Property Bubble

I watched with interest the Business Show on the SBS on Sunday, and they had a very interesting panel discussion on property prices.

I have cut and pasted the text below, and for those who are interested (and also to quote the source!) it was taken from:
http://www.sbs.com.au/business/index.html?tid=496 . Sorry it is so long, but it is very interesting.

What do people think?

asy :D

PROPERTY BUBBLE PANEL DISCUSSION (September 22, 2002): RICHARD ACKLAND: Quite suddenly, everyone is being told that the current housing bubble is soon to pop. Maybe it has been a little slow in arriving, since housing prices in Australia have climbed 50% in the last five years in real terms, and nearly 20% in the last year. In Melbourne it has been more giddy, where the boom has pushed prices up 80% over the last five years. Adelaide 33%, Canberra 28%, Perth about 26% and Brisbane 20%. The gloomy old Commonwealth Bank has wagged its finger at people who have forgotten that price rises don't always go on for ever.
DAVID MURRAY, CHIEF EXECUTIVE, COMMONWEALTH BANK: There is excessive optimism on behalf of ordinary people in Australia...amongst ordinary people in Australia about the progress of their house price.

NARELLE HOOPER: But it is investors who are causing much of the trouble. Since the last property slump in the early '90s housing finance for owner/occupiers has risen almost threefold - but look at the huge run-up in finance for investors over the same period. In fact the last two years look a lot like the Nasdaq looked just before it crashed. Rental vacancy rates are rising and rents are falling. Westpac Bank says earnings from investment housing are the lowest in 40 years.

RICHARD ACKLAND: The Reserve Bank put it gingerly, when it said: "It is more likely that any assumption by investors that future capital gains can be assured will have to go some revision."

RICHARD ACKLAND: To get a proper grip on that revision, and how uncomfortable it might be, we are joined by John Symond, who is the founder and managing director of Aussie Home Loans. Brendan Crotty, the founder and managing director of one of our largest apartment developers Australand. And Chris Caton who is the chief economist for BT Financial Group.

RICHARD ACKLAND: John Symond, before we get to a sober reassessment of what is happening now, could you give us some sort of picture of what has been happening and how long this boom in housing has been going on.

JOHN SYMOND, MD, AUSSIE HOME LOANS: Well I think the boom in real estate, across the board, has probably been going for the best part of four years, in some areas five years, Melbourne started probably a year after Sydney. So, certainly, it has been healthy and very robust and it's been the flavour.

RICHARD ACKLAND: How did it compare to the previous property boom at the end of the 1980s?

JOHN SYMOND: Well there is one huge difference, which is that interest rates were 18%, 17%, 20%. And in this case it is the lowest interest rates, we are close to the lowest interest rates in 30 or 40 years. So, there are huge differences in dynamics between the last property boom and bust and certainly this boom.

RICHARD ACKLAND: Brendan, what has been your experience in this period with apartment construction?

BRENDAN CROTTY, MD, AUSTRALLAND LTD: Well, apartment construction in Melbourne shot up quite a lot, in response to an almost zero construction of apartments for a period of almost 10 years. But the one thing that people shouldn't ignore is that every apartment block that you can see under construction – there’s at least 80% of those apartments are pre-sold.

NARELLE HOOPER: Hmm, not much different to the position in the late '80s. Chris Caton, from your perspective, is this the strongest housing boom we have ever seen, do you think?

CHRIS CATON, CHIEF ECONOMIST, BT FINANCIAL GROUP: Well, ever is a long time. It is certainly one of the strongest in Australia - and relative to the one that most people remember in the late '80s, I guess you would say that that one was shorter and sharper, and also more localised. This one is spread across pretty much all capital cities.

NARELLE HOOPER: And in a lot of the regional.

RICHARD ACKLAND: And what are the conditions that are fuelling it?

CHRIS CATON: I suppose, as John mentioned, low interest rates has got to be number one. And number two - booms tend to beget themselves, if you like. Once everybody sees property prices rising, they convince themselves that it is going to continue. Therefore two things happen - first of all, if you want to get in, you have got to get in now and secondly you want to get in, because you know prices are going to rise after you get in. So, you know, a boom has its own dynamics.


Sorry, it was too long, continued on next post...
 
RICHARD ACKLAND: And the first homeowner's grant, has that had an effect?

CHRIS CATON: The first homeowner's grant, yes. And particularly the doubling of it if you bought a newly constructed home. That would have had some effect last year - but it is difficult to believe that...it is estimated that about 34,000 new home-owners bought houses before they otherwise would have, last year. That would have had a big effect on new construction, but it is difficult to believe it would have had much flow-on effect to the existing home-owners.

NARELLE HOOPER: And you can't pull forward forever, as we'll come to in a second. John Symond, you were quoted on the weekend as saying you were absolutely certain that this market has topped. Why are you absolutely certain?

JOHN SYMOND: Well, I guess I have seen property cycles - what happened in the '70s, early '80s, late '80s - and I guess experience is a wonderful thing. And we have put through thousands of mortgages on homes every month and I'm just reading that the signs are there that this market is at a stage where if the heat doesn't come out very quickly, we do stand a terrible chance of a bust. And just listening to Brendan, about 80% of new apartment blocks being built have been pre-sold, and if there is any correction whatsoever a lot of those people will have trouble settling those contracts.

RICHARD ACKLAND: Is this mainly in the category of people who are investors, John Symond?

JOHN SYMOND: One in three today, in the capital cities, close to one in three, are investors. But they are small, normal people. And that concerns me because that has been driven by low rates, it's been driven by the fact that superannuation - they either don't have any or superannuation isn't performing - and they are wanting to create their own superannuation and aggressive marketing in some cases.

RICHARD ACKLAND: And we have these deposit bonds which they don't actually have to...

JOHN SYMOND: Yes, my concern is they are normal, hard-working Australians, and anything can happen. And I think the small investors stand very exposed and the first homebuyer is very exposed. First homebuyers are borrowing $300,000-$350,000 on next to no deposit, they have got next to no equity. They have got no buffer. If it is a couple and the wife falls pregnant or they lose their job, they haven't got any buffer in that price.

RICHARD ACKLAND: Do you think it has peaked Brendan Crotty?

BRENDAN CROTTY: I think the issue is, though, that the market changes from segment to segment and if you took the other suburbs of Melbourne, for example, prices haven't gone up very much in the other suburbs of Melbourne because there is plenty of supply. The middle-distance and inner suburbs of Melbourne, that is where the prices have really rocketed. And it is very well capitalised and people with good incomes who are creating the spike in those prices. My belief is that this has been a boom in prices rather than volume. And if you take Perth, for example, prices in Perth haven't moved very much at all. Brisbane prices have really only started to move in the last 12 months.

NARELLE HOOPER: We should be more afraid of the headlines that we are reading, rather than the actual conditions.

BRENDAN CROTTY: Well, I think the issue is that there are some markets with which people should be very cautious, they should be very careful, if a market has run up 70 or 80% in the last say two or three years, then that is a market about which you should be very cautious. But other markets - prices haven't really moved a lot.

RICHARD ACKLAND: Chris what flow-on effect do you see this having in the rest of the economy, if a lot of air was to come out of this balloon and it was to fly around like a crazy thing at a birthday party?

CHRIS CATON: If we could go back to the point that John made, if it is topping out now, then that is a lot better, the air coming out now, if you like, then more air coming out in a year from now. If it is topping out now - and the thing with property bubbles, unlike, say, equity market bubbles, is that they don't always lead to a period of dramatic price fall. Now, again, you have to take Brendan's point that it is all localised and in some cases of course prices will fall. But we may well go from 20% house price inflation to, say, zero, rather than -20%, on average. But if we do do that we might go to zero for a long time. So essentially, at the micro-level, people would have realised they will have made mistaken investment decisions and that will have some impact. There will be a downward reassessment of wealth and that is as macro thing, across the whole economy. But I doubt if it happens now, I doubt it will be serious enough to have major macro-economic consequences. That is, to drag down consumer spending, consumer confidence etc. If it happens a year from now, after another 20% price rise, that would be different, I think.

RICHARD ACKLAND: Now I'm just interested in your experience, Brendan Crotty, with the apartments that you are building at the moment, would you know what proportion have been purchased by investors, and the apartments are empty - they just can't get a tenant?

BRENDAN CROTTY: Probably less that 1%. And the reason is very simple. If you have an apartment that is more than five years old, compared to a new apartment, but in most cases renters are comparing apartments. If you take the age of the apartment stock in Sydney it is at least 20 years. So if you are comparing an apartment that is at least 20 years old to a brand new apartment, and this happens all the time.

NARELLE HOOPER: The Federal Government is now saying "We need to make it easier for people to get into homes. And the Menzies Research Centre's has come up with this idea of sharing equity with your lender here, or with the banks. What are your thoughts on that? Does it have some merit, or does it rely on a rising market to actually work?

BRENDAN CROTTY: I think the reality is that the Menzies Research Centre relies entirely on a rising market. I think there is two things about that - there is a group of people which represent about 20%-30% of generation X and generation Y, who will, over time, need some significant assistance because they cannot afford a mortgage and there is this gap between the median price of housing and the mortgage that they can get. So, something will have to be done for those people.

NARELLE HOOPER: What are your thoughts John?

JOHN SYMOND: Well, I am very pro looking at any new way of helping, particularly first homebuyers getting home ownership. But I agree with Brendan and it is assuming that house prices will continue and I think timing will play a very important role. I don't believe that the timing would be right to roll out an initiative like that when there is so much heat. But my real concern with the overall market is everybody seems to have forgotten what happened 10 years ago. Everybody is talking about how much their houses have gone up - double, $200,000, $300,000. And they seem to feel that Australia is totally insulated from the global downturn.

RICHARD ACKLAND: Well this is the very issue that Ian Macfarlane was talking about at the Reserve Bank, back in May. That we had to have the rate rises to take the sting out of housing. And yet we had two rate rises, nothing further. What happens if rates don't go up again.

CHRIS CATON: Well, I think I need to leap to Mr Macfarlane's defence. My view is that we raised rates for a number of reasons - and the housing bubble was highlighted. But since then he has said that they are not going raise rates just to burst a housing bubble, but they are not going to stop talking about it either. Now, rates are on hold in Australia at the moment, and will be for the rest of the year, reason: they are no longer certain about the global economy and also of course the rather depressing effects of the drought - so yes, whatever happens in housing is going to take place right now against a background of rates which are going absolutely nowhere for the rest of the year.

RICHARD ACKLAND: Look, thank you very much for that Chris Caton. Also to John Symond and to Brendan Crotty for a splendid discussion.






The information shown here is not suitable to be acted on as investment advice. SBS advises that viewers obtain personalised investment advice before making any investment decisions relating to this subject matter..
 
Asy,

thanx for this info/discussion summary you posted... it was definately worth a read (as I missed the Business Show)... well my views are that the market will stabalise, with a possibility of 0 (zero) growth for a couple of years, but can't see the market going backwards 20% as indicated by one of the pannel members &/or from the media hypes (I'm not referring to inner city appartments, which I personally think may see a decline in prices)... I'll give you some examples I have received from my father (as I missed some of the earlier booms)... in 1982 dad sold a house in Yarraville (Melb) for $30,000 (which was the going rate). In 1984 the person that purchased it on-sold it for $60,000 (price doubled in 2 years, little like what we experienced in some areas of Melb). Then from 1984 till late 1980's the property prices stabalised with minimal growth & then we had the well known late 80's boom, etc...

What I'm getting at is if you are in IP investing for the long haul (buy/hold strategy & not a property trader), you should be right, as long as you buy right (ensure your figures stack up) & have some contingencies in place if you are faced with longer vacancies (savings), health issues (income protection insurance) &/or to shield you from interest rate hikes & ensure you have a wealth protection strategy (insurances, including landlord insurance). In 1984 when the properties doubled in value, everyone must of been laughing at the clown (assuming they used such humour) that bought it for such a rediculous price, but if we look back at it now, it was a bargain, as that home would now be worth close to $500,000... I personally think that at the year 2010 we will be looking back at these current prices & we would be kicking ourselves for not picking up those bargains :)

That's just my 2cents worth once again...

Cheers,

MannyB.
 
G'day Phil,

Thanks for that one - I noted the quoted "difference" in that report between conditions in 89 - 90 and the present. Back then, with Interest Rates "through the roof", and people spending up to 80% of AWOTE on mortgage payments (cf normal lending policies of 30% - 35%), some people just couldn't hold on. And down they came (prices, that is).

Back then, with Interest Rates of (say) 17%, and been above 12% for some 4 years, I don't expect too many were expecting them to rise much further. But that's history - and when Interest ticked up from 16% to 17%, the actual increase was 6.25% more than they had paid before (but LESS than that if a P&I loan was involved).


TODAY, with Interest Rates at their lowest rate in 30 - 40 years, the talk is "the only way is UP!!" for the future. (Not sure that I agree with this for the immediate future, but within a year.... maybe...) Meanwhile, with the Stock Market falling, investors turning to IP's, as well as the Olympics, intro of the GST,
FHOG, etc, the heat has definitely been ON in Real Estate for the last couple of years.

All of the above have been inflationary factors of Real Estate prices, so the "boom" has continued. Will it run out of steam?? Of course!!

One of the majors, though, is that with the current Interest Rate of ~6%, people will be knocked off their perches with a relatively small IR increase. At 6%, a 1% rate increase is a 16% increase in the amount you need to pay on an IO mortgage!!! How will you handle a 16% increase in your mortgage? Will the tenant be happy to pay an extra 16% to help you out??

Today, too, because of the "heat" in the RE market, any mortgage is undoubtably much higher than it might have been in 89 - 90..... !!

Is this a recipe for disaster? Maybe !! Maybe not !!!

At times like this, a little caution is probably well advised - be prepared for when those, that aren't as well prepared, need to sell - and nobody's buying ....

Of course, there are ALWAYS bargains - but this is probably NOT the time to borrow 95% or 106% unless you've got yourself ONE HELLUVA deal !!!


Will there be a BUST ??? Some areas, yes - some, NO. When prices have sky-rocketed, it hasn't been "across the board" - those areas that sky-rocketed are the ones more likely to be affected by a "burst bubble". And, from what I've heard, units in some areas are most likely to be affected (usually where units have been built in almost plague proportions).

And, also from what I hear, the smart money has been off-loading their "under-performers" (cashing up for the future??) while prices are where they are.


And then again, some sources say "Booms go higher than they should go" (or some words like that - I don't have a book to quote).

Are we at the peak?? Who knows !! Do these "experts" know?? "Booms go higher than they should go" - is this IT??? Have we reached the peak?? What will your next move be?


The Chinese say "May you live in interesting times" - we've GOT THAT, and that's for sure. :)

What do YOU think of the current state of IP investing?
 
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