to catch up. But this scenario is a very small 1-2 year window in a typical 10 year full cycle.

I think if it's a little bit cheaper to rent than to buy then maybe that's ok, but if it's 50% cheaper to rent, that's a dangerous sign for the property market.
Not necassarily. It is not uncommon for capital growth to have a 40% or 50% spurt in some years. Remember rents are often locked in for 6 - 12 months on leases and so there is a lag, for as much as 12 months, for rents to even start to play catch up. This is not a dangerous sign, it is just normal cyclical activity.

I certainly wouldn't be buying any investment property that returns only 3-4% return. That's a really low return investment. Will take 33 years to get your money back at 3% return. And that's not counting inflation.
Whether you buy or not at that retuen is up to you and your SANF and your own personal financial situation. Additionally, you have not factored CG into your scenario here. I'd agree that at 3-4% return if that's all there was, then there would be better investments out there. But if you are also getting 10-11% CG average pa then the numbers change.

Anybody read about japan in the 1990s? The Market has gone down in Japan for 20 years since then. Australia is not Japan because we have population growth and they don't but it's still a big risk that values will fall when property gets too high.
Yes we've read about Japan....and No, we are not Japan......and what is your definition of "too high"?

Obviously it depends on the individual property and there are always good buys. And if you are buying to sell within 6 months it's not so much of a risk.
I totally disagree. A 6 month time horizon to hold property is the most risky thing I can imagine. You have almost no idea of what a property can do in 6 months. You have a better idea of what it can do in 10 years. But you know exactly what your transactions costs are to get in and out - and they are high.

Also if you are buying in a location that is totally prime (for example walking distance to Sydney beaches) the lack of supply may hold up prices permanently and keep them going higher.
First point I think we can agree on. :)

Most people say that the reason Australian prices are so high is an imbalance of supply and demand. Maybe but as the prices go higher, supply will adjust. It becomes more profitable to build and so you will get more and more supply until there is an oversupply.
This would be true if supply and demand were the only factors in the equation. Unfortunately, you have omitted the 'availability of credit' for developers to develop & build - and this is the hurdle at the moment as banks do not want to lend for this activity.

I'm not saying it's definitely going to happen, but I am saying that it's dangerous to buy property when it has really low net yields of 3-4%.
I think your overall assessments and conclusions are shallow. Some of the best performing property from a capital growth standpoint (i.e. beachside, waterfronts etc) have some of the lowest rental yields of around 3%.
 
7-8.5% returns are much safer because even if property prices crash you are still making money.

Most people buying property in Australia are not buying with these high yields, but obviously you are buying smarter than average.

Actually I'm not saying it's going to crash, but I am saying that buying property with 3-4% yields is a dangerous investment

Old and boring topic.

The next question then becomes, does low yield equal high growth? Or do they all grow equally? Yield isn't the be all and end all.
 
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Most people say that the reason Australian prices are so high is an imbalance of supply and demand. Maybe but as the prices go higher, supply will adjust. It becomes more profitable to build and so you will get more and more supply until there is an oversupply. That's inevitable if prices get out of whack.

How will supply adjust? Rates are going up. Building is getting harder by the day. Most players in this field - be it the developers themselves or suppliers such as Hastie Group or Norfolk Group - don't expect residential construction to stage a recovery until late 2011 or early 2012.
 
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I'm not saying it's definitely going to happen, but I am saying that it's dangerous to buy property when it has really low net yields of 3-4%.

And even more dangerous when it has really low GROSS yields of 3-4%.

There are plenty of those around too.

Sure, CG can make up for that but I would consider it a dangerous investment to rely on greater than average CG just to break even.

A simple risk/return scenario analysis of the likelihood of outcomes makes me wonder why anyone would buy a low yielder in this environment.
  • If prices fall, you lose.
  • If prices stay the same, you lose,
  • If prices rise with inflation, you lose.
  • If prices increase by more than inflation, you break even,
  • if property market booms, you win.
You'd need to assign an 80% chance of prices booming to get a postive return!
With all the uncertainty out there, you'd have to be brave, foolish, or know something the rest of the world doesn't to do this.

I am happy to stick to buying distressed, cheap and occupied commercial REITs where at least you can buy high NET yields, and at massive discounts to book value.
 
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To sort of put that into context, if I buy something with high yield and low growth, then:

If prices fall, you lose.
If prices stay the same, you lose,
If prices rise with inflation, you break-even.
If prices increase by more than inflation, you win a little,
if property market booms, you win less than a high growth low yield place
 
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To sort of put that into context, if I buy something with high yield and low growth, then:

If prices fall, you lose.
If prices stay the same, you lose,
If prices rise with inflation, you break-even.
If prices increase by more than inflation, you win a little,
if property market booms, you win less than a high growth low yield place

Why do you lose if prices stay the same?
If you have a high yielding property and prices stay the same, you win.
You also win even more if prices increase with inflation (this is usually more likely if the yield is already high)
 
Most people are buying for somewhere to live, not for the yield.

Although renting is cheaper, it is a belief embedded in us culturally that owning is better than renting, despite the cost.
 
Why do you lose if prices stay the same?
If you have a high yielding property and prices stay the same, you win.
You also win even more if prices increase with inflation (this is usually more likely if the yield is already high)

Oh because I assumed your yield wasn't high enough to offset interest and I assumed high gearing.

I should've said it as you lose less.

I think the story is, if you lose, you lose less in a high yielding property. But if you gain, you gain less.

It's just a case of high risk high return? Just as bond yields go up... bond prices come down? I don't see any magic behind high yielding properties. It's usually just a different class of asset and your growth should reflect that.
 
Most people are buying for somewhere to live, not for the yield.

Although renting is cheaper, it is a belief embedded in us culturally that owning is better than renting, despite the cost.

I've heard that one. The Americans had the same dream and preferred to buy rather than rent. Unfortunately this does not mean that prices can't go down.

Yields are a good indication of whether the demand was really being caused by people needing somewhere to live, or whether its caused by speculation and banks giving out too much cheap and easy credit.
 
China.......

You either don't know much about China or much about finance... I think credit in Australia and United States and United Kingdom are all cheaper as far as home loans go.

http://online.wsj.com/article/SB10001424052748703594404575191552241784906.html

Deposits of 50% are now required for investment properties in China... If Australia so as to even tried tighten it to 25%, houses will probably fall 70%+. Time to get those facts right rather than read the Herald Sun or Daily Telegraph editorial mate

Maybe you're talking about Chinese buying with cash, not credit. Time to whip out that dictionary.
 
Oh because I assumed your yield wasn't high enough to offset interest and I assumed high gearing.

I should've said it as you lose less.

I think the story is, if you lose, you lose less in a high yielding property. But if you gain, you gain less.

It's just a case of high risk high return? Just as bond yields go up... bond prices come down? I don't see any magic behind high yielding properties. It's usually just a different class of asset and your growth should reflect that.

Not quite. The payoff ratios are far worse for low yielding properties.

In my scenario, buying a low yielding property, there is only 1 out of 5 outcomes where you would actually win after interest cost, and it wouldn't be a large amount.

Who would play such odds for such a low expected return.

I should start a property casino. I could give better margins and I'd still clean up.
Roulette table - Black you lose, Odd number you lose, Red is a standoff, Evens and I'll give you a 20% return on your investment.

Who's up?

It amazes me that people really believe that capital growth is a reward they are entitled to in return for buying a low yielding property. Especially in the current market.
 
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