House prices rise in 2010, unless you're Keen

[forumite]

I'd be a lot happier if our dollar was around 75cents, China growth wasn't over 4%

We cannot view economic growth in developing countries in the same context as developed countries.

Quoting from a 13 Jul 2009 article: http://search.japantimes.co.jp/cgi-bin/nb20090713d1.html

"But given China's current socioeconomic structure, single-digit growth is no longer bearable because a country with a 1.3 billion population needs to grow at a rate of at least 10 percent to create enough jobs to absorb new entrants to the workforce, Yuan said. Anything slower than 10 percent is sure to create massive unemployment, while 7 percent to 8 percent would be "tantamount to zero growth," causing more joblessness and deflation, he said."

Quoting from a Jan 2009 paper: http://www.foreignpolicydigest.org/January-2009/Archive/chinas-slow-growth-challenge.html

"China hopes that its stimulus package will boost growth rates to 8 percent (the point at which the country can maintain sufficient employment for its population), but reports by the World Bank and World Economic Forum suggest that this may be unlikely."

A growth of less than 4% for China will spell disaster for Australia's economy as this will mean a drastic plummet of resources export to China.

 

[Wibbly Pig]

What stage do most people think we are in the cycle right now?

 

[Propertunity]

What stage do most people think we are in the cycle right now?

About 8:30 - 9:00 o'clock.

 

[Wibbly Pig]

About 8:30 - 9:00 o'clock.

Hmmmm. Rising interest rate cycle. Very fragile global economy in tentative recovery mode. Withdrawal of artificial government stimulus. Not sure we are at 8.30-9.00 on your chart. Maybe 12-1pm. Next 6-18 months will be very interesting. Not saying there will be massive drops, but perhaps a plateauing in prices or slight dip?

 

[Propertunity]

Hmmmm. Rising interest rates? Fragile Global Economy in tentative recovery mode? Withdrawal of artificial government stimulus? Next 6-18 months will be very interesting. Not saying there will be massive drops, but perhaps a plateauing in prices or slight dip?

I heard all that stuff all the way through the GFC and what did we get? A property boom in Sydney & Melbourne is what!

I don't know about the next 6-18 months...it does not interest me really. I take a longer term view of 7 - 10 years. There will be some plateaus and some dips along the way I'm sure. What I don't know (and neither do other so-called experts) is when these will occur.

 

[hobo-jo]

What stage do most people think we are in the cycle right now?

Definitely denial, but not sure the drop will look as significant as the one in that chart

 

[Wibbly Pig]

Definitely denial, but not sure the drop will look as significant as the one in that chart

Although it is impossible to really know, my gut feeling is we are currently in the denial stage also. Just look around us - most of the Western world such as the US and most of Europe are no doubt currently in the fear and capitulation stage and have been so for the last 12-18 months. In hindsight, I think most people now acknowledge these countries were definitely in a property bubble that is now deflating. The world is a global economy and although Australia has been relatively unscathed during the GFC mainly due to China's seemingly strong economy (and I emphasize seemingly), as Forumite pointed out, there only needs to be a small hiccup in China's economy/growth for there to be major repercussions on Australia's economy and potentially house prices.

Most people in Australia believe we are different to the rest of the world (hence my ponderings that we are currently in the denial phase) and maybe we are just lagging the downturn by 12-24 months due to the fact we were in a strong economic position heading into the GFC (many years of budget surpluses prior to GFC due to resource boom) and we had a stimulus package that was deployed much earlier in our economic downturn cycle than the rest of the world. We did have up to a 20% fall in property prices (in Melbourne at least) during 2008 which bottomed around Dec 2008 then prices took off in 2009. I wonder whether 2009 was in fact the bear market rally phase on the graph and due to the extra stimulus, the peak in 2009 actually surpassed the previous peak in 2007. As many who trade shares and follow charts would know, a 'double top' pattern often is a precursor to subsequent significant falls.

I have been interested to learn more about the current state of the U.S. property market and there is no doubt it is currently a bit of a blood bath over there. I have been particularly interested in the general sentiment leading up to the housing market collapse and scarily there are some similarities to what is being currently professed in our mainstream media. At the top of their market, there was widespread belief that house prices never go down as there was a severe housing shortage, population and immigration continued to increase and many foreign buyers would enter the market at any sign of weakness to support prices. (Sound familiar??!!) So at the peak, NO one saw what was around the corner.

Nonetheless, I agree with Propertunity that as long as you don't over commit and you can service your loans comfortably, you should be relatively safe if you plan to hold property over at least a 7-10 year time period even if a significant downturn is just around the corner. Especially if it is for a PPOR as everyone needs somewhere to live!

Anyway just food for thought....

 

[JulieW]

Latest prognostications:

http://www.theage.com.au/business/housing-tipped-to-rise-5-x2026-20091225-lexo.html

Steve Keen, associate professor of finance and economics at the University of Western Sydney, said the combination of rates and grants had already led to a housing boom this year.

''The fact that rates are rising as we enter 2010, combined with the ending of the boost and the winding back of government stimulus packages, means that rising interest rates are likely to end the [housing] bubble that began in 2009,'' he said.

and

The Housing Industry Association's chief economist, Harley Dale, predicts 20 to 25 per cent growth in new housing stock through to mid 2011. He also supports predictions of 5 to 6 per cent growth in established housing next year.

I saw another article in the week that said in the sharemarket last year, the consensus predictions returned an 80 percent success rate. Presumably the consensus in RE applies too, so if true I'd expect an 80 percent chance that RE will continue to rise, and a 20 percent chance of just sideways.

 

[BV]

as Forumite pointed out, there only needs to be a small hiccup in China's economy/growth for there to be major repercussions on Australia's economy and potentially house prices.....

If the Oz economy got any worse interest rates would have got even lower and this means increased affordability and increasing property prices

 

[Wibbly Pig]

If the Oz economy got any worse interest rates would have got even lower and this means increased affordability and increasing property prices

If the economy got any worse resulting in a significant increase in unemployment, no matter how low interest rates are (even near 0% like in the U.S.) there would be an increase in loan default rates and resultant pressure on house prices. The real X factor for the property market is the unemployment rate and the government and RBA know it. There is no benefit in having a loan with ultralow interest repayments if you don't have a job to be able to service it.

 

[weg]

If the economy got any worse resulting in a significant increase in unemployment, no matter how low interest rates are (even near 0% like in the U.S.) there would be an increase in loan default rates and resultant pressure on house prices. The real X factor for the property market is the unemployment rate and the government and RBA know it. There is no benefit in having a loan with ultralow interest repayments if you don't have a job to be able to service it.

You originally stated a small hiccup in China's economy/growth. So are you now describing the effects of a small or big hiccup?

Things would have too get much worse (as opposed to 'any' worse) than they have been to get to this situation.

Not that I'm say it's your prediction but even Keen is much more conservative with his views now.

 

[Wibbly Pig]

You originally stated a small hiccup in China's economy/growth. So are you now describing the effects of a small or big hiccup?

.

Even a small hiccup in China's economy/growth may have significant impact on our economy and unemployment rates. I agree, at present all looks quite rosy with unemployment levels seemingly near or past their peaks and much lower than originally predicted 12 months ago. The property market in 2009 has pretty much already factored this in hence the rapid 20%+ rise (at least in Melbourne) back to pre GFC levels. I hold geared investment properties much like many other posters on this forum as I think property is an excellent long term investment class. I am just intrigued about what happened to the property markets in the rest of the Western world and am looking for some clues whether something similar could happen here and if there are any lessons to be learnt. (See my other post "Is Australia Really That Different?).

It is important to be a little bit wary with China's stated growth figures as although it all looks strong and sustainable on the outside, you never quite know the real story. When you do, it is often too late!

I guess all I am saying is with the amazing recent run we have had in property prices in 2009 against the worldwide trend, I feel there is more downside risk than upside risk at this point in time.

Even Jan Somers herself says on page 102 of her 'More Wealth from Residential Property' book 'Now I'm not one for picking exactly the right time to invest in property, but there are a few months at the peak of any cycle when it may be best to steer clear because of the frenzied buying spree'.

 

[markpatric]

Keens gone from predicting of 40% drop in property prices to now predicting a 5% drop .

Well 5% drops happen periodically in the property market so he may well get it right this time.

We all know property doesn't go up 15% every year .

WRONG, it will actually drop 40% THIS time!.

 

[BV]

If the economy got any worse resulting in a significant increase in unemployment, no matter how low interest rates are (even near 0% like in the U.S.) there would be an increase in loan default rates and resultant pressure on house prices.

There could be some pressure on house prices but don't bank on it because there is no oversupply.

Also, repossessions used to take up to 12 months a year ago when interest rates where 9%.

Loan defaults could take even longer today because with low interest rates
our repayments are the same much as paying rent and people also have savings,
or they can get cash advaces through their super due to hardship, borrow money from friends and relatives etc.

 

[Hooray]

If the economy got any worse resulting in a significant increase in unemployment, no matter how low interest rates are (even near 0% like in the U.S.)

You know nothing about US mortgages if you really think you can get a 0% mortgage in the US. You DO realise the standard US mortgage is a 30 year fixed rate, currently around 5% depending on your FICO score?

If you don't know that, what's the value of the rest of your opinion?

 

[weg]

WRONG, it will actually drop 40% THIS time!.

You mean much like the US but without their many problems .

Can you give specifics on why you think this will happen, given we are in a very different position.

Some facts to back up your position would be helpful.

 

[Wibbly Pig]

You know nothing about US mortgages if you really think you can get a 0% mortgage in the US. You DO realise the standard US mortgage is a 30 year fixed rate, currently around 5% depending on your FICO score?

If you don't know that, what's the value of the rest of your opinion?

I don't think I made any mention of US mortgage rates at 0%. I was referring to current official US interest rates at 0.25% (compared to a current official Australian interest rate of 3.75%). Refer to http://www.fxstreet.com/fundamental/interest-rates-table/. In any case, the actual figure is a moot point and the main point is that despite a prolonged period of very low official interest rates put in place to stimulate their economy and support property prices, house prices in the U.S. have continued to fall.

 

[BV]

despite a prolonged period of very low official interest rates put in place to stimulate their economy and support property prices, house prices in the U.S. have continued to fall.

In some areas and mostly due to oversupply and due to nonrecourse loans
where a person can simply hand the house keys back and not lose anything other than the house.

Different countries, different markets, different products, you can't compare them

 

[markpatric]

In some areas and mostly due to oversupply and due to nonrecourse loans
where a person can simply hand the house keys back and not lose anything other than the house.

Different countries, different markets, different products, you can't compare them

Not lose anything except, all your money, a place to live and the ability to obtain one cent of credit for ten years.
In Australia you go bankrupt, same thing exactly.

 

[markpatric]

You mean much like the US but without their many problems .

Can you give specifics on why you think this will happen, given we are in a very different position.

Some facts to back up your position would be helpful.

Law of averages, what goes around comes around call it what you like but there are too many investors leveraging thier way to oblivion.
The cost of living in australia is spiralling out of control and we all know it is going to get much worse.
A high % of home owners are banking on another boom and actually praying for inflation to lessen thier debt.
A high % of Aussies are very well off on paper due to the past ten years of unprecendented growth in property values.