“Are we about to see one of the greatest property booms ever?” Lets debate!

[Peter 14.7]

Hello All

I ask “Are we about to see one of the greatest property booms ever?”

I am a simple investor. I believe in supply versus demand first and foremost and all others factors simply adjust this equation.

So the facts that I see are:

• Rents are strongly rising (in Sydney and Western Melbourne two I watch)
• Employment is high
• Purchase prices are not rising, improving the yield, and they are not dropping significantly. Sydney today reported as drop of 0.8% which is nothing.
• Supply (in Sydney) is drying up and no sign of immediate relief
• Banks are tightening lending criteria for loans cutting out new investors and developers
• Developers are nervous (i.e. Mirvac today froze $240M investors from withdrawing their funds financed form developments)
• Construction costs are rising because material costs are rising and labour supply is low or non existent

AND three big indicators that I have been commenting about for a while are changing the right way for property:

1. Interest rate are rising from the Banks but economic indicators appear to show the economy has slowed and many are saying the RBA will and indeed must drop rates in the near future. Todays SKY business News predicts October only 8 weeks away.
   
2. Petrol Prices are dropping form record high and will provide more relief to inflation or at least slow any further growth.
   
3. Share market has tanked and lost confidence so investors are getting up and cashed up, Where do they put it?

AGAINST THIS IS

• Oil could go back up
• US Bank Crisis is yet to fully unfold
• Drought is still strong and affecting food prices

So to close lets debate pro and cons but as I see it NOW is great time to get in.

1. I am already “propertyed” up but if I was to buy now I would follow this strategy:
2. Lowballing the right properties in strong rental markets (mum and dads in the burbs)
3. Get 2003-5 built homes from distressed sellers to provide high depreciations rates.
4. Getting the best short rate loan I could to finance this with the view to riding the drops

I see property as long term play (min 3 year) and whilst prices may not rise in the next 12 months it will simply mean a bigger rise in 24months and all the time rents going up.

Why not? Peter 14.7

 

[Shadow]

Hello All

I ask “Are we about to see one of the greatest property booms ever?”

Hi Peter,

I agree with you, especially for Sydney, where prices are still down 15% (in real terms) from the 2003/2004 peak, after half a decade of negative real growth.

I had a very similar thread running in January, but it would be good to debate this again, given the acute change in the economic climate since then...

Will Australia's Next Property Boom be the Greatest Boom Ever?
http://www.somersoft.com/forums/showthread.php?t=38278

I think we will see interest rates start to come down from September/October which will slowly bring life back to the Sydney market. I expect the next real surge in prices to occur around 2010-2011, with the next boom peaking around 2014-2015.

However I do expect those cities that saw 20%+ growth last year to experience some correction, similar to what Sydney experienced after the 2003 boom.

I think the next two years represent an excellent buying opportunity for Sydney. I'm planning to buy another property this year.

Shadow.

 

[evand]

You are forgetting that we are at the tail end of the biggest property boom in history which sent rental yields falling big time.

Property prices are still way above the long term average and need time to re-adjust.

Affordability is terrible. Even before the IR increases it was bad.

Yes, yields are rising but from a very low base. Caused by the recent boom in prices. Nothing to get excited about.

Looks like we might be at the beginning of a mild recession. Stopped from being much worse by the commodities boom.

Plenty of others..........

The last boom was a rare thing (possibly once in a lifetime just as this commodities boom probably is) and people that benefited from it were lucky (including myself). We might never see the planets so perfectly aligned again....ever.

So i think there might not even be another property 'boom', let alone one we are just about to see.

 

[josko]

Hi Peter,

Great Thread/Post.

Emotionally: I hope so.

Statistically: The indicators are there for the boom, I guess, but what makes the bottom of this cycle any different from past cycles to actually make it so?

The unusual factor in this part of the cycle is this:

1. While Inflation has been rising - so has the AUS Dollar. Therefore foreign investment has been strong and should remain strong.

and as you say:

2. The share market has tanked and so has/is property.

I'm not a strong believer of the pertrol price equation. In 2001, petrol was 99c. An adult movie ticket was $11.00. What were the stats 7 -10 years before that, in 1994. Is petrol part of the inflation equation?

Sure we have seen Goods & Services increase above CPI but this is pretty normal within any cycle?

I really have no arguement for or against, only that is to say: The Australian and World economy seems to be in a very different place than it has been in other cycles.

Whether that means BiG BUST then BIG BOOM - is anyone's guess.

Regards Jo

 

[boomtown]

It will be a cashflow boom not a capital gains boom for the next 3 years.

*IRs will continue to stay high for the next 3 years.

*This means prices will rise modestly - maybe 5% p.a. for the next 3 years. Maybe 1% above inflation or could even fall in real terms by 1%. Inflation will sit around 4 - 6%.

*Rents will continue to rise rapidly. You can buy well located innner ring property now and it will be CF+ in less than 5 years. Rents will go up 50% to 100% over the next 5 years.

*Development will continue to be a poor choice for the next 3 years. Building materials and labour will just be too expensive. Existing stock will remain below replacement cost.

*When IRs do drop - in 2011 - then the entire market is just going to explode. House prices will double in 12 months.

*By then most of us here should have benefitted from the cash flow boom and be in a position to expand in 2011 to ride up the next wave.

 

[Shadow]

You are forgetting that we are at the tail end of the biggest property boom in history which sent rental yields falling big time.

Property prices are still way above the long term average and need time to re-adjust.

The last boom was a rare thing (possibly once in a lifetime just as this commodities boom probably is) and people that benefited from it were lucky (including myself). We might never see the planets so perfectly aligned again....ever.

Hi evand,

While it is true that some cites are at the tail end of a boom, others such as Sydney are just coming off five years of negative real growth, and will probably experience little growth over the next year or so while rates reasonably remain high.

As per the chart below, the last boom was not particularly 'rare'. It is just part of the long term trend, and did not really take that long term trend too far off course. Any overshoot has now been corrected over the past five years (for Sydney).

*When IRs do drop - in 2011 - then the entire market is just going to explode. House prices will double in 12 months.

Hi Boomtown... the market is very strongly expecting an interest rate cut this year. With up to three cuts (75 basis points) priced in by the middle of next year. The OCR will definitely not remain at this level until 2011! See below...

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

Doubling in 12 months! Even I'm not that bullish!

Cheers,

Shadow.

 

[josko]

I missed the sotry on the news this morning, but did I hear specualtion of a RBA IR drop at next meeting? That is a first.

I don't think it will happen, I think they will let the economy slide further, just to make sure they have done their job.

Regards JO

 

[MichaelW]

Hi Guys,

I've said this already many times, but its worth putting it in here again:

In favour of a boom:

1. Demand / Supply equation. Not nearly enough stock for those that want it.
2. Improving rental yields. Rents rising rapidly whilst prices are flat.
3. Decreasing interest rates. Hasn't started yet, but not far away now.

Against:

1. Affordability. The rental yield, whilst increasing is still well below the prevailing interest rate.

I put my tipping point hypothesis out there a year or two ago and stand by that as my primary tool for picking the bottom. In the 90's we actually had the rental yield exceed the prevailing interest rate, so properties were CF+. We're nowhere near that point now and would require 5 years of flat price to get there. BUT, everything else is favouring boom, so I think we'll see prices move stongly upwards again in a couple of years. But, I don't think it will be the biggest boom we've ever seen only because we're coming off a higher base than in the past.

It will be a boom, and maybe even see 50%+ price increases, but I can't see property doubling or more in the next 5 years. Just isn't going to happen. We hit the affordability hurdle too hard for the Sydney median to run to over $1M. The only caveat I will add, is that IF the banks get more creative with lending products to reduce the cash flow required to service bigger loans then we will see a monumental boom. As Ross Gittins articulated here, we did it to ourselves. If banks extend loan terms to 40 years or actively push shared equity loans, then expect the upside potential to be lifted significantly. At present though, that ceiling is holding us back from too much price explosion quickly.

Cheers,
Michael

 

[Shadow]

I missed the sotry on the news this morning, but did I hear specualtion of a RBA IR drop at next meeting?

Here you go...

The market is pricing in a quarter-point interest rate cut to the Reserve Bank's 7.25% cash rate by November, according to Bloomberg data.

Expectations moved from a 24% chance of a rate move in November to a certainty, according to Bloomberg, after seasonally adjusted retail sales yesterday fell to -0.1% in June, from a revised 0.9% in May.

http://business.smh.com.au/business/rate-cut-hopes-grow-20080801-3o92.html

http://www.news.com.au/dailytelegraph/story/0,22049,24109480-5014103,00.html

http://www.news.com.au/couriermail/story/0,23739,24108881-3122,00.html

 

[evand]

No, booms arent rare, the size of the last one was.

Sydney is not one homgenous market. Some areas are going down, some sideways, some still rising etc.

Not sure about the scaling of your chart. It makes it look much more benign than it was.

Hi evand,

While it is true that some cites are at the tail end of a boom, others such as Sydney are just coming off five years of negative real growth, and will probably experience little growth over the next year or so while rates reasonably remain high.

As per the chart below, the last boom was not particularly 'rare'. It is just part of the long term trend, and did not really take that long term trend too far off course. Any overshoot has now been corrected over the past five years (for Sydney).



Hi Boomtown... the market is very strongly expecting an interest rate cut this year. With up to three cuts (75 basis points) priced in by the middle of next year. The OCR will definitely not remain at this level until 2011! See below...

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

Doubling in 12 months! Even I'm not that bullish!

Cheers,

Shadow.

 

[Shadow]

No, booms arent rare, the size of the last one was.

Sydney is not one homgenous market. Some areas are going down, some sideways, some still rising etc.

Not sure about the scaling of your chart. It makes it look much more benign than it was.

The source data is here... http://www.residex.com.au/index.php?content=get_indices&from=why_indices

 

[Ausprop]

a theory.... whilst the commodities boom continues Sydney cant boom. IRs are high becase of the commodities boom in the west and Qld. If it werent for the resource states this country would be in a woeful position, however conversely rates wouldn;t be so high either and so it may not be. Thus, if commodites drop off IRs can come right down and Sydney MAY flourish, however that is not the case, IRs are up and the economy of Sydney is suffering as it is not adding any value to the big picture. Finance and services is so very 2007 in this brave new world.

 

[MichaelW]

a theory.... whilst the commodities boom continues Sydney cant boom.

Thanks Ausprop,

I forgot to add: "End of the commodities boom" to my list of things in favour of a property boom. As everyone is now clear that China is going to act to control domestic inflation, and commodities are overcooked. Oil is a good lead indicator of the direction for commodities as a lot of speculative pricing is coming undone.



Michael

 

[Shadow]

Not sure about the scaling of your chart. It makes it look much more benign than it was.

Here is the same data on both Log and Linear scale...

http://www.residex.com.au/index.php?content=get_indices&from=why_indices

 

[PrimeCommercial]

I'm going to sit on the fence and agree with half of whats been said.
I'm thinking that a 49% increase in 12 months for a couple of Sydney suburbs indicates that there are still a few cashed up people around that haven't heard that the property boom is over. I think that we may be a little ahead of our selves talking about the next boom when there is probably more hurt to come for Sydney in general.

There have been quite a few people being retrenched of late and I'd say that as inflation and the economy slow there will be a rise in unemployment which will hit rents and property prices.

Interest rates probably dont have all that much further to go before we start seeing a drop but as owner occupiers make make the vast majority of the property market, its them that will drive the next boom and I dont see them being in that position for several years yet (3-5y maybe) regardless of IR's

I'm still thinking that we haven't seen the catalyst for the next boom/bust. It could be another war, change in government policy, terrorist attack, severe climate change, sudden worldwide demand for widgets, I dunno, but what ever it will be we havent seen it yet.


On another note, the link that Shadow posted.
I found these average figures interesting

Capital City Median Values
City Houses Units
Canberra $468,000 $364,500
Sydney $573,000 $401,000
Darwin $415,500 $318,000
Brisbane $452,500 $350,000
Adelaide $373,000 $291,000
Hobart $346,000 $248,000
Melbourne $479,500 $361,500
Perth $504,500 $393,000

Gut feeling here is that Canberra is a slightly over priced, Darwin and Perth are very overpriced. And I'd say that Brisbane and especially Melbourne are underpriced.

 

[evand]

Thats a bit more realistic. It sure was some BOOM!!!

To me tho, the fundamentals are:

1.. that rents are rising but from a very low base (nothing to get excited about for quite a while yet)

2.. Prices are levelling or falling but from a very high relative point. Gonna take a long while for everything to come back to a point that looks attractive to investors, let alone a BOOM.

Everything else (to me ) is fluff.

Here is the same data on both Log and Linear scale...

 

[MichaelW]

Here is the same data on both Log and Linear scale...

Hi Shadow,

I like these graphs, but I still can't get my head around a Sydney median of $1M by 2013. As I said earlier, I just don't buy a near doubling of price in the next 5 years. I hope I'm wrong, but I think Sydney is in dire shape as outlined by Robert Gottliebsen in the linked article below and will need some serious open heart surgery before we see it return to its position as the premier city in Australia. Don't get me wrong, I love Sydney. Its just been mismanaged for so long now, that all the investment is going elsewhere.

http://www.businessspectator.com.au/bs.nsf/Article/No-longer-the-Premier-State-H29D5?OpenDocument

The appalling management of the state of NSW is starting to affect the rest of Australia.

It started at the very top with the NSW state government and has worked its way down through local government and various other bodies to disrupt the business and personal affairs of the entire landscape.

NSW building approvals are down 16.5 per cent in June which is exactly what you would expect from a state that slaps a tax of $140,000 on building sites when the equivalent in other states is about $20,000. But the mess goes much deeper than that.

Cheers,
Michael

 

[lizzie]

something that no one has touched on ... interest rates dropping depends entirely on the banks passing on the reserve bank decrease.

they have had no qualms in the past 12 months about increasing rates without any prompting from the reserve bank - so what makes you all think that they will follow suit now?

now, that will be interesting ...

 

[Shadow]

something that no one has touched on ... interest rates dropping depends entirely on the banks passing on the reserve bank decrease.

they have had no qualms in the past 12 months about increasing rates without any prompting from the reserve bank - so what makes you all think that they will follow suit now?

now, that will be interesting ...

Hi Lizzie, the banks source about 50% of their funds from overseas markets, so I expect they will only pass on half of whatever amount the RBA cuts by, which means the RBA may need to cut by 50 basis points to have the desired effect (they won't do that initially though).

 

[boomtown]

Shadow - I understand that the finance markets are pricing in a cut - I just so happen to think they are wrong.

I also think we are seeing a structural change in the Australian economy. Brisbane and Perth will become (permanently) the most expensive places to live and Sydney will sink to a distant third. I do not see Sydney participating in the next boom to the extent of Brisbane and Perth.