Is Australia Really That Different?

[Drak]

Hi Graemsay,
There's been a few posts like yours andI have been meaning to post some of this stuff.
I suppose I should say that while I do look at the "stats"and "numbers" I am also a big beliver in seeing whats happening at the coal face as well. I realise your in the UK so it's a bit hard to appreciate what's happening at the ground level.
This is just my observations since the start of the year in Sydney. In regards to one particular large development in Sydney's North West.

- People camping out for land. (yes, literally pitching tents next to the sales office - some display home owners are thinking of renting rooms as they are next to the sales office)

- Display villages with the car park overflowing on a cold and wet Sunday afternoon. (after 4pm)

- Display homes with almost standing room only

- Builders (more than one) can't return your phone calls because they are so busy

- Builders having to hold client meetings on a Sunday to clear the backlog

- Development was supposed to take 8 years to release all the land, latest projection is that it will now take around 4.

- Land prices for a simliar blocks have gone up by approx-$ 20-30k since the start of the year and people don't blink

-People playing the dirty trick stuff, telling little fibs to get their prefered block. "you don't want that piecie of land, it used to be a XYZ..."

This was supposedly in a recession that didnt eventuate.

This is stuff I have personally witnessed, and there's plenty more little observations.
It really does feel like some of the RE grab days of the early 2000's.

As said above, if people have the capacity and the birth/immigration levels even stay close to what they are now, I can't see it slowing down.

Not having a go, just letting you know what's happening.
All the best.

 

[Mike&Wendy]

I moved here from the UK in 2002. At that time houses I was looking at were around 300k and we were getting 3 dollars for 1 pound, so UKP100k. Same house today is around 750k and exchange rates are 1.75, so UKP=425k. That's a four fold increase in 7 years. The cashed up pommes are a thing of the past. It is a lot less advantageous to emigrate now.

Boy, am I glad we moved when we did. We couldn't afford it now.

Just my 2c.

Mike.

 

[chilliaa]

The cashed up pommes are a thing of the past. It is a lot less advantageous to emigrate now.

Mike.

Thats ok we have a substitution product now: mainland Chinese.
They pay cash first organise financing later

 

[Shadow]

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

We'd better tell that to all the people buying property here then, and to the banks who are lending them the money. I wonder how all these people are managing to afford this seriously unaffordable property...?

 

[DeeHwa]

Thats ok we have a substitution product now: mainland Chinese.
They pay cash first organise financing later

You probably attended the same auctions as I did in the inner east. In fact, a lot of mainland Chinese do not even need finance, it is 100% cash. I know at least 1 case where a mainland Chinese family went to hell with mortgage and paid 100% in cash after winning the auction. You probably also know the incredible prices they are willing to pay as well for prestige and location. If you are in the suburbs of Toorak, Kew, Hawthorn, Canterbury, Brighton etc..and you either have a brand new house or a big block of land...chances are it will be bought by a mainland Chinese at way above reserve prices.

What is worth noting is that these mainland Chinese families are all into asset accumulation (more aggressively and more so than Australians). They will just keep buying and never sell if they don't have to (eventually passing them on to their kids). They would rather sit at home all day and not spend money to buy more assets, whether it be houses, businesses or any other investment. Many view entertainment, weekly pub crawls as a waste of money. Sure, they may not go on holidays every year and have the time of their lives at the age of 20, but that is the sacrifice that a lot of these Mainlanders are willing to make. I know, because I am Chinese myself! Mainland Chinese people will squeeze the living daylights out of the average local family whether they like it or not. If you want to live in a decent house in Toorak, Kew, Canterbury, then be prepared to outbid a whole bunch of Mainlanders first! Maybe in 10 years time...you may need to outbid Indians as well!!!

 

[coastymike]

"They would rather sit at home all day and not spend money to buy more assets"

What a boring life. To have all those assets and not enjoy them. I am now at the stage in life where I am starting to enjoy the assets that were passed onto me and I acquired.

Roaming through the streets of Vienna savouring a finely made coffee while admiring the architecture, watching the lions roam in Kenya, Sailing past a glacier in Iceland. No way I am going to die sitting at home while I accumulate more assets so my kids (dont have any dont want any) take them.

 

[lizzie]

This is just my observations since the start of the year in Sydney.

some more:

- state and ferderal govenment blocking large proposed developments because of a few protesting NIMBYS. (recent one in the hunter for over 2,000 homes was canned and another on the newcastle coast for around 500).

- banks not financing new developments (we have a 4 townhouse development ready to go - could've borrowed easily 18mths ago - not now) which would turn one house on huge wasted block in inner city into four good sized townhouses.

 

[Graemsay]

In reply to various peoples' replies...

Topcropper, the main attraction of Australia is that it's dodged the GFC. The UK is in a real mess right now, and I can't see it getting better in the short term.

KeithJ, I'll have to take a longer look at the paper you linked to. But I don't think that it's an entirely rosy picture in terms of affordability.

I'd like to see that graph extended over a longer term.

To an extent, affordability has been supported by lower interest rates. I think that's helped put a floor under falls in the UK.

The big driver seems to be sentiment, which is a common thread in KeithJ's, Drak's and Willair's posts.

Lizzie's comment about funding is interesting. Banks began to withdraw credit about a year before the credit crunch hit up here. Might be one to keep an eye on.

As an aside on immigration, the rules have been tightened up recently. If you're not in an occupation that has a critical shortage (typically medicine, accountancy, engineering or IT), or are sponsored by a state or company, then it's going to take around three years to get a visa.

 

[willair]

In reply to various peoples' replies...

Topcropper, the main attraction of Australia is that it's dodged the GFC. The UK is in a real mess right now, and I can't see it getting better in the short term.

KeithJ, I'll have to take a longer look at the paper you linked to. But I don't think that it's an entirely rosy picture in terms of affordability.

I'd like to see that graph extended over a longer term.

To an extent, affordability has been supported by lower interest rates. I think that's helped put a floor under falls in the UK.

The big driver seems to be sentiment, which is a common thread in KeithJ's, Drak's and Willair's posts.

Lizzie's comment about funding is interesting. Banks began to withdraw credit about a year before the credit crunch hit up here. Might be one to keep an eye on.

As an aside on immigration, the rules have been tightened up recently. If you're not in an occupation that has a critical shortage (typically medicine, accountancy, engineering or IT), or are sponsored by a state or company, then it's going to take around three years to get a visa.

But the bottom line is"Immigration,"is not going to stop ,and not all come into Australia with only 20 cents in their back pocket,you only have to spend a day at the weekend-auctions to see who is buying and there seems to be a lot of cashed up Indians with money..imho..willair..

 

[Wibbly Pig]

If you are in the suburbs of Toorak, Kew, Hawthorn, Canterbury, Brighton etc..and you either have a brand new house or a big block of land...chances are it will be bought by a mainland Chinese at way above reserve prices.

You are right Dee Hwa. I have noticed this trend over the last 6 months also.
This has been pretty much since the government relaxed the FIRB rules in April allowing non australian residents to purchase residential property without needing to obtain prior approval to do so. Previously non Australian residents could not bid at auctions as they could not get FIRB approval in time. Now it is a 'free for all' and reserve prices on prime inner suburban properties in Melbourne (and I'm sure other capitals in Australia) are getting smashed.

Somewhat disturbingly these cashed up overseas buyers often buy these properties and leave them vacant - ie Land bank. They don't even bother with tenants as they believe they are not worth the hassle! They just rely on long term capital gain or at least capital preservation. They see Australian property as a relatively safe place to park their money.

Local buyers/families who want to move into these areas just cannot compete. As mentioned earlier many of these overseas buyers just pay cash (often millions!) and don't even need to take out a loan, hence are not interest rate sensitive.

I'm sure this 'subtle' change in FIRB policy was part of the government stimulus package designed to support the property market during the slump late 2008, but if the trend continues long term, more and more prime residential properties will be overseas owned and often left vacant! This is not good for local buyers trying to enter this property segment and will possibly get worse with time. The high $A of late has slowed the flood a little, but the trend remains.

 

[Aaron Sice]

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.

and what do you base the fact that prices should fall back here in Australia? because the dollar's higher and the prices are higher so you can afford less on exchange rates? because of the gap between mortgages and rents. newflash buddy - rents are rising - fast. no gubment is gonna sit by and watch property prices erode for something as trivial as cost differences in payments.

unaffordability can go jump. america is "unaffordable" to their market as well - 5 unit sites, tenanted, CF+ 20% yields for $30k USD? how low do prices have to fall before their local market CAN afford it....?

you forget - as everyone does everynow and then - that aussies will walk to work, carpet their backyard to keep the sand down and eat baked beans on toast to live in their own home.

I can't see any other Western country with such dedication to property ownership.

 

[Graemsay]

Willair, I agree that immigration isn't going to stop, but it could well slow dramatically.

However (to undermine my argument ) Australia is still welcoming skilled professionals, and these will be relatively richer than the average local.

Wibbly Pig, there was a similar trend in the UK a few years back, with investors buying up new build flats, and then sitting on them. The idea was that capital appreciation was where the profit was, and a better return could be achieved by keeping the property empty and selling it on with the premium for a new dwelling intact.

Needless to say it didn't end well for them...

Blue Card, the Australian property market is like a flashback to the UK's in 2007, both economically and from the sentiments expressed by investors. Believe me, I've heard arguments about how immigration, low interest rates and a stable economy will mean that prices will never fall. (OK, substitute Russians for the Chinese buying at the top end... )

My feeling is that the same risks that existed in Britain, Ireland and the US also exist in the Australia. If the banks cut back on lending (and Lizzie's comment hinted that this is happening) then things could change.

I'd also argue that there isn't scope for continued above inflation capital gains over the long term. Anybody who claims this is mathematically illiterate: If house prices rise at 7% and wages at 3.5% then the median House Price Earnings ratio in Australia will hit 10 within a decade. That's what Japan peaked at nearly twenty years ago.

So I'd suggest three realistic outcomes:

1. House prices fall back to relatively affordable levels.
2. House prices stagnate until wages and rents catch up. This could take a very long time in a low inflation environment.
3. House prices remain high, but continue to grow with wages.

The first is possible, that's what tends to happen when there's been a boom in the housing market. The second seems unlikely, as it could take a decade or more to work through, but it's roughly what the Sydney market has been doing for the past four or five years. I have a suspicion that the UK market could be doing the third option, though with serious risk of a major correction.

Lastly, KeithJ asked (rhetorically) how much better off a renter is long term versus a buyer. Assuming really bearish market conditions (prices fall by 40 - 50%, rents and prices rise with salaries over the long term) then it'll take somewhere between 15 and 20 years for the buyer to win out. Yes, I've done the maths.

 

[chilliaa]

Willair, I agree that immigration isn't going to stop, but it could well slow dramatically.

Yes good point, never assume something will happen just because people say it will, this increases your risk because you are relying on assumptions.

Wibbly Pig, there was a similar trend in the UK a few years back, with investors buying up new build flats, and then sitting on them. The idea was that capital appreciation was where the profit was, and a better return could be achieved by keeping the property empty and selling it on with the premium for a new dwelling intact.

Good point and a very valid indicator of a market in excessive and unsustainable boom conditions. But is this happening in Australia: NO.

Blue Card, the Australian property market is like a flashback to the UK's in 2007, both economically and from the sentiments expressed by investors. Believe me, I've heard arguments about how immigration, low interest rates and a stable economy will mean that prices will never fall. (OK, substitute Russians for the Chinese buying at the top end... )

Yes you have highlighted another potential risk. Where there is excessive optimism about the future and that its better to buy now at any cost to avoid higher prices in the future, then probability is a current person is paying a higher price than would be dictated under normal market conditions.

My feeling is that the same risks that existed in Britain, Ireland and the US also exist in the Australia. If the banks cut back on lending (and Lizzie's comment hinted that this is happening) then things could change.

Nope not at all. There are bullish cycles and then there are super bullish cycles. As mentioned above do you see investors holding stock of residential property without renting them?
Do you see flipping happening?
Do you see crowds lining up to buy off the plan at any cost?

I'd also argue that there isn't scope for continued above inflation capital gains over the long term. Anybody who claims this is mathematically illiterate: If house prices rise at 7% and wages at 3.5% then the median House Price Earnings ratio in Australia will hit 10 within a decade. That's what Japan peaked at nearly twenty years ago.

Yes i agree, but how it will play out i just dont know and neither do you. Its also quite possible that future prices could correct to a level higher than they are now.

You are quite entitled to your view.
But just dont go whinging at a future time that its impossible to buy a suitable PPOR, especially if you are trying to get the dream home in one hit without making the progressive step up the ladder.

 

[Ausprop]

I'd also argue that there isn't scope for continued above inflation capital gains over the long term. Anybody who claims this is mathematically illiterate: If house prices rise at 7% and wages at 3.5% then the median House Price Earnings ratio in Australia will hit 10 within a decade. That's what Japan peaked at nearly twenty years ago.

ok I'll debate it... when I bought this house it was about 8.5 times my income. It is now about 21 times my income. is this sustainable? yes... for a given house. not for a median home though. A median home has drifted about 15kms from the CBD in that time frame, my house is exactly where it was when i bought it.

a specific home's cap growth will exceed inflation. The median price won't, nor can it.

 

[keithj]

Lastly, KeithJ asked (rhetorically) how much better off a renter is long term versus a buyer. Assuming really bearish market conditions (prices fall by 40 - 50%, rents and prices rise with salaries over the long term) then it'll take somewhere between 15 and 20 years for the buyer to win out.

Sure, you can assume that prices will fall by 40-50% & create a scenario where OOs are better off after 15 yrs.

I agree that there is a possibility of -40%, however, it's not a central case scenario for most here.

I'd also argue that there isn't scope for continued above inflation capital gains over the long term. Anybody who claims this is mathematically illiterate: If house prices rise at 7% and wages at 3.5% then the median House Price Earnings ratio in Australia will hit 10 within a decade. That's what Japan peaked at nearly twenty years ago.

Regarding affordability, I'd agree with Ausprop. I have a similar anecdote. My granny bought the cheapest crappiest house on the edge of Sydney 70 yrs ago - no-one else wanted it 'cos it was 15km from the CBD. It's value has grown by 11%pa averaged over those 70 yrs. However the Sydney average has only been <7% over those 70 yrs. Doesn't add up ....... unless you assume that in those 70 yrs, cheaper houses further out (up to 40km for Syd today) have been added to the statistical population. Those cheap houses have dragged down the average for the whole of Sydney. So it IS possible for individual houses to grow faster than wages or inflation or the city median. And consequently the price/income ratio is irrelevant for 70% of the houses in any city.

The price/income ratio is only relevant to the lowest 30% of houses in a city, ie those cheap ones on the outskirts. The RBA has some good material on this which shows affordability for the FHB demographic (median income for someone aged 25-39) for a 70th percentile house has never been better.

 

[steveadl]

That's the point continually overlooked by all those who argue house prices are unsustainable. Many countries/cities median are high and will continue to march ever higher, in the eyes of some making it unsustainable, not allowing incomes to keep pace, due to have a crash etc. I bet you'll be able to find plenty of properties in each of those cities that can be bought by a FHB.

The simple fact is that medians will continue to rise faster than median income etc - the number of entry price properties in the market will proportionately decline each and every year as the cities grow forcing the medians up.

 

[stumunro]

In an age where executives are getting paid 300-400k + and there are plenty of them, I don't think anyone can really comprehend the obscurities of analysing median prices, and the true lag effect on data such as income & discretionary income. When was the last time someone from ABS asked you how much you earnt?

 

[grubar30]

Wiggly,

How dare you come in here and pose questions that go against the opinions of the pro-property groupies.

You should be ashamed of yourself.

You don't have your own property?....what is wrong with you? You're a have not. Disgusting.

 

[Aaron Sice]

you also forget - australia has one thing the UK doesn't - resources (okay, so you got coal...).

the UK has been selling services since thatcher. suddenly those services weren't needed and/or there was an oversupply of said services.

 

[Neophyte]

ok I'll debate it... when I bought this house it was about 8.5 times my income. It is now about 21 times my income. is this sustainable? yes... for a given house. not for a median home though. A median home has drifted about 15kms from the CBD in that time frame, my house is exactly where it was when i bought it.

a specific home's cap growth will exceed inflation. The median price won't, nor can it.

This is strong (and sometimes forgotten point). This is why it is worth looking a price rises for a suburb rather than a city, or if possible tracking a particular class of house e.g. 4 bd 600 sqm. It is also worth remembering that the quality of the overall housing stock is usually increasing due to renovations/extensions/etc... faster than depreciation and decay.

I'd make a few semantic notes.

Price should roughly track disposable income (exactly which price is a matter of debate). Disposable income in recent times has risen faster than income which has risen faster than inflation. If each difference is only 1% a year it stacks up pretty fast over 5-10 years to increases well above inflation.