Property Crash?

[MPmelb]

Hi All,

I read this weekend's AFR and had a property article which featured the following quote:

"Anyone who believes that property cannot fall should look at Japan where prices have dropped 80% in the past 10 years. When the propery boom ends, there are going to be a number of Estate Mortgage style collapses among lenders" - Bill Moss, Macquarie Bank.

What does everyone really think about what is likely to happen in the property market?

Thanks in advance.

 

[frenzy]

you have to ask 80% in 10 years compaired to what.. l mean can we buy in japan for 20% value???


either property was way to high or the 80% drop was wrongly quoted

 

[bbg2003]

What, nobody remembers SE QLD early to late 90's?

 

[Garry K]

Hi bbg

Having only become seriously interested in property in the last few years, I was not really paying that much attention in the early 90's in SEQ. Bought an IP in Brisbane 2001.

I notice from Brisbane median house price that there was slow increases - 2 to 3 % pa, however the median is not a great guide to what is actually happening in particular parts of the market.

I understood that the lack of real growth was due to an over supply.

Can you enlighten me more?
Are there signs of an oversupply yet?

The AFR have reported a couple of big developers plannning huge estates in northern Gold Coast eg Coomera.

They seem to be banking on the estimated influx of new buyers from down south and immigration.

Having a lot of investors in the market soaking up supply can give give a distorted view of the real demand by homeowners.

Brisbane certainly lagged behind Syd/Melb, but is catching up fast.

My belief is that there is still a bit to go, say 12 - 18 mths in SEQ.

Melbourne is remarkably resilient, aside from City apartments.

Are you familiar at all with Northern Coastal NSW ie north of Byron Bay?

I am looking there at present.


Geekay

 

[MarkB]

At the end of the day, something is only worth what someone else is prepared to pay for it - it is a narrow definition - but one which, with few exceptions, works well.

At one point in the late 1980's, the CBD of Tokyo had a higher land value than the entire Australian mainland.

Clearly this is no longer the case.

Whatever the fall - be it 80%, 70%, 50% - one thing is for certain, it hasn't just been the property market.

This has only served to exascerbate the fall in property values.

The Japanese economy as a whole is out to lunch.

Or to put it another way..... not quite dead in the water... but certainly unconscious and floating face down.

MB

 

[Kevmeister]

But why is the Japanese economy out to lunch, and is there a possibility of the same situation hitting Australia?

Looking at Japanese CBD real estate falls is also kind of pointless because forum members are largely residential investors, not commercial investors.

Australia's residential property market is roughly 70% owner-occupied. I wonder how that compares to Japan?

I think I read somewhere on the Quartile Property network (one of their online books) that it is this 70% which gives solidity to Australia's residential property market. The prescribed theory is that owner-occupiers don't necessarily rush out and sell their property when there is a property "crash" because they still ultimately need somewhere to live. Personally I'd say that applies to me also - if our house dropped $50K or $100K in value I'd still be living there regardless.

Of course there are at least several reasons why owners might choose to bail out also. They might not be able to sleep at the thought of owing the bank more than their house is worth (negative equity); they might think it an opportune time to "cash in" on a high and buy a better property later (after renting a few months) at a lower price-point.

I think our residential property market is much more sensitive to interest rates than slow or negative capital growth.

 

[MarkB]

The Japanese economy is out to lunch for a number of reasons. I don't pretend to know them all, but they would include:

- extreme loss in confidence in the japanese financial sector. Our financial system is a lot stronger.

- gradual decline in the competitive advantage of the japanese manufactuting sector. In recent years they have faced renewed competition from US manufacturers, not to mention the rise of other south-east asian nations (Taiwan, Phillipines, etc) as manufacturers.

Essentially, Japanese methods have been imitated and improved upon.

- the opening up of China and increased industrialisation of other nations. Japan now has to compete with China and other nations for international capital (money).

- a cultural element. The post-WWII Japanese had an extremely strong ethic, especially during the reconstrution of the economy. Perhaps the current generation have it too easy and aren't prepared to work 6 days a week for 12 hours a day (as was the norm).

Will Australia suffer the same fate?

I doubt as much. Certainly not to the same degree.

We've weathered the storm thus far.

I agree with you that Int rates would be more important than CG in Australia. Int rates are going nowhere fast at the moment.

MB

 

[sanchez]

How is Japan's population growth compared to Australia's?

Does everyone in Japan want a house on a 1/4 acre block or are apartments the norm?

What is the percentage of owner occupiers?

Is their historical growth anything like ours at all?

What did the residential land market do as compared to the apartment market and the commercial market?

I think that these are important questions to consider before being shocked and awed by the sweeping statements of institutions who need your super money.

By the way, what would the effect be on such institutions if the population decided to invest in property en masse for their retirement rather than relying on super? (Not that that would be a good thing for the property market either)

 

[Aceyducey]

I don't believe there is much value in considering Japan residential property market events when trying to determine Australian market trends.

Japan is a radically different country to Australia.

Japan has a high population with low available land (particularly in desireable areas) - Australia is a huge country with low population & although much of Australia is arid, we still have much more usable land available per individual than Japan has.

Culturally Japan is very homogenous & radically different to Australia. A famous story about an American doing business in Japan....after years of work his Japanese counterpart tells him that they are thinking on parallel lines - the American is overjoyed as he knows he's about to close the deal....a few months pass and nothing happens. He calls his Japanese counterpart and asks what is wrong as he thought they were thinking on parallel lines - his counterpart says "yes, parallel lines never meet'.


Economically Japan focused on manufacturing to info/tech sectors - produces virtually no primary products and has virtually no energy resources. Australia rides on the sheep's back and has a very underdeveloped manufacturing sector, though a decent info/high tech one.

Japan is a heavily regulated & controlled economy led by a few large congolmorate companies working hand in glove with the government. Australia is one of the free-est markets in the world and has a large divide enforced between government & business.

Traditionally Japan has discouraged innovation, unlike Australia, although both have led the world in certain innovative areas.

Most residential property in Japan is in the form of apartments with little or no land value, or tiny blocks (smaller than townhouses here) with freestanding dwellings.

....you might say, per my story above, that the two countries' residential property markets are operating on parallel lines.

Cheers,

Aceyducey

 

[MarkB]

Acey has a point.

Sanchez, fyi... re: Japan

See the CIA factbook at:

http://www.cia.gov/cia/publications/factbook/geos/ja.html#Econ

Pop - 127,000,000

growing at 0.15% p.a.

GDP - US $3.55 trillion

Annual GDP Growth rate = -0.3% (minus .3 %)

Inflation = -0.9 % (minus .9%)

Unemployment rate - 5.4% (very high for Japan)



Completely differen to Oz, both at a micro level (Acey's point)

and a macro level (the point I was making before).

MB

fyi - while it is true that Japan has a very small primary sector, they are a very powerful lobby group (= protective trade policies).

 

[brains]

In yesterdays Sunday Herald Investor section there was an excellent large article about investment myths. One was called "property prices never fall, never in Sydney, never in my street"


It says that in 90/91 the average drop in property prices was 20%.

In the 82/83 recession it was a 15% drop and in 73/74 the drop was 25 percent. It also says that in the depression of the 30s property prices fell 45%.

Theres a lot of other stuff in the article bthat ive left out cause im a useless typist but my point is that property prices do fall even if a property;s price stays the same over 5 years it has dropped in real figures against inflation and in a high inflation enevironment (say 10% pa) that can be a lot.

Dont ever think property prices will rise forever, for the people who came into property investing at the beginning or during this boom (including myself) you can be blinded by the continuous rise in prices.

Remember that anything for sale on an open un regulated market can go up AND down in price.

 

[MarkB]

Brains

All those property price falls that you mention have either proceeded or occured concurrently with either a recession or depression.

In terms of economic averages, we are actually overdue for a recession, certainly when you consider the last 30 years or so.

I'm curious to know of any instances in which property prices have fallen while the economy continues to grow?

Also, did the article mention if those falls were real or nominal?

MB

 

[see_change]

I've quoted these examples in the past ( but not for awhile ) of two properties in Mid North Shore of Sydney I looked at in 93 - 94 when we bought our PPOR .

One was in Pymble Ave, one of best streets in area. Was for sale in high 6's. Looked like something out of the lifestyles of the Rich and Shameless. Had sold for over 1 mil in 89. In current market would easily be over 2 mill ? 2.5 - 3 even.

Second was in Gordon , East side , walk Station , quiet St. Had sold for 550 in previous boom , was now for sale in mid 3's.
would probably be worth 1.2-1.3 nowdays which is what you need to pay for a reasonable house in a good position in the area.

Things will go down at some stage , but for those who keep their ear to the ground instead of their head in the sand ( I like that....) the approaching change should ( hopefully ) be obvious..... Well I hope so......

see change

 

[Aceyducey]

Frankly, when prices go down it's good for investors....property is cheaper!

The trick is anticipating it & having the funds ready to buy!

Cheers,

Aceyducey

 

[natmarie73]

So lets say that property values drop by 25%. Bank has valued my house at $200000 before the crash so now it is worth $175000. What will bank do? Will they make me give them back $25000 which I have used as a deposit on another property or does previous valuation stand?

I don't think property is like shares in that the bank will make a margin call is it? All I can see that will happen is that I will not be able to use my house as equity in another property purchase until values rise again but will have to save a new deposit instead. And if property values drop this will be easier to do wouldn't it?

Nat

 

[Garry K]

Hi Natmarie

You can never say never, but provided you keep your loans up to date (meet the payments) etc, it is unlikely the bank will bother you.
If the home was tied to a business loan and the bank thought the business was in trouble they might try to put pressure on you to come with more equity.

The big banks usually spread their risk and are usually the first to start to tighten up lending guidelines. They are not that keen on putting people out of their home as its a costly exercise, provdided they see that the situation is just not going to keep getting worse for them.


Geekay

 

[Aceyducey]

Originally posted by natmarie73
I don't think property is like shares in that the bank will make a margin call is it?

If banks started calling in mortgages because property prices decreased they'd be cutting their own throats.

Firstly, they would have to call in a large number of loans unless this was a very unusual circumstance - meaning HUGE costs to the bank for no profit (as they cannot recoup their money from the property anyway).

Secondly they would lose the valuable cashflow generated through repayments....and if the householder is repaying more than the house is currently worth, that's not the bank's problem is it If the bank repossessed, resold & refinanced the property their cashflow would drop.

Thirdly, the PR implications would be disasterous.....

AND property prices are cyclical, so it is highly likely that the house price will go back up again eventually anyway.....

Therefore, assuming banks know what is good for them - he best thing a property investor can do is take out LOCs on their properties when the market is at the top of the cycle & sit on this money (or put it into some other investment delivering more return than the borrowing cost) until property prices are close to the bottom again....then use this money to buy more property.

Then repeat this strategy every decade.

Of course, most of us are impatient & try to keep buying - therefore have to spend more time on due diligence to find the good deals.....but who wants to wait four or five decades for financial independence

Cheers,

Aceyducey

 

[geoffw]

I was in England when property prices dropped. The house we bought for GBP50K in 1988 was worth perhaps GBP40K when we left in 1990.

That was an English bank, some years ago- but at a time when Australian banks looked really good against UK banks.

The loan was not called in- or even reviewed- despite what always was a bad LVR (though we didn't know what that meant back then).

John McGrath (I think) was quoted recently as saying that the big disadvantage of property- illiquidity- is an advantage in a downturn. For owner occupiers, if prices go up, people want to sell and upgrade (or else sell up and emigrate to a cheaper place). But if prices are going down, the owner occupiers just stay in their houses and do nothing for the number of years it takes until prices start to rise again.

I have heard it said that the biggest loser in a downturn is in the area where the high fliers fly. When the economy goes up, the stockbrokers/entrepeneurs/high fliers can afford a gazillion dollar house. When it goes down they are the first to go broke.

The net affect is that median prices go down. But the Joe Average houses in middle suburbia don't really dfrop that much. So, discounting the top of the range (which can and does drop a lot), when drops occur, they haven't hit the average person to nearly the same extent as the top of the range person.

Though that doesn't explain what happened to me in England

 

[MarkB]

"Housing affordability hits a low"

P. 8 of todays AFR.

"Young buyers are feeling very unwelcome at Australia's property party as housing affordability slumps to its lowest since the boom-bust days of the early 1990s. "

"Housing affordability fell most dramatically in Brisbane, where it was down 12.3% in the quarter"

"But Sydney remains by far the most expensive city in Australia, as housing loan repayments reached 40.6% of Average Weekly Earnings"



Apologies for the lack of a hyperlink, but it is a subscription only article (I could post it all, but I'd be breaching copyright).

MB

And in another article - "the average price paid by a first-home buyer in Sydney is $467,000"

 

[Aceyducey]

See a similar article in the SMH:

"First home buyers in Sydney are being forced to fork out a record 40.6 per cent of average incomes to pay for a typical mortgage, as spiralling home prices make gaining a foothold in the city's booming property market more difficult than ever."

http://www.smh.com.au/articles/2003/07/28/1059244563019.html
Mortgages soak up 40% of first home buyers' pay
By Matt Wade
July 29 2003

Cheers,

Aceyducey