More articles appearing about OZ 'property bubble'

[hobo-jo]

Not trying to nitpick, but there are a lot of posts thrown around on this site with an heir of authority as if they were factual when infact they are just opinion.

Neophyte, I see your above post as one of these…

In Australia the potential cause of house price crash is mass unemployment at least 8%+. Unless people lose their jobs its unlikely they will lose their homes.

What are you basing this 8%+ figure on? Is there mathematical reasoning behind it? Does it have historical precedence/relevance? Or was it just pulled out of a hat?

Rising interest rates cause belt-tightening, however they are also only a temporary measure (e.g. 1-2 years to stop inflation) and at the same time inflation => wage growth. For people to be unable to meet there mortgages rates need to rise at least another 1-2% maybe more, however that can only happen if the economy is booming.

Once again, what are you basing the 1-2% figure on? My opinion is that we could be at the tipping point for many of the 190,000* FHBs that took it up during the “boost” period (Oct 2008 to Dec 2009) where we had record low interest rates available and free large deposits. Many leveraged to the hilt (as proven by the high LVR reported in the Fujitsu reports) which indicated poor level of savings and most banks only factor in around a 1.5% interest rate buffer, which has already likely been breached in the 6 official rate rises since October and most banks increasing over the official cash rate during this period. Not to mention we have seen other expenses increase significantly over the same time, including fuel costs which could be affecting those in the mortgage belt suburbs…

Undoubtedly some people are at risk, but they are a very small fraction comprising those who have both bought recently, have low job security and overextended.

Fujitsu’s mortgage updates indicate quite a large number of new buyers have been affected in what they measure as “mortgage stress”. Thing is that it only needs to be a small fraction of stressed sellersr that can cause prices to dip or crash because it’s only ever a small fraction of the entire market that is for sale each year…

Most people are not on a financial knife-edge. If you bought more than 3 years ago then your income has probably gone up 10% since and your property value has probably gone up 20%.

I do agree with the above. I would assume most that have owned for 3 years are in a much better position than those that have purchased more recently, but then for those that have equity behind them it’s less of a concern if they have to knock 5% off asking price to compete with distressed stock…

We are at an interesting point, I think to completely dismiss the idea that prices will correct is naïve as it would be to completely write off the possibility they will stagnate then rise again. Personally though I am leaning towards the expectation that prices will correct back to historical norms.

* http://www.tanyaplibersek.fahcsia.gov.au/mediareleases/2009/Pages/home_owners_boost_05dec09.aspx

 

[devo76]

Wow 7.5 times the family income
in my neck of the woods you could take a family income of two below average wages. Multiply by 7.5 and that would get you a riverfront property in a great part if town. Or some acres. Or a nice cbd pad.
Just goes to show there are different markets everywhere. Some booming,some flat,some dropping. It is fair to believe that any following correction will have just as varied results

The Australian Financial Review also reported on Jerremy Granthams comments today. Pitty you cant get this article online without a subscription because they point out some inconsistencies in the message.

Summary of what AFR wrote...
* Grantham says prices must come back to the normal multiple of family income, based on the assumption housing normally trades at 3.5 times family income.

* Grantham says we are now trading at 7.5 times family income, which he says would mean if we hit 10% interest rates then people would be paying 75% of their wages in income (which by the same measure means we are paying 55% of wages in income now, not likely IMHO)

* AFR says that according to Rismark the average house price is $433,129. The ABS has family income at $93,926. Therefore the actual price to income ratio is 4.6 and has been steady since Dec 2003, implying we are paying 34% of our wages in repayments

* Since 1993 the average price to income ratio has been 3.6 times

* Mr Grantham has studied every bubble for which there was data back to 1720 (.toe comment - as I sudgested in a previous thread this is flawed modelling known as 'survivorship bias' because Grantham did not also study all 'phantom bubbles' (looks like a bubble but did not burst) over that period).

* GMO got out of tech stocks 2.5 years to soon and lost many clients as a result. GMO was also bearish on US housing since 2004, 3 years too soon there also.

* Quote Grantham "We live in a mean reverting world. All bubbles break".



By this logic we should not be able to find one historical example where people were calling a bubble but the bubble didn't burst. This doesn't mean that Grantham is wrong about an Australian bubble mind you. Just that he cannot be right every single time, as he sudgests he can.

 

[Graemsay]

By this logic we should not be able to find one historical example where people were calling a bubble but the bubble didn't burst. This doesn't mean that Grantham is wrong about an Australian bubble mind you. Just that he cannot be right every single time, as he sudgests he can.

That begs an interesting question, can anyone name one of these phantom bubbles?

I'd like to know how GMO have performed despite calling bubbles a couple of years early. Sure they missed out on a couple of years' growth, but they also missed out on the 90% falls at the end of the Dot.com boom.

 

[.toe]

That begs an interesting question, can anyone name one of these phantom bubbles?

Good point, I have access to some history I can look into. But generally I can say that much info is likely to be missing about disasters that didn't happen, which is why this will be hard to quanify. As an example if we use historical price data in our share trading, we should try getting data on bankrupt companies, but we will pay thousands cause few providers have it. Yet if we dont use bankrupt company data in our calculations our results will be skewed dramatically.

Anecdotally it appears someone was calling a housing bubble in aus in 2003, so the talk goes on SS back then HERE. Whether GMO was calling it I dont know but they claim to have looked at every historical bubble, I wonder if they saw this a phantom bubble or if they thought it would boom again before bursting, or if they ignored it?

I'd like to know how GMO have performed despite calling bubbles a couple of years early. Sure they missed out on a couple of years' growth, but they also missed out on the 90% falls at the end of the Dot.com boom.

GMO have done extremely well from all accounts, I'm not doubting that. Jerremy Grantham is a smart man. And for all I know he is right about Aus being in a housing bubble. But the Financial Review did point out some inconsistencies. Not the least of which was that the actual price to income ratio is 4.6 times not 7.5, and that the ratio has been stable since 2003.

7.5 times family income at 7.5% interest rates means the average family would be paying 56% of the family income in mortgage interest. Do we really believe that, I dont know anyone whos paying that much, and banks wont lend that much based on DSR calcs.

From memory the AFR article claimed that GMO lost money shorting the dotcom bubble for several years and basically made it back when the bubble burst. As I said though they are very successful generally.

 

[atsim]

I earn $55k my wife $48k which = $103k. The median 2bdroom unit in liverpool is about $300k which is 2.91 times our income, but from buying and selling ips we have an extra 300k so we bought in the eastern subs of syd for $600k which if we had borrowed the max we would have borrowed 5.8 times our income. By the way the average income in our area would range from $120k to $175k which 3.5 t0 4.5 times. M aybe people should understand we dont all need A HOUSE anymore, not close to the cbd anyway

 

[pickle pickle]

How housing market is no different from any other countries housing market. So why did many housing markets fall during the GFC (IE. Ireland, USA, etc) while Australia rise. Simply because Australia avoided a recession.

If Australia continues to perfrom well economically, then housing won't crash. The only way that house prices will crash, is if the economy has a major hit.

House prices will crash one day in Australia, however prediciting when it will happen is anyone's guess. Could be over 20 years away.

 

[davo6253]

How housing market is no different from any other countries housing market. So why did many housing markets fall during the GFC (IE. Ireland, USA, etc) while Australia rise. Simply because Australia avoided a recession.

If Australia continues to perfrom well economically, then housing won't crash. The only way that house prices will crash, is if the economy has a major hit.

House prices will crash one day in Australia, however prediciting when it will happen is anyone's guess. Could be over 20 years away.

Agree pickle. Until we have unemployment rising and/or a real tightening in lending the Australian market will keep chugging on. However I don't view this as an acceptable risk to make an investment as at some point these factors will come into play again.

 

[bene313]

House prices will crash one day in Australia, however prediciting when it will happen is anyone's guess. Could be over 20 years away.

And how big a crash is the other question.

 

[bene313]

M aybe people should understand we dont all need A HOUSE anymore, not close to the cbd anyway

This is a good point. Land is finite in desirable areas - the inevitable as our population grows it seems would be higher density living.

(Oh but try to do a development and everyone nearby objects and complains!)

 

[Intrinsic_Value]

How housing market is no different from any other countries housing market. So why did many housing markets fall during the GFC (IE. Ireland, USA, etc) while Australia rise. Simply because Australia avoided a recession.

If Australia continues to perfrom well economically, then housing won't crash. The only way that house prices will crash, is if the economy has a major hit.

House prices will crash one day in Australia, however prediciting when it will happen is anyone's guess. Could be over 20 years away.

this is a VERY INTERESTING POST.

Well done pickle for posting it,
which comes first the egg or the chicken,
the trouble is its even more complicated, which comes first the egg or the chicken, or the finance that produced the egg or the chicken.

Dont look at me i dont have the answer.
but well done to the poster, a very intelligent post in my opinion

 

[Deltaberry]

It's a bandwagon effect. And journalists love bashing things like property because of tall poppy syndrome and sour grapes syndrome. And most readers like it too, for the same reasons. No, really...

 

[urbanprospector]

look out he is back .. new pc lol


here is the other side of the arguement with pretty charts too .

http://www.globalspeculator.com.au/documents/GoldandAustraliasMonetaryInflationDelusion_000.pdf

 

[urbanprospector]

is charts on houses vs. gold on othe link above