Are Australian property prices going to crash?

[Player]

...............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.

Part of my portfolio contains such properties however they were bought so long ago, that I have beaten the house (pun intended)

My emphasis however in your quoted text is to highlight the key lesson here. I do not believe that right now is the time to be seeking blue chip location resi (investment properties) delivering 2 % yields or less. I'll caveat that by stating a PPOR as an OO is a different situation.

Rents will grow somewhat, however if the current sentiment that I smell in the air (in Melbourne at least) persists, I reckon that in a general sense we are at 1992/1993..........................................and it will be another seven or so years before we get to that rampant bullish speculative market (of late 90's) again.

Be prepared for sideways markets. There will be exceptions, however that is what I am gleaning from what I see and hear. So a property will likely double in 10 or so years, however it may all occur in a three year bull cycle with nothing but holding costs and interest rate risk in between.

Not prudent in my eyes. There will of course be cashflow properties however they are unlikely to be resi blue ribbon locations IMHO

 

[Value Emperor]

Be prepared for sideways markets. There will be exceptions, however that is what I am gleaning from what I see and hear. So a property will likely double in 10 or so years, however it may all occur in a three year bull cycle with nothing but holding costs and interest rate risk in between.

So if the next 7 years brings sideways movement, anyone with a property yielding less than about 8% gross will be lucky to break even.
Who would be interested in that?

Even if that were to occur, I could not see any reason why properties would double over the following 3. Property does not double in EVERY 10 year period. This next decade will be one of them that it doesn't.

 

[Player]

It may or it may not. I am not disagreeing with your post, indeed your final remark (in the current market) was so highlighted by me to make that point.

I don't know what will occur in the next ten years, I merely gave my opinion of what the environment is smelling like (to my nose) and what MIGHT repeat.

 

[mattnz]

I was actually referring to Chinese money being the reason that home lending is dropping in Australia, while prices are increasing, not that the credit was particularly cheap.

 

[willair]

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.

What all those investment property-equities-spruikers that can turn someone into a multi-millionaires in 2 hour for $69.99 are wrong even those ****head know that 2% may well make it while the other 98% do stuff all,that's the one item most new investors miss the time factor someone that bought in inner Brisbane 10 years ago,would not care less about what you are saying,the same as someone who bought 20 years ago,the only place that i know that the median property prices dropping for 3 -6 months in a row are country areas..imho..willair..

 

[Value Emperor]

someone that bought in inner Brisbane 10 years ago,would not care less about what you are saying,the same as someone who bought 20 years ago,the only place that i know that the median property prices dropping for 3 -6 months in a row are country areas..imho..willair..

That makes me laugh
Someone who bought 20 years ago in Brisbane may not worry.
Someone who bought in the last few years will spend the next ten years wondering if the above trend returns will actually hold and wishing they have waited so they could buy cheaper or rent for longer and save even more!!

 

[Deltaberry]

I think you got the order wrong.

A property doesn't grow more because it has low yields (which is what you're saying). Rather, it has low yields because it grows more (read it again if you don't see the difference).

In other words, investors require a lower rate of return because their risk profile is less and the expected growth is stronger (blue chip suburb, held by people whose mortgages are mainly paid off).

New suburbs require a higher yield because it's a riskier proposition, since most people in those suburbs are on the mortgage belt and let me tell you, with the economy tanking the way it is it's not the employers in the blue chip suburbs who are worried about mortgage repayments (since they've repaid their houses already), it's their employees in new suburbs who are on the mortgage cusp and one week's worth of late salary means they default on their house and trigger the domino's effect that wipes out all these high yielding assets. But rest assured, your yield will go up even higher as prices fall and when it halves, your yield has just doubled. High yield = high return? Hah

Anyway to compensate them for this risk, the yield is higher. Simple risk-reward theory or finance 101 rather. It's just like bond pricing theory?? High yield means prices fall?

 

[paul2299]

I think you got the order wrong.

A property doesn't grow more because it has low yields (which is what you're saying). Rather, it has low yields because it grows more (read it again if you don't see the difference).

In other words, investors require a lower rate of return because their risk profile is less and the expected growth is stronger (blue chip suburb, held by people whose mortgages are mainly paid off).

New suburbs require a higher yield because it's a riskier proposition, since most people in those suburbs are on the mortgage belt and let me tell you, with the economy tanking the way it is it's not the employers in the blue chip suburbs who are worried about mortgage repayments (since they've repaid their houses already), it's their employees in new suburbs who are on the mortgage cusp and one week's worth of late salary means they default on their house and trigger the domino's effect that wipes out all these high yielding assets. But rest assured, your yield will go up even higher as prices fall and when it halves, your yield has just doubled. High yield = high return? Hah

Anyway to compensate them for this risk, the yield is higher. Simple risk-reward theory or finance 101 rather. It's just like bond pricing theory?? High yield means prices fall?

I think the high yields in the burbs are mainly related to expectations of low capital growth, due to no real scarcity of that type of land, as opposed to risk level. Low capital growth in land values means people will only invest if the yield is right. I personally think the more premium properties represent a higher risk proposition, just look at how they were hit in the GFC compared to the cheap stuff. Even recently clearance rates on cheaper properties are still relatively solid, whilst the million dollar suburbs they have dropped like a stone.

 

[dan c]

I think you got the order wrong.

A property doesn't grow more because it has low yields (which is what you're saying). Rather, it has low yields because it grows more (read it again if you don't see the difference).

In other words, investors require a lower rate of return because their risk profile is less and the expected growth is stronger (blue chip suburb, held by people whose mortgages are mainly paid off).

That is a great point. Due to the higher growth in previous years, the rents have not kept up, and yields have declined. If growth stalls and rents continue to rise as forecast, the yields will improve.

 

[Deltaberry]

I think the high yields in the burbs are mainly related to expectations of low capital growth, due to no real scarcity of that type of land, as opposed to risk level. Low capital growth in land values means people will only invest if the yield is right. I personally think the more premium properties represent a higher risk proposition, just look at how they were hit in the GFC compared to the cheap stuff. Even recently clearance rates on cheaper properties are still relatively solid, whilst the million dollar suburbs they have dropped like a stone.

I don't know if that's true. There's a lot of talk about how they were 'hit' during the GFC. I personally live in what many would consider a blue chip suburb. Buying activity slowed down, but I certainly didn't feel any houses on my street were hit. People were pretty relaxed as most people are quite well off and just shrugged off the GFC. My neighbour is the 4th generation in their house and they certainly seemed relax - they don't even work. In contrast, I was hearing a lot about mortgage defaults about to creep up in other places.

I guess to put another way. If we read the paper, it often talks about people struggling to pay their mortgages and having to cut back their spending significantly to the extent they can't even watch a film. I never see people in Canterbury or Kew struggling to do that (blue chip suburbs in Melbourne). But sure read about a lot of Laverton / Deer Park in that category (new suburbs in Melbourne).

 

[Player]

I don't know if that's true. There's a lot of talk about how they were 'hit' during the GFC. I personally live in what many would consider a blue chip suburb. Buying activity slowed down, but I certainly didn't feel any houses on my street were hit...........

Where do you live?

In 2008, my suburb (Bayside Melb) and those surrounding probably came off 25-30 %. These suburbs were owner occupied PPOR and property assets not 1 or 2 BR flats that an investor might rent out for a woeful yield.

Whilst those that held on and we were in that camp as we have no PPOR debt, showed how rosy it was to the world, those that sold (or had to sell) felt it and moreso if they were not upgrading into a concommitantly punished "blue chip" suburb.

These markets have recovered and more, however that 25-30 % value drop was in a very short time (approx six months). If stock market Armaggedon revisits, expect pain to these areas.

 

[Deltaberry]

Where do you live?

In 2008, my suburb (Bayside Melb) and those surrounding probably came off 25-30 %. These suburbs were owner occupied PPOR and property assets not 1 or 2 BR flats that an investor might rent out for a woeful yield.

Whilst those that held on and we were in that camp as we have no PPOR debt, showed how rosy it was to the world, those that sold (or had to sell) felt it and moreso if they were not upgrading into a concommitantly punished "blue chip" suburb.

These markets have recovered and more, however that 25-30 % value drop was in a very short time (approx six months). If stock market Armaggedon revisits, expect pain to these areas.

I live in blue chip east (ie Canterbury, Hawthorn, Hawthorn East, Kew, Camberwell, Toorak, Armadale, Malvern etc)... in fact one of them.

Anyway I 'read' a lot about those sorts of falls. In my opinion a lot of it was also driven by a lack of expensive stock. I guess what I'm saying is those mega mansions won't really be changing hands during that time, and that certainly drags your selling prices down. You'd only know if you actually tried to sell your house in 2008 I guess and see what price it fetched.

 

[Nathan]

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

Buying widgey boards with 3% yield is a bad investment, buying a widgey board with a 20% return is good. I would NOT buy a 5% property in todays market or any market any time soon. Unless it was a 4-8 week flip or a dev site being built on immediately.

If people are getting 3-4% yeild, geez.... someone saw someone else coming.

I dont even know where 3-4% yeilds are or exist. Oh they do but there not investment markets there owner occupied markets.

7%+ is the norm for investors I would immagine.

 

[tvadera]

I don't know if that's true. There's a lot of talk about how they were 'hit' during the GFC. I personally live in what many would consider a blue chip suburb. Buying activity slowed down, but I certainly didn't feel any houses on my street were hit. People were pretty relaxed as most people are quite well off and just shrugged off the GFC. My neighbour is the 4th generation in their house and they certainly seemed relax - they don't even work. In contrast, I was hearing a lot about mortgage defaults about to creep up in other places.

I guess to put another way. If we read the paper, it often talks about people struggling to pay their mortgages and having to cut back their spending significantly to the extent they can't even watch a film. I never see people in Canterbury or Kew struggling to do that (blue chip suburbs in Melbourne). But sure read about a lot of Laverton / Deer Park in that category (new suburbs in Melbourne).

Hi,

I agree with your point regarding blue chip suburbs, but I dont agree with your view regarding Deer Park..
My reasons are below:

Over 50% (exactly 58%) houses in deer park are paid off... and also 90% of the dwellings are detached houses with decent block sizes (480 sqm +), hence the values would hold well. Also for the demographic its mostly retired ppl in deer park who have paid off their houses.. thats just my point.

 

[Player]

I live in blue chip east (ie Canterbury, Hawthorn, Hawthorn East, Kew, Camberwell, Toorak, Armadale, Malvern etc)... in fact one of them.

Anyway I 'read' a lot about those sorts of falls. In my opinion a lot of it was also driven by a lack of expensive stock. I guess what I'm saying is those mega mansions won't really be changing hands during that time, and that certainly drags your selling prices down. You'd only know if you actually tried to sell your house in 2008 I guess and see what price it fetched.

A lack of stock would actually drive prices up.

In any case the properties I allude to weren't mansions.They were circa 1 Mill to 1.5 Mill houses. I don't follow most of those eastern suburbs you mention, however do know from friends and relatives that live in Kew, that it took a beating just like bayside suburbs of that price range. From that I can extrapolate to the others.

As I mentioned they did recover, however do not be surprised if an short/sharp (albeit short lived) adjustment rears its ugly head even in these types of areas. It will depend on whether or not the knives keep falling on the stock market and the subsequent business sentiment that diminishes along with ensuing job (in)security.

Couple that with more bad news to arise from Europe and I don't know when..................the market makers do and we shall be looking at 2008 revisited IMO.

I ain't a bear, however I am a realist. The short term shall be volatile and unknown

 

[BayView]

Where do you live?

In 2008, my suburb (Bayside Melb) and those surrounding probably came off 25-30 %. These suburbs were owner occupied PPOR and property assets not 1 or 2 BR flats that an investor might rent out for a woeful yield.

Whilst those that held on and we were in that camp as we have no PPOR debt, showed how rosy it was to the world, those that sold (or had to sell) felt it and moreso if they were not upgrading into a concommitantly punished "blue chip" suburb.

These markets have recovered and more, however that 25-30 % value drop was in a very short time (approx six months). If stock market Armaggedon revisits, expect pain to these areas.

The other factor in your scenario (area) is the access to finance during this period.

While the GFC was in full bloom, the Banks had pretty much closed up shop other than for the customers with very solid financials and with larger deposits.

As we all know, in every level of income there are many who are not solid (live week to week, with lots of consumer debt).

So, even in you more affluent suburbs there would be a large number of higher income earners who would not get loans during that period.

The result is no buyers.

So, combine that with those who got into financial hot water during this time and had to sell...you have no buyers and a need to sell = lower selling prices.

 

[Player]

Well elaborated Marc.

Of course behind the scenes, it was money supply tap that was being closed down and too many sellers relative to buyers. Creates an over-supply of stock and downward pressure on sales prices.

 

[THEHEATH]

actually it's a double win because the debt erodes with inflation as well.

And along with it erodes the value of every dollar you hold/own. You win nothing.

 

[Ausprop]

And along with it erodes the value of every dollar you hold/own. You win nothing.

the debt is deflating but your assets are inflating. you wont win on your net assets, its a break even. the win is just on the debt

mond you if you are allocated to gold it could be a win win

 

[Sunfish]

I have steadfastly maintained that inflation does not erode away debt!

All that happens is that inflation causes higher interest rates so you compensate your lender for the inflation that would otherwise reduce his/her capital investment in you each year. Do you honestly believe that your lender would allow you to cheat him that way! True, after years of steady inflation your debt reduces significantly in nominal value but you have paid the difference every month.

You can argue tax advantage if you are desperate but I am talking about pre-tax advantage.