I've been chatting to a lot of agents/buyers/developers/bankers/bums off the street and have a theory that I'd like to share.
I believe that the current uncertainty in the market is the result of a combination of the following factors
1 the RBA increased interest rates several times, in rapid succession, which dented buyer, investor, and consumer confidence, resulting in lower demand for property from cautious investors, greater supply of property from cashflow poor vendors, and slower spending from consumers with less disposable income.
2 banks tightened lending requirements significantly, particularly by requiring genuine savings as a deposit. this reduced demand from buyers who had the capacity to buy, even though they had the capacity to pay, while they took time out to start saving up for a deposit
3 banks tightened lending/presale requirements for developers, resulting in a decreased demand for developable land, and the shelving of entire development projects. Simultaneously, cash strapped, leveraged developers experiencing longer clearance times were more willing to discount existing inventory
4 the emergence of a two tier economy (resource vs everyone else) strengthened resource workers/investors, yet stongly disadvantaged the remainder of the market, because the mining boom simultaneously propped up the australian dollar (making non resource based exports more expensive, reducing local tourism, reducing overseas demand for aussie property etc) and neccessitated the RBAs increase in interest rates.
5 government stimulus ended, or was greatly reduced, removing artificial upward price pressure based on liquidity
6 government stimulus had the effect of overheating the market a little too much, causing some reckless speculation, price inflation, and the building in of capital appreciation that should have occurred over the next 2-3 years into the price of property sold today, thereby undermining investor confidence and demand
7 media reports heavily weighted towards doom and gloom, crash type scenarios, absolutely scaring the life out of buyers and developers alike, creating a self fulfilling prophecy effect whereby the reports themselves (which may br true, or not) actually created the scenario that they were describing, which is double irritating because not only is it reckless, but these same people ahve been wrong about the impending bust for aroundabout the last decade.
8 we have hit the affordability ceiling for a lot of people, who want to buy, but cant really justify doing it because if they cant pay, how can they expect to onsell to someone else who will pay more. I think that the affordability ceiling has been hit because housing prices are out of line with inflation and wage increases. Thats not to say that it is a bubble per se, but that people who dont already have money/properties are priced out
I think that the convergence of the above factors (and a few more that I dont think are strong enough to bother listing, although I may revisit the post) created the low confidence that we are seeing today.
I personally think that we should be okay in the medium to long term, and refuse to follow the fearful ones and panic sell (Im unleveraged anyway, so the world can be on fire around me and Ill be there with a packet of marshmallows), but thats what I think.
Furthermore, I find the following factors encouraging:
a) we have strong levels of population growth, that will sustain demand for property
b) we have a high australian dollar, which at present increases resource based exports, any fall in value of which will strengthen the remainder of the economy, as well as increase demand from overseas investors
c) we have a large segment of the market highly invested in negative gearing (1.5 million australians), thereby supporting demand/staving off a mass sell and making policy change unlikely
d) we are looking at an anticipated increase in rental yields, which may in some way offset the built in capital appreciation present in property pricing for the investor
e) we have recently seen implementation of green energy building guidelines, which are increasing the cost of building, and replacement cost of property, by 5-10 or so percent (depending).
What do you guys think? Im not an economist, but then, that's a good thing, because most of those guys are full of it and have track records that look like train wrecks
I believe that the current uncertainty in the market is the result of a combination of the following factors
1 the RBA increased interest rates several times, in rapid succession, which dented buyer, investor, and consumer confidence, resulting in lower demand for property from cautious investors, greater supply of property from cashflow poor vendors, and slower spending from consumers with less disposable income.
2 banks tightened lending requirements significantly, particularly by requiring genuine savings as a deposit. this reduced demand from buyers who had the capacity to buy, even though they had the capacity to pay, while they took time out to start saving up for a deposit
3 banks tightened lending/presale requirements for developers, resulting in a decreased demand for developable land, and the shelving of entire development projects. Simultaneously, cash strapped, leveraged developers experiencing longer clearance times were more willing to discount existing inventory
4 the emergence of a two tier economy (resource vs everyone else) strengthened resource workers/investors, yet stongly disadvantaged the remainder of the market, because the mining boom simultaneously propped up the australian dollar (making non resource based exports more expensive, reducing local tourism, reducing overseas demand for aussie property etc) and neccessitated the RBAs increase in interest rates.
5 government stimulus ended, or was greatly reduced, removing artificial upward price pressure based on liquidity
6 government stimulus had the effect of overheating the market a little too much, causing some reckless speculation, price inflation, and the building in of capital appreciation that should have occurred over the next 2-3 years into the price of property sold today, thereby undermining investor confidence and demand
7 media reports heavily weighted towards doom and gloom, crash type scenarios, absolutely scaring the life out of buyers and developers alike, creating a self fulfilling prophecy effect whereby the reports themselves (which may br true, or not) actually created the scenario that they were describing, which is double irritating because not only is it reckless, but these same people ahve been wrong about the impending bust for aroundabout the last decade.
8 we have hit the affordability ceiling for a lot of people, who want to buy, but cant really justify doing it because if they cant pay, how can they expect to onsell to someone else who will pay more. I think that the affordability ceiling has been hit because housing prices are out of line with inflation and wage increases. Thats not to say that it is a bubble per se, but that people who dont already have money/properties are priced out
I think that the convergence of the above factors (and a few more that I dont think are strong enough to bother listing, although I may revisit the post) created the low confidence that we are seeing today.
I personally think that we should be okay in the medium to long term, and refuse to follow the fearful ones and panic sell (Im unleveraged anyway, so the world can be on fire around me and Ill be there with a packet of marshmallows), but thats what I think.
Furthermore, I find the following factors encouraging:
a) we have strong levels of population growth, that will sustain demand for property
b) we have a high australian dollar, which at present increases resource based exports, any fall in value of which will strengthen the remainder of the economy, as well as increase demand from overseas investors
c) we have a large segment of the market highly invested in negative gearing (1.5 million australians), thereby supporting demand/staving off a mass sell and making policy change unlikely
d) we are looking at an anticipated increase in rental yields, which may in some way offset the built in capital appreciation present in property pricing for the investor
e) we have recently seen implementation of green energy building guidelines, which are increasing the cost of building, and replacement cost of property, by 5-10 or so percent (depending).
What do you guys think? Im not an economist, but then, that's a good thing, because most of those guys are full of it and have track records that look like train wrecks
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