Discussion in 'Property Market Economics' started by TJamesX, 27th May, 2015.
Not for long...if I have my way....
I go to the City a few times a year for various things.
But little things spoil you; just having to wait at the lights for 3 or 4 sets of lights to make a right hand turn etc...does your head in and make you scream to get out...can't wait to get back home.
Our township is directly South of the CBD. I look directly North at the city lights and the MCG lights etc across the Bay. In a straight line it is about 60km's from memory.
I can be at the MCG in an hour.
We went from our place to the Werribee Zoo one Sunday morning a few months ago; 1 hour 15 mins door to door. Not a single traffic light.
But; to do the Mon-Fri 9-5 office commute; god knows how long that would take - probably 90 mins as you say. I never travel to town or back during those crazy hours.
If I owned my own island and could issue my own currency - probably not too worried about what's going on with the price of anything...
My view on pricing and markets of pretty much anything
1) markets fundamentally aren't efficient and can become distorted in the short to medium term
2) economic fundamentals drive the long term market price - psychology drives the medium to short term.
3) prices are set by what people are willing to pay (and the willing part is led by psychology)
Markets also have a tendency to trade to a position where at some point there are a number of factors which mean the probability of pricing going much higher (or lower) become outweighed by the other and creates a floor or cap in pricing direction... and I think Aus real estate is at that point
assuming the market can be grouped into three views;
1) the last 30-50 years in price performance provides a very strong trend and indicator for how prices will perform going forward; or
2) the key fundamentals that drove that growth over the last 50 years no longer hold true and the market will shift to a different pricing mechanism (ie flat real for 20 years) or
3) there are new and different fundamentals (ie rise of Asia) that will drive price growth going forward
I'd be 80% camp 2 and 20% camp 3... so fundamentally bearish on real price direction
Australian real estate? Or Sydney?
While Sydney is at its peak, there are plenty of places at the bottom of the cycle.
2015 for Australian weighted average, Sydney and Melb
Somewhere over the last couple of years for other cities
IMO real prices won't reach these respective peaks for 20 years for the weighted average - different cities may have slightly different timing
Can you summarise what these keys fundamentals will be ?
1) difficult to see Aus avoid a recession (first in 20+ years). People are underestimating how much oil & gas and mining saved Australia in 2009-10
2) population growth, immigration levels will have to drop - unemployment now in a long term trend upwards and continues... overcapacity in the economy
3) balance sheet capacity of household balance sheets has maxed out
4) Govt rhetoric and politics means that further deficits will not be recieved well or supported.... which creates a self reinforcing cycle in an economy when it slows
1) tax, increasing liklihood that tax treatment of property will change to the negative (whether through neg gearing or land tax) - unlikely that it can get more favourable
2) household income, the rise of the two income household has been a phenomenon since post war that will not be repeated over the next 30 + years. Working mothers now go back to work as soon as possible to manage family budget - hence stress in childcare.... I think we are maxed out here
3) interest rates and debt cycle, 30 years of year on year decreasing cost of servicing debt aligned directly with increasing ability and propensity to take on more debt (which manifests directly into house purchase price). IMO much higher liklihood that cash rates return to 5-6% over the next 10-15 years rather than head to zero and stay there over that time... this is the single biggest factor.
Whilst not all of these will play out I think for each of these factors, the probability and risk is to the negative for house prices... which in effect is the turning of a big tide. The one balancing impact is the potential rise of China on our population and economy - but I think this will be outweighed by the above
I'm not sure why you're mentioning Short Term issues when you've made a Long Term prediction
Re 2) Should this be in the L/T list below ? If so, then your comment on unemployment being in a long term upward trend is interesting. You will be aware that the number of jobs is increasing - however, the reason the unemployment rate is increasing is because there are more people (who need somewhere to live) arriving in the country. Most economists feel the unemp rate will peak below 7% in 2016 before jobs growth catches up with popln increase. They also feel that the economy is in the early stages of acceleration towards trend growth. Do you feel otherwise ?
All 3 levels of govt benefit from high land values (Rate, Land Tax, Stamp Duty & CGT). 70% of the population (home owners & landlords) benefit from high prices. What changes do you expect ? and how popular do you expect them to be ?
The rise of disposable income has been around 6%pa for the last decade (wages increase at 4% and inflation at 3%). Admittedly, wages have trended lower since GFC, but they are still above inflation, and are likely to return to trend. This continued increase in disposable income is likely to lead to a corresponding l/t increase in house prices.
So you think IRs will return to a little under their long term average of 7%, but property won't return to it's long term doubling every 10 yrs ?
The reason the cash rate will be increased is because the economy (& wages) are doing well. Do you think they will be raised while wages aren't rising strongly ?
You haven't addressed the ABS forecast of an extra 10M people in Oz by 2035. Where do you expect these extra people to want to live ? What effect do you think this will this have on existing house prices ?
From a global POV, house prices are currently at 2000 levels because of exchange rates. Do you think this may affect immigration ?
[So you think IRs will return to a little under their long term average of 7%, but property won't return to it's long term doubling every 10 yrs ?]
well at least in my neck of the woods in Brisbane (Wakerley/Wynnum/Manly West/lota) prices have gone up but sales in the past year of 10 year old+ properties built 2005 and before have not doubled in price, more like 40-50%.
Maybe that doubling concept is applicable to Syd/Melbs.
I do think there are longer term limits on house prices and how far they can move above wage growth. If you believe the stories about low productivity growth capping wage growth, i think house prices are a natural extension.
The doubling effect is a phenomenon supported only by an expansionary credit environment. Only now that APRA has moved the goalposts are people coming to understand that the supply and demand for credit is the driver of prices, not the supply and demand of property.
Let me take you back to the late 80's...
1. First came deregluation, allowing more banks to lendin Australia , and allowing all of them to lend more than they were previously allowed to lend.
2. Then came a massive upswing in securitisation, allowing banks to raise the funds to lend more ( see above) which suited them very nicely thank you kindly, as Point 1 now made it legal for them to hold far far far less capital on their balance sheets for every dollar lent out.
And so it began...
Then came a massive increase in competition as a result of points 1 and 2 . Think credit unions, building societies, international banks like ING, Citi, HSBC, Rabo. Think non bank lenders such as Wizard, Aussie "we'll save you", RAMS, etc...
Then came falling rates as a result of points 1,2 and 3
Then came the real game changer - LMI. Borrowing capacity EXPLODED overnight because a 50K deposit got you 500K at 90% LVR when it only got you 250K the day before at an 80% LVR. A few short years later when 95% LVR's became a free for all, 50K got you $1Million capacity.
All of this corresponded with a massive increase in double income households.
Connect the dots and it's plain to see. The explosion in house prices corresponds precisely with the explosion in credit availability . Not just here, but worldwide.
The expansionary credit environment has now run its course. It actually ran it's course @ 7-8 years ago in the rest of the world, but Australia was insulated by highly regulated lending and by much higher interest rates, which allowed one final hurrah.... The last frontier available to banks- big rate cuts passed on through banks servicing calculators created one final credit boom in Australia - except this time it didnt take the nation with it. It only took Sydney with it and some parts of Melbourne with it. Now that final frontier has been targeted by APRA.
End result... we will see a return to more moderate levels of growth across the market. There wont likely be any big collapse unless unemployment spikes aggressively and rates increase at the same time, and there will of course be exceptions because there is always a small percentage of the population with sufficient resources to avoid the broader constraints APRA is now imposing - but it's foolish to believe that the credit explosiveness of the past 25 + years can be replicated in the next 25 years.
So we're half way through 2015 now, and I'm not seeing any sign of this boom ending, at least not in Sydney. Auction clearance rates still above 80%, housing finance rising, vacancy rates below 2%, and Sydney has less stock on the market than Melbourne, Brisbane, Perth or Adelaide.
Supply in Sydney is incredibly tight. Tightest in recorded history actually (well, at least as far back as the SQM data goes, which is to 2008)...
Yes the APRA effect will take several months
1. pre existing loan approvals aren't affected. Those loans will be rolling through to settlement now and in coming weeks and months.
2. not all investors are affected by the APRA changes...
But in coming months you will see the APRA effect take root. One side effect may be that Sydney starts to slow, and investors will looks to cheaper cities such as Adelaide or Perth or Brisbane , where loan sizes will be smaller and the APRA effect on their capacity to borrow will be far less...
It will likely be 6 months at least before any real evidence of Sydney slowing down will be seen - but it will come. Slowly. Consistently. If it doesnt, APRA will simply take further steps. The result will be the same, either way.
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