Australian housing overvalued

If you have such a one track mind when it comes to property, why read an enthusiasts forum?

Do you see me reading or posting on family or child raising forums?
 
I don't have a one track mind.

Some cities are more overvalued/undervalued than others.

Have owned property, will buy again.
 
Banks do not look at affordability using a snap shot in time or assume that rates will stay low but add in a buffer of around 2%, an increase of around 20% on what most people are paying.

Serviceability+2%= affordability
 
I know bugger all about property economics. I do see a trend though, reading through these forums and other sources it looks like the naysayers always predict a big downturn every time the property market has positive news and an upswing. this 'big downturn' never comes though. Sure maybe one day there might be a 15% drop in the market but if you buy well this shouldn't affect you too much, and in the mean time while certain people are waiting for this downturn to happen there are plenty of people getting rich through property investing.

Also i have never brought into the commonly used phrase of housing being unaffordable. i know we are talking about property being overvalued not unaffordable, but its another topic that the naysayers are always going on about. Sure if you have a couple of kids and your household income is 80k then your not going to be able to buy a million dollar inner city home...but thats a given. there are affordable housing options for everybody on any income if they want it.

cheers
blair
 
They don't look at affordability, they look at serviceability. That's why they use serviceability calculators.

Serviceability ≠ affordability.

Might want to redo the math on that.

Yes, the bank calculations add in a 40% buffer not 20% and who knows other than yourself what the economy may be doing by the time interest rates are up 2%.

Does that leave the calcs. as

Serviceability= affordability + 40%

I'll stick with walking the walk you can stick with talking the talk:D
 
I see some properties as undervalued and some as overpriced. Will stick to focussing on the undervalued properties and you can't go wrong!
 
Yes, the bank calculations add in a 40% buffer not 20% and who knows other than yourself what the economy may be doing by the time interest rates are up 2%.

Does that leave the calcs. as

Serviceability= affordability + 40%

I'll stick with walking the walk you can stick with talking the talk:D

This is theoretically true and what APRA/IMF point to as a 'key' prudential tool.

Realistically though, banks (generally speaking) apply that buffer to any loan that is held with them. However, not for loans held with other institutions (depending on lender policy).

For example, if an investor with a $5m portfolio at Bank A goes to Bank B for a $500,000 loan - Bank B will assess the $5m 'at cost' (i.e. no buffer) and the $500,000 with the buffer.

Bank B has only applied an interest sensitivity buffer to 10% of the investors total interest holdings.

Heck one bank (and sometimes two) don't even apply that buffer to the investors existing holdings with their bank.

This is one 'loophole' (so to speak) brokers utilise structure investors finances in a way to maximise their borrowing power.

Cheers,
Redom
 
I have a problem ..... making assumptions such as rates will always stay low, incomes will increase at the rate they have in the past, etc.
I think that explains a lot of your issues. The markets v. strong view is that the new normal is low rates - that is a safe assumption. You can absolutely guarantee it when you fix for 15 yrs at 7%. Why aren't you also making that assumption ?

Here are two definitions of 'afford':

1. Afford: To have the financial means for; bear the cost of.
2. Afford: To manage or bear without disadvantage or risk to oneself.

Some think that the first defines affordability, if the household has the means to purchase a house (/service the loan) with everything as it stands today, then they can afford it. I lean toward the second definition which is a more holistic view, which is important when looking at a decision that will affect the buyer for many years. In my opinion a household taking on an amount of debt that couldn't be afforded should rates normalize is not able to afford it (as it's a real risk). Which is why I said above:
Serviceability ≠ affordability.
If you can mitigate the rate risk, then would you agree that there is little difference between definitions 1 and 2 ?

Out of interest, when would you consider housing affordable ?
 
I think that explains a lot of your issues. The markets v. strong view is that the new normal is low rates - that is a safe assumption. You can absolutely guarantee it when you fix for 15 yrs at 7%. Why aren't you also making that assumption ?
Because that's not what a majority of people in Australia do (fix rates long term).

How accurate has "the market" been when looking out 2-3 years at interest rates? From my anecdotal observations, not very. If you have a measure that shows the markets medium - long term view on interest rates has been consistently accurate I would be interested to see what it is, sounds like guaranteed profit ;)
If you can mitigate the rate risk, then would you agree that there is little difference between definitions 1 and 2 ?

Out of interest, when would you consider housing affordable ?
When I talk about lack of affordability, I am talking in a general sense/on a national scale, it can differ between states and the actions of the majority sway my judgement. But yes on a case by case basis if a household takes appropriate measures to protect themselves then the property they buy may be affordable... as I wrote last year:

I would never discourage others who want the stability of ownership and are prepared to treat housing as a consumable (rather than an investment) from buying. If you have a healthy deposit (preferably one that will help you avoid LMI), fixed interest rate (or able to service higher interest rates), protect yourself (income protection, cash buffer, etc) and expect to stay in the property you purchase for the long term (until mortgage paid off), then it shouldn't matter what prices do (rise, fall or stagnate).
http://www.bullionbaron.com/2013/08/whats-next-for-adelaide-property-prices.html
 
I know bugger all about property economics. I do see a trend though, reading through these forums and other sources it looks like the naysayers always predict a big downturn every time the property market has positive news and an upswing. this 'big downturn' never comes though. Sure maybe one day there might be a 15% drop in the market but if you buy well this shouldn't affect you too much, and in the mean time while certain people are waiting for this downturn to happen there are plenty of people getting rich through property investing.
Correct.

For those of us who are older and have seen a few cycles; it doesn't matter in the longer term too much about various factors such as rates, wars, buyer sentiment, etc - the shorter term will be effected of course.

But the property you buy and the numbers at that time are the most important. Holding on for the longer term can smooth out a lot of the minor influences.

Most of the drops you hear about are in the higher-end of the market - which is a different animal to yer standard run-of-the mill homes that average folks live in, and/or a particular property that was sold for less than previously bought - usually caused by operator error; not the market itself.


Also i have never brought into the commonly used phrase of housing being unaffordable. i know we are talking about property being overvalued not unaffordable, but its another topic that the naysayers are always going on about. Sure if you have a couple of kids and your household income is 80k then your not going to be able to buy a million dollar inner city home...but thats a given. there are affordable housing options for everybody on any income if they want it.

cheers
blair
Also true.

Younger folks always say it's tough; older folks say it was always tough to buy the first home.

It comes back to champagne tastes on a beer budget, usually.
 
I think that explains a lot of your issues. The markets v. strong view is that the new normal is low rates - that is a safe assumption. You can absolutely guarantee it when you fix for 15 yrs at 7%. Why aren't you also making that assumption ?
Because that's not what a majority of people in Australia do (fix rates long term).

How accurate has "the market" been when looking out 2-3 years at interest rates? From my anecdotal observations, not very. If you have a measure that shows the markets medium - long term view on interest rates has been consistently accurate I would be interested to see what it is, sounds like guaranteed profit ;)
As you consider rates to be unpredictable, then surely you will always consider housing to be to high risk ? Regardless of the fact that you are offered v. long term fixed IRs are at historic lows.:confused:


If you can mitigate the rate risk, then would you agree that there is little difference between definitions 1 and 2 ?

Out of interest, when would you consider housing affordable ?

When I talk about lack of affordability, I am talking in a general sense/on a national scale, it can differ between states and the actions of the majority sway my judgement. But yes on a case by case basis if a household takes appropriate measures to protect themselves then the property they buy may be affordable...
When I asked when would you consider housing affordable ?, I was hoping for an answer like when IRs are at X% & price/income ratios are Y & ...., not a non-answer like 'on a case by case basis... with appropriate measures..... actions of others'. Are you waiting until price/income ratios get back to 3x ?

Every house that sells qualifies for your 1st affordability definition. And these days lenders ensure the vast majority of those also qualify for your 2nd definition.
 
As you consider rates to be unpredictable, then surely you will always consider housing to be to high risk ? Regardless of the fact that you are offered v. long term fixed IRs are at historic lows.:confused:
So are you saying there's no market proof that low rates forever is a "safe assumption" as you previously implied?

I think to budget for reversion to 10 year average mortgage rate (circa 7%?) and then add 2% buffer on top would be reducing risk to a reasonable level. Either that or lock in interest rates long term, but as I said earlier, it's not common in Australia.
When I asked when would you consider housing affordable ?, I was hoping for an answer like when IRs are at X% & price/income ratios are Y & ...., not a non-answer like 'on a case by case basis... with appropriate measures..... actions of others'. Are you waiting until price/income ratios get back to 3x ?

Every house that sells qualifies for your 1st affordability definition. And these days lenders ensure the vast majority of those also qualify for your 2nd definition.
I think you are too closely mixing "affordability" with "overvalued/undervalued" discussion, as Redom noted there's a difference.

It's too difficult to answer your question on price to income (as there have been various measures published and not every city is on the same cycle)... I think this chart shows that cyclical lows have developed around 3.5-4 on a national level, but I do think there is a risk of it heading below 3.5 in a more significant correction if Australia were to be hit by a shock/recession, etc.

830d0b4e-b64d-11e3-b186-05667df928e3_29p26sm-Joye-ver2.png
 
So are you saying there's no market proof that low rates forever is a "safe assumption" as you previously implied?
I don't understand your Q. 'forever' isn't a time frame I'm interested in - 15 yrs is a far more interesting time frame & we have a guarantee of that.

You're saying rates are unpredictable 2-3 years out, and you're also saying that you won't buy based on an assumption of rates not rising. So my assertion is that you will never buy because you are unable to make an assumption about rate. Is this correct ?

I think you are too closely mixing "affordability" with "overvalued/undervalued" discussion, as Redom noted there's a difference.
I think you're basing valuation on an overly backward looking measure, and not a more recent past & forward looking basis... see below.

It's too difficult to answer your question on price to income (as there have been various measures published and not every city is on the same cycle)... I think this chart shows that cyclical lows have developed around 3.5-4 on a national level, but I do think there is a risk of it heading below 3.5 in a more significant correction if Australia were to be hit by a shock/recession, etc.

830d0b4e-b64d-11e3-b186-05667df928e3_29p26sm-Joye-ver2.png
The last 10 yrs of your chart shows that price/income ratio ranges from 4.0 to 4.5 for >90% of the time.... for all of this time we have had a low rate environment. The 10 yrs prior to that the P/I is around 3.0... for that period we were not in a low rate environment. We've established the market is expecting a low rate environment for the next 15 yrs. So as a buyer the odds would favour the P/I ratio to remain in the 4-4.5 band rather than revert to the 3.0 ratio. If one were to wait another 15 yrs until there is a possibility of a structural change a PPOR buyer would probably have wasted over half their working life. And in that 25 years prices are likely to have quadrupled. Of course, there are a few who will stick to their principles & theories that a P/I ratio of 3.0-3.5 is the 'right' ratio, but that reversion is likely to come about only after more price rises.
 
So as a buyer the odds would favour the P/I ratio to remain in the 4-4.5 band rather than revert to the 3.0 ratio.
I don't think a return to 3.0 is likely (as a long term average), though it could head that low in a severe correction.

Interest rates aren't the only influence that has allowed prices to keep swinging to the top of the 4.0-4.5 band, it's been a combination of factors including a prosperous economy & strong income growth on the back of mining boom... we'll have to wait and see how it plays out, but I think we may find a new norm at a lower price to income ratio (perhaps 3.5-4.0) even if low interest rates continue.
 
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