Is Australia Really That Different?

[Wibbly Pig]

Every major Western nation in the world has had a 20-40% correction in house prices yet Australia appears to continue to defy the trend with house prices rocketing in the last 6 months (at least in Melbourne). They have now caught up and are rapidly surpassing the boom prices seen in late 2007. I know there are numerous factors and theories why Australia appears to be the 'lucky' country with a major factor being the China effect resulting in 'decoupling' and insulation of Australia's economy from the rest of the world's economic woes. Nonetheless, it is hard to fathom the dramatic house price rises we have had of late and whether this is truly sustainable. Although it appears we have weathered the storm better than most, surely most Australians and the Australian economy are not in a better position than in 2007 before the GFC/Stock market crash. So where is all this money coming from to support the current market's record highs?

Most of it appears related to government 'stimulus', in particular record low interest rates, generous FHB grants, and relaxation of foreign investment rules allowing more overseas buyers into the market. Unlike in 2007, there appears to be no real strong economic foundations to the current boom.

This 'stimulus' effect I believe is likely to last for another 6-12 months as once significant buyer's momentum is generated such as is the case currently, it is like a steam train running at full speed (hopefully not out of control) and it will take quite a few interest rate hikes or economic shocks to slow it down. Human nature often follows a 'herd mentality' with the pendulum swinging 180 degrees to 12 months ago when there was a pervading fear of 'catching a dropping knife' to now an overwhelming fear of missing out (hence the competition and big prices).

The big question is what will the property market do when the stimulus wears off and when interest rates inevitably rise. Will the market drop 10-30% over a several year period or will it just stagnate for years and years at the level it finally peaks at until the real economy/wages catch up? (Probably the government's preferred outcome rather than a bust scenario). I could be entirely wrong, but I feel currently there is more downside risk than upside risk.

I would be most interested in everyone's thoughts and views and would appreciate any comments on my summation.

 

[mr_taco]

The market will not fall after the FHB grant is completely withdrawn . House prices will continue to rise , for a while anyway .
Our treasurer and housing minister announced that they expect investors to fill the gap, and the media is helping this self-fulfilling prophecy along just nicely .

Before it was first- home buyers buying out of fear of missing out before the boom , and now prices are being pushed up by a new wave of investors buying out of fear of missing out on the next boom .

And it' s working . Go you good thing !

 

[Wibbly Pig]

What about the 1 million dollar plus market?
Surely there will be less investors looking to buy at this level?

 

[mr_taco]

What about the 1 million dollar plus market?
Surely there will be less investors looking to buy at this level?

Wrong again . That is where the heat is right now . The one main area that is experiencing a turn around . The low -end has had it 's run . The top end is beginning to sell . This doesn 't benefit me as I only hold low -end properties .

 

[PreAu]

Market price moves according to supply/demand, so I always look at what is affacting the supply and demand on the market.
WP you are right some of the demand relates to the government "stimulus", while at the same time supply is slow.
Other demands I believe are coming from net capital input from overseas. They can come from many aspect in the economic activities: eg export incomes, capitals brought in by migrants, funds buying up OZ dollars.....etc. Untill those capital change its flowing directions, property supply in australia still way behide demands.
I don't know much about real estate market in other major western nations, but I still think that there will be serious undersupply of housing in Australian capital cities for a long time.

 

[Ausprop]

this resources boom is bigger than the last one - the economy will be at full capacity pretty soon

 

[Propertunity]

...yet Australia appears to continue to defy the trend with house prices rocketing in the last 6 months (at least in Melbourne).

I've got news for you: its happening in Sydney, Newcastle, Brisbane and a few other places around the country too.

They have now caught up and are rapidly surpassing the boom prices seen in late 2007.

In the case of Sydney the last boom was 2003. So here it has been 6 long years of waiting to see growth return.

it is hard to fathom the dramatic house price rises we have had of late and whether this is truly sustainable.

** sigh**

Although it appears we have weathered the storm better than most, surely most Australians and the Australian economy are not in a better position than in 2007 before the GFC/Stock market crash. So where is all this money coming from to support the current market's record highs?

Your kidding surely? Back in 2007 we (investors anyway) were paying 8% & 9% interest rates. For those of us who still have jobs (the vast majority) and with IRs now 5% something it means we are swimming in cash compared to 2 years ago

Most of it appears related to government 'stimulus',

So withdraw $3,500 of govt FHOB back on 30 Sept and what happened? The market continues upward. Withdraw another $3,500 on 31 Dec and all the planned govt stimulus to housing is gone - and what will happen? FHBs who are getting the stimlus are only 20% of the whole market.....and that 20% is getting $7K less

in particular record low interest rates,

Well that is the RBA, not the goverment

.... relaxation of foreign investment rules allowing more overseas buyers into the market.

Yes, this has been responsible for lots of foreigners buying high end property but this has slowed recently due to the high $AUD and the therefore non-favourable excange rate.

Unlike in 2007, there appears to be no real strong economic foundations to the current boom.

This was a Melbourne centric boom - none in Sydney or Perth in 2007

The big question is what will the property market do when the stimulus wears off and when interest rates inevitably rise.

My suspicion is that IRs will need to rise 2-3% before we see much of anything

Will the market drop 10-30% over a several year period or will it just stagnate for years and years at the level it finally peaks at until the real economy/wages catch up?

No, neither in my opinion.

I could be entirely wrong, but I feel currently there is more downside risk than upside risk.

You do what you feel comfortable with. I hold an opposite view of the market.

 

[Wibbly Pig]

I've got news for you: its happening in Sydney, Newcastle, Brisbane and a few other places around the country too.

I am not surprised as the stimulus effect should impact the whole of Australia.

Your kidding surely? Back in 2007 we (investors anyway) were paying 8% & 9% interest rates. For those of us who still have jobs (the vast majority) and with IRs now 5% something it means we are swimming in cash compared to 2 years ago

Not everyone is fortunate enough to own multiple properties, with many struggling to buy their first PPOR, let alone an investment property. Those who have made the jump to purchase their first PPOR in the last few months with interest rates at historical lows + government grants may run into trouble even with a small rate increase. An increase from 3% to 5% is proportionally much greater than say 7% to 9%. I guess the counter argument would be investors would step in to pick up the forced sales of these first home buyers who had not done their due diligence when purchasing....

So withdraw $3,500 of govt FHOB back on 30 Sept and what happened? The market continues upward. Withdraw another $3,500 on 31 Dec and all the planned govt stimulus to housing is gone - and what will happen? FHBs who are getting the stimlus are only 20% of the whole market.....and that 20% is getting $7K less

I think it is too early to tell what effect the so far gradual withdrawal of the FHOB grant has had on the market. It is likely to take at least 6-12 months before the effect wears off. I think a more likely scenario is the government overestimated the actual downturn to hit Australia (not hard to do given the severity of the downturn elsewhere globally) and the stimulus package was over the top for our scenario, hence the real estate market has now been 'overstimulated'. The risks are a hyperinflationary and potentially high interest rate environment down the track. Unlike the 1990s, where high interest rates were accompanied by significant increases in wages allowing loans to be serviced as usual, if the global economy remains weak or the Australian economy falters (ie. China's growth stalls for some unforeseeable reason) wage growth may not be be able to match interest rate increases, resulting in defaults and inevitable price falls....

Well that is the RBA, not the goverment

Sorry my mistake. You are correct!

My suspicion is that IRs will need to rise 2-3% before we see much of anything

This is quite possible in the next 12-18 months.

You do what you feel comfortable with. I hold an opposite view of the market.

I have no particularly strong opinion either way but am just raising some concerns of mine to see whether people think they are valid. History is on your side. For at least the last 50 years or so, Australian property has been a wonderful wealth creation vehicle as long as it has been held with a long term horizon.

 

[Propertunity]

IAn increase from 3% to 5% is proportionally much greater than say 7% to 9%.

Yes, you're correct. However, bear in mind that when lenders approve loans for borrowers, they use a rate 2% higher (the "assessment" rate) than the present one. So borrowers should be able to do a 2% increase OK.

I think a more likely scenario is the government overestimated the actual downturn to hit Australia (not hard to do given the severity of the downturn elsewhere globally) and the stimulus package was over the top for our scenario,

Yes, I agree. Hindsight is a beautiful thing

hence the real estate market has now been 'overstimulated'.

I think it was more the retail stimulus that got overdone.... and perhaps they should have directed the RE stimulus to new property to get construction underway (as NSW have now with 50% SD relief for new) rather than just up the price of existing housing.

 

[chilliaa]

Not everyone is fortunate enough to own multiple properties, with many struggling to buy their first PPOR, let alone an investment property.

Wibbly Pig,
this is exactly the type of comment that tends to differentiate the 'haves' from the have nots'.
I think the majority of people on this forum are actually 'average income earners' and yet they have managed to acquire a property portfolio of some degree.

The 'have nots' say yes but it was easier for them because property was much cheaper and then list a number of reasons why 'now is not the time to acquire property'.

As time goes by the 'have nots' run two real risks:
1) property DOES go up over the long term provided populations are increasing.
2) their remaining years of workable life decreases which makes it harder to acquire both their first property and then to 'trade upwards'.

I am not trying to denigrate you, just to emphasise the risks of having a negative frame of mind.

In the future property could well have a pull back in prices, but to what levels? They could have a future pull back to prices that are higher than they currently are, we just don't know.

 

[Shadow]

The big question is what will the property market do when the stimulus wears off and when interest rates inevitably rise.

It might do what it did between 2002 and 2007, during the last interest rate raising cycle. There was less stimulus back then too. Of course, these days population growth is a lot higher, and interest rates are starting from a lower point, so maybe the capital gain will be even stronger this time around.

 

[Wibbly Pig]

Wibbly Pig,


I am not trying to denigrate you, just to emphasise the risks of having a negative frame of mind.

In the future property could well have a pull back in prices, but to what levels? They could have a future pull back to prices that are higher than they currently are, we just don't know.

Hi Chilliaa,

Thanks for your reply. I do not think your comments are denigrating at all. I really value your opinion as I thought your posts in the 'What will interest rates peak at this time ? ' thread were very astute.

I am in the fortunate position of having a PPOR and investment properties and am actually thinking of upgrading PPOR.

I know fundamentally with property, there never is a bad time time to buy as long as you can service the loan comfortably and plan to hold it long term.

Maybe I am feeling a bit negative at the moment as every property I have been interested in of late (predominantly Auctions here in Melbourne) are regularly smashing their reserves (not quoted price) by 20%+.

 

[josko]

Australia's Credit Policy and Regulation Standards were supremely higher than that of the the USA.

If we had have allowed people that were borrowed up to the hilt in debt with absolutely no way to pay back by normal income means - to simply hand the keys back to the bank and walk away......well I am sure we would be similarly up to our necks in deep water.


Regards JO

 

[steveadl]

An increase from 3% to 5% is proportionally much greater than say 7% to 9%. I guess the counter argument would be investors would step in to pick up the forced sales of these first home buyers who had not done their due diligence when purchasing....

Hearing this a lot lately. Yes that's true but let's keep it in perspective. You can say "wow! If rates go from 3% to 5% that will be a 66% increase!" (instead of 29% rise of 7 to 9%) - sounds quite bad.

Or you could view it as both increases would hit your pocket the same $2k for every $100k borrowed. Much less dramatic when the actual $ figures are brought in.

You're also assuming all the people taking out mortgages at 5% can't afford 7% rates or higher. I wouldn't assume that. The market (and buyers) plugs along as usual when rates are higher, for all the reasons usually discussed in these sorts of conversations.

 

[josko]

Not to mention that back in Nov 2003, the cash Rate rose to 5% (6.8% Interest rate) and Interest rates were STILL perceived as relatively low.

Regards JO

 

[chilliaa]

Hi Chilliaa,


I am in the fortunate position of having a PPOR and investment properties and am actually thinking of upgrading PPOR.

Ah then its a completely different ball game. If you already have property then you are more than entitled to fret over 'value' because you already have skin in the game.

I'm in a similar boat, whilst i still believe in property as a long term wealth creation vehicle, i want to use any up coming boom to deleverage.
I plan to offload 2 of the 5 properties within the next 18 months (so long as prices increase). Any further sales would depend on the degree of price acceleration but i dont think i would sell more than 3 as by the 3rd sale i would be pretty much debt free (this includes draw downs used to finance my share investments over the last 18 months). Note also this doesnt include debt direct against the share portfolio (margin debt) and hence my desire to reduce debt, ive got debt everywhere.

To me this will represent a happy medium, if property prices continue to increase i still have skin in the game (however obviously my return is much lower as i have higher equity), and if property does go through i rough patch in the future i have sufficient equity to take advantage of any distressed sales.

My initial comments were directed towards those that have no property exposure at all.

 

[Graemsay]

Australian property is seriously unaffordable on virtually any metric that you care to name.

I'd expect it to fall back in value relative to earnings in the medium to long term. This could happen due to high inflation or a sharp collapse in prices, or even a soft landing where stagnant prices are gradually eroded by low inflation over a prolonged period.

Why do I think this is a likely outcome? Property prices are highly expensive, and rents are frequently cheaper than the interest payments on mortgages (even at current low rates). And I don't think that tenants could afford rents that would cover mortgage payments - if they could then they'd be buying in far bigger numbers.

In answer to Chiliaa's question to Wibbly Pig, I don't own any property. I'm currently in the UK, with a view of moving to Australia this time next year.

I haven't bought into the UK market because I didn't feel it offered good value, and expected prices to fall back. They have, kind of, and I expect them to fall further. So it's an investment decision.

 

[topcropper]

I'm currently in the UK, with a view of moving to Australia this time next year.

Is it possible that you've just answered why Australian property is so expensive with this one point you just made? You want to come here? Why?


See ya's.

 

[keithj]

Australian property is seriously unaffordable on virtually any metric that you care to name.

I'd agree if you stick to using simplistic income/median price ratios.

However if you look a bit deeper (as the RBA has done), you'll find that they are currently more affordable than ever. See the RBAs Observations on the Cost of Housing in Australia

I'd expect it to fall back in value relative to earnings in the medium to long term.

I'd agree with you if the market comprised solely of rational investors (such as yourself ?). However, we are fortunate enough to have a market full of irrational, emotional people who simply want a PPOR better than the Jones & have the capacity to pay for it.

Why do I think this is a likely outcome? Property prices are highly expensive, and rents are frequently cheaper than the interest payments on mortgages (even at current low rates).

Are you suggesting rents are to low ?

Or are you suggesting that after year 5 or 10 or 25 that renting is still cheaper than buying ? As you know rents rise at approx inflation, OTOH P&I repayments stay the same for the whole 25 years.

And I don't think that tenants could afford rents that would cover mortgage payments - if they could then they'd be buying in far bigger numbers.

There's plenty of reasons why people don't want to commit to buying a house.

 

[willair]

Australian property is seriously unaffordable on virtually any metric that you care to name.

I'd expect it to fall back in value relative to earnings in the medium to long term. This could happen due to high inflation or a sharp collapse in prices, or even a soft landing where stagnant prices are gradually eroded by low inflation over a prolonged period.

Why do I think this is a likely outcome? Property prices are highly expensive, and rents are frequently cheaper than the interest payments on mortgages (even at current low rates). And I don't think that tenants could afford rents that would cover mortgage payments - if they could then they'd be buying in far bigger numbers.

In answer to Chiliaa's question to Wibbly Pig, I don't own any property. I'm currently in the UK, with a view of moving to Australia this time next year.

I haven't bought into the UK market because I didn't feel it offered good value, and expected prices to fall back. They have, kind of, and I expect them to fall further. So it's an investment decision.

Maybe once you come to Australia and see for yourself what is happening in most lagre cities,immigration is not going to fall,i don't think values will plunge,mavbe just stall for a while depending on how high the rates go,