Confidence in Australian Housing Market

[Giddyup]

What sort of answer is that? I could post: If you close your eyes and chant "its going to crash 40%" repeatedly, its a great time to be in cash. But that wouldn't make my case any more than your stupid little dittie makes yours.

Goose.

Cheers,
Michael

Merely having a laugh at the 'investors' that blindly buy property with a 1% yield and expect 25%+ CG per year because 'you cant lose on property right?'. Give it a few years and they'll be appearing on Today Tonight and ACA complaining that they dont have a enough to retire on because of all the loss making properties they bought and that its all someone elses fault.

Want having a dig at you. Lighten up. ****.

 

[Melbournian]

with that high possiblity of lower stamp duty for first home buyers in 2011 in victoria, there could be likely uprise in prices when that happens similar to the first home owners grant boost

 

[MichaelW]

Don't quite understand this, most need to borrow & borrowers are afraid of further rate rises.

About 1/3 of properties are owned outright from memory, so you're right that most (2/3) do need to borrow. But, even in that 2/3 that have a loan the average LVR is only 50% given $1Tn in borrowings is spread across the $2Tn of properties with loans against them. There's a full $1Tn paid off that are completely mortgage debt free and couldn't give a hoot about interest rates. If they're retirees then the higher the interest rate the better for them. And not all borrowers are afraid of further rate rises. Easy to understand with an average LVR of 50% for endebted households. Its the marginal borrowers on the high LVRs that are likely concerned and not all of these are either. Lots have locked down loans or have conservative net borrowings so the interest rates don't impact them. In truth, it is the marginal marginal borrower who has over extended at the bottom of the interest rate cycle and who has not fixed rates who is concerned. Get the idea? Its a very small percentage and not a big deal in the scheme of things but Today Tonight will no doubt try and convince you otherwise by wheeling out that marginal borrower every now and again.

I would think that those who borrowed a while back and have built some equity are much less concerned about interest rate rises.

My son has just signed for his first purchase, and he will probably fix for a year because he is worried about rate rises.

Spot on. Bet he's not so worried now...

It doesn't accurately represent how people are affected by rate rises so why bother using it?

That same overall LVR figure was around 10% back in the 1990's.

So if you want to swap ridiculous figures that don't mean anything then how about this one:

Our housing is 200% more leveraged today than in the 90s.

Keep it up MichaelW, very entertaining.

I use it because it does accurately represent how people are affected by rate rises. It shows just how irrelevant they are for the vast majority. If you want to be specific then go read the RBAs review of who's holding the debt. There conclusion was that "those most able to handle the debt hold the debt". Its the high income earners in GenX that hold the bulk of the debt and they are most able to handle interest rate increases.

Hobo-jo, can you please explain this?
Do you mean that total housing stock of $3.5t or whatever has an LVR of 80% compared with the 90s where total stock (say, $1t) was only geared 27%?

That's not what he's saying at all. He's saying the 10% national LVR has increased to 30% so its tripled, i.e. a 200% increase on the nineties level. Woopdedoo! Run for the hills kids, we're dying under debt.

FWIW, I reckon there's another wave of banking reform coming that might see more capital coming into our market and more banking competition. Might be that next catalyst to kick prices even higher. Media today talking about a fifth piller or some such.

We're on the crux of an unprecedented mining boom. Households have already started reducing debt and we're already at a very low level of indebtedness nationally. Those most able to handle the debt hold the debt. Those who stand to benefit the most from the income effect of the ensuing boom hold the debt. Banking reform is coming with a fifth pillar on the way. We're at almost full employment. The economy dodged recession. We have massive under-supply of housing. The population is continuing to grow at unprecedented rates. And they're solving the PIIGS problem in Europe. Even the US is looking like printing its way out of problems.

You can try and invent some black swans if you want to, but sometimes its just easier to face up to reality and invest accordingly. Don't try and get in the way of this commodity bull or you'll be the one hemorhaging, not the marginal over-indebted borrower that Today Tonight runs to sell ad spaces in prime time to sell burgers to the punters.

Cheers,
Michael

 

[hobo-jo]

Its the high income earners in GenX that hold the bulk of the debt and they are most able to handle interest rate increases.

Suspect this group will also have no qualms dumping property if it doesn’t perform to the standard required to make a decent return.

We’ve already seen a huge increase in stock on market since the middle of the year. November alone has seen a 4% increase in stock according to REFind. The high income earners may hold the debt, but that doesn’t mean they are prepared to hold an underperforming asset over a long period of time.

We're on the crux of an unprecedented mining boom. Households have already started reducing debt and we're already at a very low level of indebtedness nationally.

The world is still choking on debt, I suspect the current rise in commodity prices (and Silver/Gold) is more so the beginnings of a currency crisis than a new bull market in commodities, but may take some time to identify if this is the case.

“we're already at a very low level of indebtedness nationally”

Compared to what/when/who?

 

[tom32]

About 1/3 of properties are owned outright from memory, so you're right that most (2/3) do need to borrow. But, even in that 2/3 that have a loan the average LVR is only 50% given $1Tn in borrowings is spread across the $2Tn of properties with loans against them. There's a full $1Tn paid off that are completely mortgage debt free and couldn't give a hoot about interest rates. If they're retirees then the higher the interest rate the better for them. And not all borrowers are afraid of further rate rises. Easy to understand with an average LVR of 50% for endebted households. Its the marginal borrowers on the high LVRs that are likely concerned and not all of these are either. Lots have locked down loans or have conservative net borrowings so the interest rates don't impact them. In truth, it is the marginal marginal borrower who has over extended at the bottom of the interest rate cycle and who has not fixed rates who is concerned. Get the idea? Its a very small percentage and not a big deal in the scheme of things but Today Tonight will no doubt try and convince you otherwise by wheeling out that marginal borrower every now and again.

Nice logic.

When it is put like that the whole system does indeed look more robust and indeed the average LVR looks like it would be 0.5 following your maths. I actually think the banks do these numbers and most are around this figure or lower. I am trying to find it but without success.

The only 2 issues I think to bear in mind though when reflecting on this where issue 2 is really only a general summary of issue 1.:

1. The average LVR for a FHB is a lot higher than this. It is several years later when the magic of time and inflation have worked on the asset that the LVR has reduced for these people. Without FHB'rs being able to afford our stock for whatever reason, no matter how many well to do existing owners are around with low LVR's the current price is going to be in trouble. Your other points around new capital and government policy are very important as changes here are the only way I can see that prices can go higher, or anything that allows FHB'rs to buy more expensive properties.

2. Markets and the market price are driven by the margins. Marginal purchaser and the marginal supplier. It is the last person who can afford to buy and the last entrepreneur who is willing to create new supply where the marekt price is set, i.e. at the margin.

Look at the UK when LVR's were difficult to obtain at more than 0.6. While this is no doubt above their average LVR too it had a profound impact on their market.

 

[tom32]

The world is still choking on debt, I suspect the current rise in commodity prices (and Silver/Gold) is more so the beginnings of a currency crisis than a new bull market in commodities, but may take some time to identify if this is the case.

“we're already at a very low level of indebtedness nationally”

If the government put all its cards on the table though I don't think there is any question that debt could get much higher.

We have limited room in the private sector for an escalation in debt levels. Banks are struggling to raise funds at the prices they need to obtain them at for the Australian market. Our government however has quite a large capacity to take on more debt and importantly at lower rates than the banks can get, or at the very least a large capacity to guarantee further private debt allowing private debt to again go on increasing and at low interest rates.

I think the funds market is going to get more expensive on the supply side but by the same token I could list off hand 5 policy responses that would be both affordable (to a gov with limited debt) and set in motion further house price rises.

I just ask the question, is this really a good thing for Australia? Even for IP owners, unless they can pick some future peak in prices? I mean wouldn't it be safer for people to have assets valued at fair market value over the long term than the government to now move in and fuel credit. Is it not better that the market prices credit at the level it should be at and if this means some correction now than is this not better than a worse correction down the track? The upshot is if the government moves into this space, I am not sure the long term outcome is going to be pretty.

 

[.toe]

Remember, interest rates only affect 1/3 of property in Australia. Total resi lending is about $1Tn of the $3.5Tn in total resi property. So, 2/3 of the property value in Australia is impervious to mortgage interest rate increases. That's not 2/3 of houses but 2/3 of value. Some individual properties will be 100% lend while others obviously zero. But the impact of interest rate increases only has an impact on 1/3 of our property by value. Another way of looking at it is that if we were all amalgamated into one super borrower then our LVR would be 30%...

That's worth bearing in mind but I think we also have to consider who determines what the value of our properties will be into the future. Melbourne for example has about 2 Million households. At the moment the weekly number of auctions has been huge at around 1000pw, thats about 2% turnover. Add a figure for private sales and you've still only got a turnover of a fraction of the total stock. And those few percent of sales are responsible for revaluing everyones properties, including those that are owned outright.

The question is who are the people that are selling at any one time. I would hazard a guess that right now sellers are wanting to 'cash in' on the gains of the past year, which is why there are so many auctions.

If unemployment or interest rates go up, a small percentage of all owners will become sellers. If the turnover rate is say 5% and 2% of owners become sellers then the number of sellers has grown by 40%, and those new sellers are "motivated".

Don't get me wrong, this is not my forecast for the market. It's just an observation of market functioning.

 

[our obsession]

Confidence in myself to keep buying well, accumulating assets...hell yes.

 

[HomeBuyAU]

Lot's of opinions but at the end of the day you have to decide for yourself. My own feeling is that we are going through a slow period, a time to buy property is upon us now and even more so from now until Feb. We won't see much growth in general but by the middle of next year or even a little earlier things will come back to normal. We have too much shortage of housing here in AU and a lot of passionate average Joe investors. The only thing that could seriously damage the industry at this fragile time is if we see more interest rates, in fact if they put them down it would help a lot.

 

[evand]

What is 'normal?'

And i think the housing shortage is a well peddled myth. If it was true, wouldn't rental vacancy rates be at zero? Or close to?

Lot's of opinions but at the end of the day you have to decide for yourself. My own feeling is that we are going through a slow period, a time to buy property is upon us now and even more so from now until Feb. We won't see much growth in general but by the middle of next year or even a little earlier things will come back to normal. We have too much shortage of housing here in AU and a lot of passionate average Joe investors. The only thing that could seriously damage the industry at this fragile time is if we see more interest rates, in fact if they put them down it would help a lot.

 

[.toe]

What is 'normal?'

And i think the housing shortage is a well peddled myth. If it was true, wouldn't rental vacancy rates be at zero? Or close to?

Whether it's true or not I dont know, but I believe the idea is it's forward looking. Population projections vs land supply accounting for rates of release, zoning, & development etc. A bit like how the RBA is saying we have to suffer high rates now because we'll have a shortage of workers in a year or two. Great if it's right, but if it's wrong, look out.

 

[Aaron Sice]

What is 'normal?'

And i think the housing shortage is a well peddled myth. If it was true, wouldn't rental vacancy rates be at zero? Or close to?

i don't think it's a myth - i think it's too general a statement.

it should read "a shortage of quality and/or appropriate housing". as in, there are plenty of 1 bed apts in city areas, but most people want 2 beds + so they can either buy with a friend/sublet. that is a lack of appropriate housing. 1beds will sit vacant, while 2 beds will command a higher rent/purchase premium and have next to nil on the market and a nil vacancy rate. but of course, only median stats are peddled, which shows a pretty average picture.

same with quality homes. why would someone rent a 60's fibro 3x1 on 700sqm for the same price as a new 3x2 on 250sqm, if all they want is a 3 bed house to rent? the 3x1s will sit idle or vacant with reduced yields while the 3x2s will again have the premium associated to them.

statements like "oversupply" need to looked at in context to the market they relate to.

 

[kotim]

On a room by room basis we have more space available than we ever had, we are having smaller familes but buying more bedrooms. There is no undersupply generally, sure in certain areas as is always the case their will be reasons for growth attached to the desire of the number of people who want to live in an area, but its always been that way and always will. In otehr words when things go bad some areas have done better than others.

I was reading stats the other day that show the participation int he workforce is now somehting like 62% but back int he 70's was 57%. In other words the data showed that yes theire are more woman int he workforce but here are also less men and in fact an increase from 57 to 62% is not a lot relative to the total. On top of that relative wages are less accross thw board.

Anyway their are many a peddled myth and the reality is that it is easier money that ultiamtely causes a bigger increase in growth than anything else.

 

[Ben P]

Just for fun!.

Central QLD seems to be doing fine and have the runs on the board to continue to do so. The average income for those employed in the mining towns is $110,000 p.a with the majority fly in fly out.
http://www.dailymercury.com.au/story/2010/11/12/mining-projects-drive-economy/

In my view the flow on effect for non mining areas occurs when these cashed up miners fly home providing much needed dollars into their local ecomomies buying homes and investment properties.

...well that's if they don't go spending all their dollars on Utes and beer!

 

[JT7]

Central QLD seems to be doing fine and have the runs on the board to continue to do so. The average income for those employed in the mining towns is $110,000.

...well that's if they don't go spending all their dollars on Utes and beer!

Just as long as they continue to rent property...happy days!

 

[Beebop]

The future is not certain. What we are is in a period of extreme risk. The properties are valued by the 'market' based on the expectation of capital gains. If these gains don't happen it might as well be as good as a fall.

BTW, if I borrow 200k today, and in 5 years the property goes to 400k, that means I only owe 50% of my property even though I am still close to 100% in debt of what I paid.

 

[Propertunity]

The future is not certain.

When has the future ever been certain?

What we are is in a period of extreme risk.

Really? Perhaps if you were in South Korea at present.

The properties are valued by the 'market' based on the expectation of capital gains.

Says who? Property can also be valued by the market at 'repalcement cost' and many other factors.

If these gains don't happen it might as well be as good as a fall.

Yes, agreed. What are you like at timing the market?
Who'd have thought, that you'd get 10+% capital growth in the middle of a GFC?

BTW, if I borrow 200k today, and in 5 years the property goes to 400k, that means I only owe 50% of my property

Yes, correct.

...even though I am still close to 100% in debt of what I paid.

Yes, you will not have reduced much of the loan principal in 5 years, if you are paying P&I on a 30 year loan. What's your point?

 

[Beebop]

When has the future ever been certain?

Really? Perhaps if you were in South Korea at present.

Says who? Property can also be valued by the market at 'repalcement cost' and many other factors.

Yes, agreed. What are you like at timing the market?
Who'd have thought, that you'd get 10+% capital growth in the middle of a GFC?

Yes, correct.

Yes, you will not have reduced much of the loan principal in 5 years, if you are paying P&I on a 30 year loan. What's your point?

The point is you sig says buyers agent.

We're counting a 10% growth on pretend money that does not really exist and are calling it equity. What we really have is a guy in 200k of debt which is growing at 10 % per year.

Given the recent world events the 'it cannot happen here' attitude seems to be pretty dangerous. It's like the sinking of the titanic .. I'm just waiting for someone to come along to say it's a mathematical certainty.

RBA rates on hold.. what a disgrace.

 

[Beebop]

When property goes up based on speculation, this means the next person needs a higher return to make the same ROI as the previous owner as rents remain relatively linear. That 10% Could just be the effect of that compounding and the higher return required because of high levels of debt.

With property, it used to be great because over the long term you would make a nice return if property values grew by between about 3% on average. The reasons were you were offseting your rental payments against the interest you paid.

These days it is all about getting 20% returns in one year. The last years have been absolutely stupid without comparison.

 

[wylie]

When property goes up based on speculation, this means the next person needs a higher return to make the same ROI as the previous owner as rents remain relatively linear. That 10% Could just be the effect of that compounding and the higher return required because of high levels of debt.

Must be a ponzi scheme, then, surely .....

With property, it used to be great because over the long term you would make a nice return if property values grew by between about 3% on average. The reasons were you were offseting your rental payments against the interest you paid.

These days it is all about getting 20% returns in one year. The last years have been absolutely stupid without comparison.

I've owned property for over 30 years. I'm no Donald Trump, but always had one IP or more. Some years values drop slightly, other times they don't move up at all, other years they rise sharply and then plateau again and wages catch up, again. What is it with the 20% returns in one year. Is that for ALL the property in Australia????

Parts of Australia's property market are rising right now, others are dropping, others are in a plateau. You cannot lump ALL property into the same basket.