Declining property prices in 2010...

Hi

Was wondering about this article...

http://www.smh.com.au/business/property-prices-on-way-down-warns-bank-20091204-kays.html

1 - There is a general perception that many FHBs have become highly geared in their rush to get into the property market during the low interest months of late 2009

2 - Credit has been restricted by the banks and will likely continue to be so for 2010

3 - Rising interest rates put pressure on FHBs, wannabe investors and those who are too highly leveraged, leading to more forced sales ni 2010 and maybe even 2011, although lowering unemployment may mitigate this factor to an extent

4 - Rising interest rates mean another rush to get into the market before it becomes too expensive to buy, leading to a surge in prices in recent months, which could lead to a correction

What is the analytical thought / gut feeling on this? Posted this on another forum, but thought I get a wider feedback.

Regards

Daniel Lee
 
Daniel

That article is over one month old and thats a long time in footy.

The age carried an article yesterday which quoted a bank stating 2010 property sector will be hot hot hot!

As always - spend what you can afford. There is never a right time or a wrong time!
 
Daniel

5% is not much so if demand drops it's possible to see a correction in median prices.

I wouldn't even be surprised to see 20% falls in some price brackets because in some suburbs agents and vendors are now using the property shortage as a reason to put up their asking prices.

As an example, properties which in the beginning of 2009 would have listed for $650K are now listing for $800K, those previously selling for $800 are now at over a million and high end properties would have gone back up to their asking prices of a couple of years ago.

IMO it's very important for people to be doing their DD and to be patient because if they can't wait for the asking prices to adjust back to reality they'll be stuck with an expensive purchase.
 
5%!!!

the doomsdayers wil be saying that's a leveraged 5% - so in actual fact it's 25% of your 20% deposit.

wow - run for the hills.
 
Hi

Was wondering about this article...

http://www.smh.com.au/business/property-prices-on-way-down-warns-bank-20091204-kays.html

1 - There is a general perception that many FHBs have become highly geared in their rush to get into the property market during the low interest months of late 2009

2 - Credit has been restricted by the banks and will likely continue to be so for 2010

3 - Rising interest rates put pressure on FHBs, wannabe investors and those who are too highly leveraged, leading to more forced sales ni 2010 and maybe even 2011, although lowering unemployment may mitigate this factor to an extent

4 - Rising interest rates mean another rush to get into the market before it becomes too expensive to buy, leading to a surge in prices in recent months, which could lead to a correction

What is the analytical thought / gut feeling on this? Posted this on another forum, but thought I get a wider feedback.

Regards

Daniel Lee

3 out of 4 of these assumptions are reasonable. The problem is that the first assumption, FHBs driving the property market in late 2009, is not accurate in the broad sense.

FHB drive the outer suburbs & satellite for most of the year, but the areas within 30km of the CBD in most capital cities were not driven by the grant. Let's face it, $7k on a $600k property is almost insignificant.

Lenders tightened their lending criteria early in 2009. Those who bought in the second half of the year already had to meet the higher lending standards. If the credit conditions continue as they are, nothing really changes for these people.

The outer areas might be in for a bumpy 2010, but these areas are always the first ones to loose value for the reasons suggested. There is also an abundance of land available to build in many outer suburbs. The bulk of suburban property will either hold its value or continue to rise due to a lack of supply and continuing demand.
 
3 out of 4 of these assumptions are reasonable. The problem is that the first assumption, FHBs driving the property market in late 2009, is not accurate in the broad sense.

FHB drive the outer suburbs & satellite for most of the year, but the areas within 30km of the CBD in most capital cities were not driven by the grant. Let's face it, $7k on a $600k property is almost insignificant.

Lenders tightened their lending criteria early in 2009. Those who bought in the second half of the year already had to meet the higher lending standards. If the credit conditions continue as they are, nothing really changes for these people.

The outer areas might be in for a bumpy 2010, but these areas are always the first ones to loose value for the reasons suggested. There is also an abundance of land available to build in many outer suburbs. The bulk of suburban property will either hold its value or continue to rise due to a lack of supply and continuing demand.


Couldn't agree more! I was thinking this as I was reading through the other posts and then... well you said it!

Markets within markets.....FHBs are only part of 'the market' and therefore only affect that part which PT_Bear has mentioned. Even then, a few of the outer surburban areas are beyond reach of the vast majority of FHBs as they are well above the 500K mark. ;)

Point 3 - another interesting take on the forced sale issue is..... every sale needs a buyer. So, supply might rise a little, but if investors feel confidence and build a little demand, then perhaps it won't matter. Hard to tell ;)
 
Markets within markets.....FHBs are only part of 'the market' and therefore only affect that part which PT_Bear has mentioned. Even then, a few of the outer surburban areas are beyond reach of the vast majority of FHBs as they are well above the 500K mark. ;)

y'know some people still don't believe this.

i had to explain this to someone not two days ago.

at the entire market place, more than one good is sold.

some sell clothes, some sell fruit, some sell books, some sell cooked food.

if someone is selling apples for $4 a kilo, and someone else is selling for $3 a kilo and no one buys $4 apples - then the market price comes down to $3.

if someone selling oranges for $3 notices people buying oranges for $4 two stalls away, he'll raise his prices because the market is clearly willing to pay $4.

if thos apples and oranges are used in the cooked food available at the market, then market price of apples and oranges will affect the cooked food price - all at the same market place.

that's a SUB market inside A market inside THE market.

they got it in the end.
 
I don't think that it's quite as simple as that.

Firstly an apple is consumable, rather than durable, and secondly most people sell their home in order to buy a new one.

Do you get property chains in Australia? In the UK it ends up that A is buying B's house, who in turn is buying C's, and so forth.

Let's say that A is a FHB, and B's house is on the market for $400K. However, due to B's asking price being optimistic, or the bank not being willing to lend so much, A ends up paying $300K.

Now B had originally got a budget of $600K for C's house, but with a $100K shortfall he can only afford $500K, and so the fall propagates up the chain.

Conversely, if there's an easy supply of credit and a large FHB grant, then A might pay $500K for B's house, who then has another $100K to spend on C's house, and hence rises bubble up.

So whilst there are multiple markets, people tend to move between them. And that's how one can have an impact on another.
 
The bulk of suburban property will either hold its value or continue to rise due to a lack of supply and continuing demand.

I don't believe that all suburban properties will hold their value.
Prices in many suburbs are already unaffordable due to the price increases in 2009 and with interest rates going up the situation can only get worse.

I think affordability is what will drive prices in 2010 and beyond.
Interest rates and our ability to borrow are key factors in determining property prices.

None doubts that interest rates will go up.
If people are unable to get a loan, prices will stall and will stay where they are
or will eventually come down to a level buyers can afford.
If prices don't come down it will be because there are still buyers out there
or because the vendors are not willing to sell at lower prices.
 
I don't think that it's quite as simple as that.

Firstly an apple is consumable, rather than durable, and secondly most people sell their home in order to buy a new one.

Do you get property chains in Australia? In the UK it ends up that A is buying B's house, who in turn is buying C's, and so forth.

Let's say that A is a FHB, and B's house is on the market for $400K. However, due to B's asking price being optimistic, or the bank not being willing to lend so much, A ends up paying $300K.

Now B had originally got a budget of $600K for C's house, but with a $100K shortfall he can only afford $500K, and so the fall propagates up the chain.

Conversely, if there's an easy supply of credit and a large FHB grant, then A might pay $500K for B's house, who then has another $100K to spend on C's house, and hence rises bubble up.

So whilst there are multiple markets, people tend to move between them. And that's how one can have an impact on another.

i do understand what you're saying - my point wasn't about durable/consumabes. it was about prices moving to other parts of the economy.

if no one can afford to buy to upgrade - ala 2005 here in WA - then they renovate what they've got. that's a SUB market inside A market. they improve their market value but they have only spent $100k or so to get what they need, instead of adding to the glut by selling and then buying into the glut for $500k.

if no one can afford to buy - then B's house won't get bought, but A won't stop buying - they'll just go to another suburb - or another market stall.

the micro argument always falls over when compared to the meso and macro argument combined.
 
1. The FHB "Bubble" is a miscomprehension and is either a result of a lack of understanding by the journalist on how banks operate or a grab at sensationalistic headlines or statements.

Banks have been assessing FHB's and anyone requiring a loan on interest rates at least 2% higher than they were 6 months ago.

This arguement should be raised when interest rates are at 8% but until then it is just not an issue.

The only issue will be the odd Gen Y on a Current Affair who has bitten off more than he can chew after purchasing a new car, a new house and still expects to eat out every other night.

2. Credit has been restricted severely to the 1% of us who own more than 5 properties and to low or no doc borrowers. There is more paperwork and detail but there is plenty of movement in the market as the banks are still willing to say yes to strong (standard) incomes with plenty of back-up. Mum and dad investors are ready to pounce and I know plenty of FHB's that didn't take the bait.

3. Rising Interest rates will put pressure on a minority not the majority. Remember, most Australians did not even blink at the GFC and "almost" recession. I do believe though that Businesses have suffered and the GFC has hit those WITH money and Investments alot harder than the middle man or employee. Those in small business seem very cautious and a little spooked. With tighter credit on development, not to mention Council hoops to jump, major development seems stagnant. However, this will only increase the Supply Versus Demand argument and may counterbalance Interest Rate Rises as rent is bound to increase.

4. Interest Rates are LOW atm. Prices have fallen in most areas. Interest Rates have still a way to go, so the rush has not even started as far as I'm concerned.

Merely my opinion, as always. It's nice to have one.;)

Regards JO
 
If you think the low end is going to fall you are in for a surprise.

Why? ....because as rates go up the low end inflated as it seems will be more in demand. Besides the low end went up only 30k-70k in most instances on property worth 250-400k.

The lack of housing supply, particular NSW is going to keep a floor on the prices.

The high end is tricky as Josko has pointed out have banks tightened their lending criteria.

Increasingly you will see people rent for most of their lives as housing becomes increasingly unaffordable. It can be made affordable but there is very little leadership from the states or feds on this issue.

Watch the regionals prosper as people move to these areas to avoid the high cost of housing in the major cities.
 
1. The FHB "Bubble" is a miscomprehension and is either a result of a lack of understanding by the journalist on how banks operate or a grab at sensationalistic headlines or statements.

Misconception? Lack of understanding?

Johnny has a net income of $5100 per month. He is eligible for the FHOG. For the sake of this example we are currently in July 2009, so the FHOG is $14k (believe now it has been scaled back to the original $7k). We are wanting to see the difference that the extra $7k makes on borrowing ability. Let's take away half the grant ($7k) and say that's for legals/stamp duty and we'll cap the LMI on top of a 95% lend.

Using this calculator his serviceability says he can borrow $440k max (7% interest, 30 years, no other commitments besides default living expenses):
http://www.aussie.com.au/home-loan/calculators/borrowing-calculator.htm

So to get Johnny into a house he simply needs a 5% deposit. Let's say he has $15k in saving. That's enough deposit for a $300k house. FANTASTIC. That's also his limit, because it's a max 95% lend. Although he can service a higher amount of debt, he doesn't have the deposit for it.

But oh we forgot. Johnny get's an extra $7k from the government, the FHOG has been boosted to $14k. So remembering that $7k was used for legals/stamp duty he has another $7k to add to his deposit. So instead of a $15k deposit he has a $22k deposit. How much do you think he can spend on a house now? $440k, his deposit $22k leaves a loan of $418k which is still under the limit imposed by serviceability.

So that's a difference of $140k (in purchasing ability) that an extra $7k can make on a 95% lend.

Why? ....because as rates go up the low end inflated as it seems will be more in demand. Besides the low end went up only 30k-70k in most instances on property worth 250-400k.
Over what time frame in what city? My property in that range went up $100k between 2006 and 2009.
 
Misconception? Lack of understanding?

Johnny has a net income of $5100 per month. He is eligible for the FHOG. For the sake of this example we are currently in July 2009, so the FHOG is $14k (believe now it has been scaled back to the original $7k). We are wanting to see the difference that the extra $7k makes on borrowing ability. Let's take away half the grant ($7k) and say that's for legals/stamp duty and we'll cap the LMI on top of a 95% lend.

Using this calculator his serviceability says he can borrow $440k max (7% interest, 30 years, no other commitments besides default living expenses):
http://www.aussie.com.au/home-loan/calculators/borrowing-calculator.htm

So to get Johnny into a house he simply needs a 5% deposit. Let's say he has $15k in saving. That's enough deposit for a $300k house. FANTASTIC. That's also his limit, because it's a max 95% lend. Although he can service a higher amount of debt, he doesn't have the deposit for it.

But oh we forgot. Johnny get's an extra $7k from the government, the FHOG has been boosted to $14k. So remembering that $7k was used for legals/stamp duty he has another $7k to add to his deposit. So instead of a $15k deposit he has a $22k deposit. How much do you think he can spend on a house now? $440k, his deposit $22k leaves a loan of $418k which is still under the limit imposed by serviceability.

So that's a difference of $140k (in purchasing ability) that an extra $7k can make on a 95% lend.


Over what time frame in what city? My property in that range went up $100k between 2006 and 2009.

Hi hobo-jo

taking your calculations 1 step further,

July 09 $418000 loan @ 5.11% IO = $1780 PM off $5100 nett =$3320
($766PW) to live on.

+2% $418000 loan @ 7.11% IO = $2477 PM off $5100 nett =$2623
($605PW) to live on.

Plus possibilities of increasing income from wage increases or overtime or additional job or taking in a boarder or cutting expenses or a combination of these plus other avenues I haven't listed.

Yeah will be a real battle for him.

Cheers

Pete
 
taking your calculations 1 step further,

July 09 $418000 loan @ 5.11% IO = $1780 PM off $5100 nett =$3320
($766PW) to live on.

+2% $418000 loan @ 7.11% IO = $2477 PM off $5100 nett =$2623
($605PW) to live on.
Plus possibilities of increasing income from wage increases or overtime or additional job or taking in a boarder or cutting expenses or a combination of these plus other avenues I haven't listed.
Yeah will be a real battle for him.
Your figures are a little deceiving. How many FHBs do you think go interest only? But you're right even P&I repayments he should have plenty to live off. The point in this example was to show how the FHOG is inflating prices (causing the FHB bubble that Josko dismissed).

If Johnny hadn't purchased in July and had blown all money earned so still only had a $15k deposit, then he has $140k less purchasing power this year. Now not every situation is going to be to this extreme, but given that approximately half of all FHB purchases in 2009 were at an LVR of 90-95% then we have to conclude that the extra FHOG money was pushing up prices. Will they be sustained this year by investor purchasing? We will have to wait and see.
 
Your figures are a little deceiving. How many FHBs do you think go interest only? But you're right even P&I repayments he should have plenty to live off. The point in this example was to show how the FHOG is inflating prices (causing the FHB bubble that Josko dismissed).

If Johnny hadn't purchased in July and had blown all money earned so still only had a $15k deposit, then he has $140k less purchasing power this year. Now not every situation is going to be to this extreme, but given that approximately half of all FHB purchases in 2009 were at an LVR of 90-95% then we have to conclude that the extra FHOG money was pushing up prices. Will they be sustained this year by investor purchasing? We will have to wait and see.

Interest rates are forever going up and down along with purchasing power.

What would Johnnies purchasing power have been in August 2008 with interest rates of around 9%.

Cheers

Pete
 
Interest rates are forever going up and down along with purchasing power.
What would Johnnies purchasing power have been in August 2008 with interest rates of around 9%.
Well I don't recall variable rates being that high (from memory rates were obtainable around low 8s at their peak?), but even at 9% interest in the calculator he has borrowing power of $370k, but if he only had the $15k deposit then he was still limited by it (to $285k lend, $300k purchase). I'm not sure when the "double" FHOG started...

Obviously purchasing power is made up of serviceability (which is affected by interest rates) and LVR (which is affected by deposit). Historically low rates were already increasing purchasing power in 2009 and it was further boosted by the increased FHOG. This is what caused the FHB bubble in my opinion.

I guess we will see over the next year or two whether it is sustainable...
 
Do you get property chains in Australia? In the UK it ends up that A is buying B's house, who in turn is buying C's, and so forth.

We dont really have "chains" here as there is in the UK. I know a little about the property market in the UK as my hubbie is English and we love watching all the property focused shows on Foxtel (Sky).

When we bought our PPOR and the IP's he kept saying (as a negotiating tactic) "We're not in a chain" and most people bar RE agents look at you with a blank stare. You get more bargaining power here to say you have pre approval from the bank for a loan.

Once your offer has been accepted and you sign contracts, which you make a point of doing ASAP in case someone else wants that property, you usually only have about 14 days to pull out of the sale and can only do so if you have put in a "subject to finance and inspection" clause. After this time it is usually only about 4 to 6 weeks till the sale is finalised and if you dont have the money by then (either the bank is dragging its tail or your house isnt sold yet) you either pull out and loose your 10% deposit or you get bridging finance.

I personally have only ever heard of 1 instance where a buyer couldn't come up with the money and lost their deposit. A RE agent would probably know of alot more times when this happens though.

Anyway, back to the topic, I think Australians have a HUGE paradigm shift to make about what they will accept as a family home. Years ago almost no one would consider buying a flat to live in, only renters lived in flats, now posibly because of the influence of Asian migrants, flats and apartments seem to be acceptable alternatives to a first home.

The time of thinking that every child in a family has to have their own room and a family needs 2 living areas, an ensuite a double garage and a formal dining room are coming to an end. I personally think houses sizes being built will start to shrink to make them more affordable therefore not be a huge drop in house prices.

I mean, really, who needs a "theatre room". I've noticed the latest trend in project homes is a Childrens play room. I looked at one a few weeks ago that had 3 living areas. They had 4 sets of longe suites (3 inside and 1 outside, and 3 dining tables (1 inside and 2 outside). Its no wonder people cant afford to build. Try getting a project home with only 2 bedrooms, impossible, and 3 beds is very limited in choice.

I dont think there will be a huge drop in prices, just a shift on what consitutes the average home size.
 
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I think the effect of interest rate rises on the property market is often overstated. Its easy to forget that over 1/3rd of properties do not have any mortgage on them at all and in significant parts of the country a majority of properties are owned outright. There are also many more homes that are mortgaged at low LVR's and these households should be able to wear signficant rate rises without too much fuss. The higher geared borrowers are, of course, vulnerable, (and this includes most fhb) but this is only a relatively small section of the market.

In terms of availability of credit affecting the market, my own opinion is that the squeeze on residential lending has been quite minor in comparison to the squeeze on development funding. This will mean that any lack of demand resulting from tighter credit conditions will be met with a greater strain on supply, which should guard against the prices falling. With the housing shortage getting worse and worse I find it hard to see the property market not continuing to grow, barring a pretty major economic disaster. Just my two bobs.

Cameron Perry
Perry Financial Strategies
 
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