Crash Imminent?

[wategos]

If houses are 80% overpriced, then a $1m house is only "worth" 200k... which is less than the cost to build it.

No it doesn?t mean that at all it works out at 555 K.
(80% overpriced = 45% drop)

A drop of this magnitude is quite possible considering the speculative forces and low interest rates that have elevated prices. I also recently talked to an Irish guy who saw close similarities and advised me to get the hell out.

 

[willister]

No it doesn?t mean that at all it works out at 555 K.
(80% overpriced = 45% drop)

A drop of this magnitude is quite possible considering the speculative forces and low interest rates that have elevated prices. I also recently talked to an Irish guy who saw close similarities and advised me to get the hell out.

It did happen in Ireland, but granted, Australia is a completely different market. Ireland went from potato farming to explosive high tech growth in the 90s then bust.

At the bust end of the Irish, my former colleague (who I still keep email contact with) kept on saying some who tried to exit the market quite literally couldn't even give the houses and land away - fact or fiction I don't know.

I see differences in both markets as following:

* Lesser competition in Australian market, there are no nearby countries to compete with except New Zealand. In Europe, there was a smorgasborg of similar properties available in different countries for purchase.

* Net emigration in Ireland vs. immigration here.

* Fewer Chinese like to live/invest in Ireland.

Despite saying the above, eerily he said things were out of control and some props were fetching 1mil EURO, when it bust went down to 200K EURO.

 

[techie]

I'd agree that property prices are overvalued and they are due for a pull back.

However this won't occur unless the one or a combination of following things happen:

1 - Significant increase in Unemployment Rate
2 - Significant Increase in Interest Rates
3 - Significant drop in real incomes
4 - Significant structural change to lending practices (abolishing NG, LVR changes etc)


1. This doesn't look like happening anytime soon
2. Unlikely in the next 10 years
3. Happening now, but not significant
4. Unlikely to change

I'd love to pick up a bargain, but my money would be on an extended period on 0% growth rather than a large drop

I'd add:
5 - Significant increase in housing availability. I.e. An oversupply of housing will reduce the demand.

 

[willair]

He kept sticking to that x14 rent p/a rule + extras. He kept saying if the Chinese pulled the pin and negative gearing was abolished, it would

I'm still trying to work that x14rentp/a rule plus extras,and I don't think the Chinese are going to stop any time soon ,even when no body knows how big the Chinese debt bubble is,some countries are on 3-4$ of raw debt to make or create every dollar of future economic growth China is still 1-1..
imho..

 

[Melbournian]

got a friend who sold his house for 1.6 mil bought by some china guy whose dad develops apartments in china. he paid 160K 10% on the day of sigining and settlement in 4 months. Come the last month, he calls the agent - says i can't settle as my dad's business in china went bust with apartments being unsold. Decides he can't go ahead and just let her have the 160K.

Friend already bought something else - on the assumption that everything would go through. now stuck with 2 properties and the china guy bought obviously at the high end and the result is now lowering the price to 1.3 mil but no takers wants to sue the china guy but this guy probably just bolted back overseas. tough luck.

 

[Deltaberry]

But he got $160k for nothing. Probably works out well in the end.

Anyway, a lot of people debate a lot, but never quite do anything.

 

[wategos]

You missed the big one, the one factor that dominates over everything else and was the cause of every property crash during the GFC so I?ll label it number 0.

0 - Availability of Credit

However this won't occur unless the one or a combination of following things happen:

1 - Significant increase in Unemployment Rate
2 - Significant Increase in Interest Rates
3 - Significant drop in real incomes
4 - Significant structural change to lending practices (abolishing NG, LVR changes etc)

 

[pieman]

reckons Australia's houses in (especially Sydney/Melbourne) are 80% overpriced.

Just curious on what your personal thoughts are on this?

Wow so I can buy that house on the beach in Brighton that currently is 5m for 1m. When's all this happening. I want in!

Let me guess, your mate hasn't got much wealth behind him?

 

[Arnoldus]

You missed the big one, the one factor that dominates over everything else and was the cause of every property crash during the GFC so I?ll label it number 0.

0 - Availability of Credit

On a slightly related topic, I'm wondering if this government will be as spend-happy as the last one if another economic calamity threatens to knock us around. Government decisions might have an impact on credit availability/growth (and by extension house prices) if we're thrown into GFC Mk.2

 

[wategos]

Wow so I can buy that house on the beach in Brighton that currently is 5m for 1m.

How can so many property investors be so bad at maths ?

 

[Macca]

On a slightly related topic, I'm wondering if this government will be as spend-happy as the last one if another economic calamity threatens to knock us around. Government decisions might have an impact on credit availability/growth (and by extension house prices) if we're thrown into GFC Mk.2

It is a lot easier to throw it around when you are debt free, unfortunately that is no longer the case

 

[kathryn d]

You missed the big one, the one factor that dominates over everything else and was the cause of every property crash during the GFC so I?ll label it number 0.

0 - Availability of Credit

That is exactly what I was thinking.

If there is a crash (and there will be), anyone who owes any amount of money on their properties, may owe more than the value of their properties.

This means they have no access to credit.

 

[joanmc]

This is what we have just lived through in our portfolio. here are our figures to digest.
total value 07/08: 3 mill, debt 2.3 mill
value 12/13: 2 mill, debt 2.3 mill
value now: 2.6 mill, debt still 2.3 mill.
Thankfully we were fully tenanted through that time but we were having serious business struggles and were x-coll up the wazoo!
We have lived the reason why structure is so important and I can't wait for values to improve enough to untangle this mess. God forbid we have another correction before then.
Also all our properties are in Caboolture/Morayfield area, so we seem to lag behind value increases in Brissie so hopefully still some movement upwards to come here.
Big drops can and do happen.

 

[pieman]

How can so many property investors be so bad at maths ?

When is 20% of 5m not 1m or is there something I've missed? Apparently houses in Australia are 80% over valued

 

[willair]

How can so many property investors be so bad at maths ?

Maybe a few only went to grade "10" at school before calculators and computers were around..

 

[sanj]

When is 20% of 5m not 1m or is there something I've missed? Apparently houses in Australia are 80% over valued

What you're describing is 400% overvalued not 80%

 

[pieman]

If a house is 80% over valued then it's "true value" is really 20%, for example if a 1m house is "truly valued", it's real value is 200k

 

[danwatto]

If a house is 80% over valued then it's "true value" is really 20%, for example if a 1m house is "truly valued", it's real value is 200k

That would put my $1.1m IP at 26% rental yield pretty much an impossible scenario.

Hard to believe a crash is imminent when they lump all the markets together as one big discussion. Many areas it's still cheaper to own than to rent, although I acknowledge there are some specific areas of Sydney and Melbourne with extremely low yields.

Sydney/Melbourne may flatten out and lose some of the gains they've had, but people who purchased before the boom will still be well ahead.

Other states - have many suburbs that have hardly grown in years. In those cases they haven't gone up enough to come down yet and they are still yielding highly.

 

[boeman]

If a house is 80% over valued then it's "true value" is really 20%, for example if a 1m house is "truly valued", it's real value is 200k

$1m house is 80% overvalued means the true value is somewhere around $555k.

$555k with an 80% increase (x1.8) = $1m.

Or at least I think that is where this is supposed to be going.

 

[truong]

Indeed percentages can be very confusing.

- When people talk about a 20% drop in price it means that the new price is 20% lower than the old one e.g a 1000K property drops to 800K (1000 x 0.8 = 800). Similarly a 20% rise means 1000 x 1.2 = 1200.

- But when people talk about a property being 20% overvalued, it means that the current price is 1.2 times the "real value", thus the real value of a 1000K property is 833K (1000 / 1,2 = 833).

- So paradoxically if a 20% overvalued property drops by 20% it hasn't reached its real value at all. New price is 800K while real value is 833K. It's now undervalued by 4% (800 / 833 = 0.96).

- That 20% overvalued property needs to drop by 17% to reach its real value (1000 x 0.833 = 833).

- Now say a property drops by 20% then rises back by 20%, one would think it has gone back to its original price... not! (1000 x 0.8 x 1.2 = 960). Similarly a property that has risen by 20% then dropped 20% would be worth 1000 x 1.2 x 0.8 = 960, the same!

- A property that drops 10% then another 10% has actually dropped only 19% (1000 x 0.9 x 0.9 = 810)

Now going back to properties being overvalued by 80%. A 1000K property's real value would be 555K (1000 / 1.8 = 555). i.e. almost half. If it drops to that level then the yield would be almost double. An investor stampede would ensue that would lift prices again, but to come back to its original price it needs to rise by... 80%. No trap this time, I got you! (555 x 1.8 = 1000)

Edit: Sorry, Boeman, you beat me by several minutes.