Property Crash?

[NIF]

I was following the market for houses very closely, around the median price, in Cronulla in Sydney’s south, in 1991.

I was shopping for my first PPOR. I was cashed up & waiting for the price falls to eventuate so I could snap up a bargain.

They didn’t happen.

Any property that didn’t achieve a reasonable price was taken off the market after 4 or 5 months. The occasional mortgagee sale achieved decent prices.

The only price falls were in the top end of the market, waterfronts & the like.

 

[MPmelb]

Property Crash likely

I am sure property is in for a crash because all the signs are there.

Everybody was saying the same that the stock crash would never happen, that it was different this time, but look what happened.

Property at the moment: Spiralling prices, oversupply, low affordability.

All it will take is a rise in interest rates and the bubble will burst.

The survivors will be those who can afford to hang on for the good times again.

 

[MF35]

MPmelb said "I am sure property is in for a crash because all the signs are there.

Everybody was saying the same that the stock crash would never happen, that it was different this time, but look what happened.

Property at the moment: Spiralling prices, oversupply, low affordability.

All it will take is a rise in interest rates and the bubble will burst."

What is it exactly that makes you so sure of this? It seems some people have been saying the same thing for quite some time now and we're still waiting.

I don't know that I'm exactly comfortable using a crash in the stock market, which I believe is a much more volatile market than property, as the basis for the reason property must crash.

Will there be a "bursting" of the bubble or a "crash" in property? These terms imply a pretty severe drop in value. Will property drop like the stock market? Will it drop to half it's value or worse? I doubt it personally. You can't live in your Telstra shares. Or when we talk about the "bursting of the bubble" are we talking about a flattening out in prices or a small drop over a few years? As seems to occur every so often historically.

If interest rates are the trigger to this, and when they go up property prices come down, is there a balancing positive for those who can hold onto their property. That is, if interest rates go up and home ownership reduces and some investors pull out of the market wont there be a sharp increase in demand for rents. I mean these people have to live somewhere and if they're not buying PPORs I'd guess they'll be renting. And with less investors in the market they're might even be reduced rentals available. So wouldn't this drive rental prices up, and at least some what offset increases in loan repayments?

It all sounds like to much guess work for me. I guess those who are in for long term don't need to worry as much because barring major catastrophe history here says property will in the long run keep on going on, up.

MF

 

[Nimee]

Apparently the government going to have an inqueiry in to the housing affordability.

There was an interesting discussion on SBS insight program.

http://www.sbs.com.au/insight/

There was BIS sharpenal man and Mark Latham.

Mark Latham saying if they are in government they will match dollar for dollar savings for first home buyers. This will have the same efect as FHOG. Not that there is any fear he will have a chance to do it next few years

BIS man says prices will not crash. At least in melbourne and sydney. He sights the population growth as the reason. and predicting at least 10% growth per annum.

I think there will not be a blanket crash in everywhere. There might be some places that go down, and some may stay the same and some will go up. So as Jan says buy when YOU can and let the time do the rest.

 

[Les]

G'day MF,

I've gotta go with you on this one:-

Or when we talk about the "bursting of the bubble" are we talking about a flattening out in prices or a small drop over a few years?

This sounds more likely to me than a "crash". And yet, the words I'm hearing for Sydney are that there are 52000 new immigrants each year (that's 1000 per week!!!) and they've all got to live somewhere.

On the flip side, though, there are those leaving Sydney (going to Bne??) - I haven't heard the numbers in that detail, but think I remember Bne growing at 100,000 per year. Can we say 50k from Sydney and 50k from Melbourne? Or is there "interstate migration" TO Bne from everywhere (i.e. Hobart, Adelaide, Perth, W'gong, Dubbo, etc, etc). Like I say, I haven't heard the definitive details for EACH city. But it does seem to me that Sydney AT WORST will stay level in population - and more likely to grow (say 20k per year??)

To me, that indicates a "flattening of prices" rather than a huge drop. By the way, I just heard today (to my surprise) that the median Sydney price grew last year 27% to Jun 03 !!!!! And I thought Sydney was "tapering off..." !!!!


Something heard on radio that could directly affect prices SOON, was the fact that Housing affordability has slumped to its lowest rate since 1990. In the report, they mentioned that the AVERAGE Sydney property purchaser is putting in 40%+ of their pay into a mortgage !!! They also commented that it only needs to climb another few percent to reach the heights found in 1990 (which was the start of the last housing value decline).

Circumstances today, of course, are QUITE different !!! Back then, Interest Rates were "through the roof". Today, the Int Rate is the lowest it's been for 40+ years - and STILL property is becoming UNAFFORDABLE to the masses. This HAS to signal the beginning of the end of the boom, IMHO.

It seems to me that "batten down the hatches" is a cry worth heeding, or at least considering at this time. For Sydney at least


By the way, I note that Fixed Rates are starting to tick upward - what does that tell you??

And when Int Rates (variable, that is) start this, watch out!!! Keep in mind that, from a 6% base rate, an increase of 1% is an extra 16.6% that YOU NEED TO FIND to fund those mortgages (IF they are IO - slightly less if P&I).

To use a stockmarket term, "nobody rings a bell at the top - or bottom - of the market". And the same applies with property !! So, "the end is nigh" could STILL be premature.

Further thoughts??? Dissension???

Regards,

 

[Bill.L]

Hi all,

An interesting part of the property overpriced scenario was portrayed in "The Age" today. It compared a purchase of a house in 1959 with that of today to show how the affordability has changed. I didn't get the message because of the following:-
In 1959 a police constables wage of 1000 pounds($2000 for you youngsters ) was used to pay for a house that cost 5750 pounds($11500) in Blackburn, then an outer suburb.

The 2003 example was a young couple purchasing a house in Lysterfield for $268,000.

According to my maths a police constable who would now earn around $44,000- $48000(depending on state and overtime etc) should expect to pay about 5.75 times their salary for a house to be where the 1959 pc was. This turns out to be between $258000-$276000, EXACTLY in the same ballpark as the example given!!!!

The big difference being that you had to save for a 40% deposit in 1959(according to "The Age") compared to only 10% today. Obviously the repayments would be higher today, but the effort required in saving back then was greater.

All very interesting.

bye

 

[natmarie73]

On the flip side, though, there are those leaving Sydney (going to Bne??) - I haven't heard the numbers in that detail, but think I remember Bne growing at 100,000 per year. Can we say 50k from Sydney and 50k from Melbourne? Or is there "interstate migration" TO Bne from everywhere (i.e. Hobart, Adelaide, Perth, W'gong, Dubbo, etc, etc). Like I say, I haven't heard the definitive details for EACH city. But it does seem to me that Sydney AT WORST will stay level in population - and more likely to grow (say 20k per year??)

Last figures I read were around 86000 per year coming to SE QLD which would include Brisbane, Ipswich, Gold and Sunny Coasts etc. Currently still a shortage in housing and land I believe.

Nat

 

[Ruby]

Seeing Australia's population is increasing by 250,000 on average each year.........they will all need accommodation somewhere.

http://www.abc.net.au/public/s823802.htm

But.........Apparently, there's a birth every two minutes and 11 seconds, and a death every three minutes and 47 seconds. hmmmm, so where does that put the numbers, and how many migrants will that make??........argghh, I give up

* Ruby goes off to find a calculator

 

[Garry K]

Hi all.

I'll steal someone else's quote and say the so-called property market is like the weather, its different all over Australia.

I think you have identified one of the keys in considering population growth, whether its immigration, migration, natural, etc.
I like to consider the retiring baby boomers as a driving force, and where will they go eg seachange, sunshine ??. What will they want -golf courses, hospitals?????

Anyone interested in the Baby Boomer theory should go to the following site. An American "guru" ( yes, another one) but this guy has done a lot of study in demographics and what he sees as the purchasing power of the baby boomer generation.
He has just completed a study on what he sees as the effects on real estate in the US. Is easy to translate this to potential effects here.


hsdent.com

Ruby, re your quote
"But.........Apparently, there's a birth every two minutes and 11 seconds, and a death every three minutes and 47 seconds. hmmmm, so where does that put the numbers, and how many migrants will that make??........argghh, I give up "

An "ocker" friend of mine has just had his third child. When I asked him if he was having any more, he said no way, because he'd heard that every fourth child born in the world was chinese!!

( I know, it's an old one - but I like it)

Garry K

 

[Macca]

Hello to all,

Bill,
following on about that article re affordability, I know that in 1962, my father was on about 1250 pounds a year ($2500), he had a wife and three kids as deductions and his TOTAL tax for the YEAR was 5%, which is $125 per YEAR tax.

It would be interesting to compare after tax or nett take home pay cost ratios over the years.

 

[Bill.L]

Hi all,

Macca,
The example of today, if the young couple on $44,000-$48,000(single income) and had 3 kids, the family tax benefits etc would help to bring down the actual tax paid to probably around the 5% level. I find it interesting that after 40 years not a lot has changed. Housing was probably regarded as unaffordable to most then.

Garry, That cracked me up.(We have 3 kids and now know why we stopped!!)

bye

 

[Les]

G'day all,

Earlier, I said ...but think I remember Bne growing at 100,000 per year

I found it !!! Brisbane's Sunday Mail date 20 July, page 52.

Had a number of interesting quotes:-

"South-East Qld is bursting at the seams. An unstoppable tide of Southerners - more than 100,000 a year - is still pouring across the border".

"Brisbane's CBD is no longer the focal point for workers. There are more workers on the Gold Coast than in Brisbane's CBD."

"Brisbane 2003 is pretty much the same size that Sydney was back in the early 60's. ....... In 2023, Brisbane will be almost as big as Sydney is today - around the 4 million mark"

Les>> Sheesh, if that last one is true, SEQ is set to grow TWICE as fast as Sydney has over the last 40 years. (I say SEQ, as it is obvious that the current "Brisbane" is due to become a metropolis made up of the Gold Coast, parts North, plus all of the separate cities and shires that currently make up "Brisbane" - with maybe some southern Sunshine Coast areas thrown in as well !!!)

Regards,

 

[Garry K]

Hi Les

Thanks for the info. Makes me happy I have an IP in Brisbane and in North Gold Coast (Pimpama Rivers).

Having said that though, I'm another mexican who has his retirement plans with that area in mind, but if everyone else is going there, I am looking for a quieter spot.

Currently checking out North of Byron eg Ocean Shores. A bit more relaxed than Gold Coast/Brisbane.
More regional than I would normally go for in an IP, but trying to cater for retirement plans as well.

Like a lot of places, the CG has reduced rental returns in OS to under 5% gross. Hopefully not a long term situation, although would still be pleased to get more CG there

Garry K

 

[NIF]

Hey Garry K,

Thanks for that Dent site, that's some really good stuff there on demographics & particularly baby boomer areas.

Its already proved true in Oz, but the interesting part is that he thinks there a lot more growth to come.

 

[Garry K]

Hi NIF

Yeah, it is a compelling argument. Its a bit like who has the gold (baby boomers), makes the rules.

A few professional presenters I have seen quote his research, so seems to have some credibility.


Geekay

 

[JFEWSTER]

Macca

Clearly your father wasn't paying the same level of tax we pay today, but-

Did your Father have a mobile phone?
What about Foxtel connection?
Two maybe three cars in the driveway?
A boat, swimming pool, motor cycle or jet ski maintenance costs?
Maybe a computer that goes out of date every 2 years?
A revolving line of credit so that the mortgage never gets paid off?
Credit or Store cards?
Kids that need the latest gizzmos, gadgets or Nike shoes?
HECS payments or perhaps an ex wifes child support payments?
Did he build a 2 storey modern mansion with all the mod cons including 3 bathrooms as a first home.

Did he work casual?
What was the chance of even having a job back then as compared to now?

Clearly this list could go on and on but I think you get the drift.
I dont think its as simple as comparing then to now as Bill has done (but I always respect his opinion cos hes usually spot on)

This boom is funded on huge debt, (just like the last time). But this time there will be no chance for interest rates to drop 5% to save everyones ass.

Also for many people the chance of re-financing and combining all debt into the house loan is already spent.

The first home owners have dropped out of the market because they have either bought or now cant afford to.

Owner occupiers are upgrading because they are buying and selling into the same market and therefore have a buffer zone.

Investors are still in the market but with the stock market looking attractive again, and with rental house yeilds low and future capital gains doubtful, you have to ask for how long?

And the 1000 a month "3rd world immigrants" to N.S.W are not going to save the day by paying 500k for a standard house.

There will come a time when it all falls in a heap. Just not yet.

By the way, had a laugh today when yet another co-worker announced he was upgrading to a larger house and was going to keep the original P.P.O.R as a rental. He had absolutely no idea that he couldnt claim the interest bill as a tax deduction.

 

[MarkB]

John

I agree with your sentiments.

However, just as you say that interest rates won't fall to 5%, it is also worth noting that there is no chance of interest rates rising to the levels seen in the late 80's and early 90's.

MB

 

[JFEWSTER]

mb364

Agreed.

But from where I stand, 1% is going to put a lot of people in deep trouble if housing prices (and therefore mortgage sizes) keep rising. Let alone rates going up to 8% which even then is below the historic norm.

We could have a quick economic recovery meaning interest rates rising fast (and the bubble bursting) or we could have a recession (deflation?) meaning less jobs (and the bubble bursting). Or things can stay the same for a while and house prices will keep rising faster than wages until it all gets so out of balance that the bubble bursts.

Sorry for being a pessimist but its hard to feel bullish about buying property right now. I suspect people doing so will be setting themselves up for 10 years of very ordinary returns.

Of course if you already own it your most likely a winner.

 

[Bill.L]

Hi all,

John, while I agree that some things are totally different given that there are 40 years difference. It remained interesting(not the only item of relevance) that in this time the comparison of wages/house prices was close.
Also in that period of time there have been many occasions when doomsters have claimed that this was the end, for many compelling reasons. However they have not been correct since the 1930's, and that was a really different era(because of being tied to a gold standard).
A rise of 1-2% in interest rates now will kill off the latest booom in RE, but it will also create higher inflation and a recession(due to the housing industry retreating). After a few years vacancies will tighten up and then we will get another boom a bit further down the track. This scenario has been playing out for many years.

If we don't go to the typical scenario, and have a period of deflation instead, then property prices are likely to boom much further than they have(as interest rates go lower), before the big bust comes( a la Japan).

My PREFERENCE is for the usual scenario to unfold.This includes some pain for us property investors, as this is the best alternative for the future.
Realistically with the growing population, and peoples NEED for shelter, it is hard to see property crashing in the short term, whichever way interest rates go.

bye

 

[MarkB]

Bill

A couple of minor points:

1. In Australia interest rates follow inflation, not vice versa.

So if interest rates rise it is because inflation has risen.

2. Talk of deflation is probably premature. The best predictions (Treasury) for 2003/04 are for slightly more subdued growth, but there are no indications that CPI will swing into the negative.

http://www.treasury.gov.au/documents/677/HTML/docshell.asp?URL=economic_outlook.asp

(And when I say "best predictions" I don't mean the most positive - I mean the best).

However, either way it does appear that some "pain" (as you refer to it) is unavoidable.

And I'll be honest - I have a degree in economics and I struggle with the concept of "deflation" - of course I know what it is and that it is a reality in Japan, but nevertheless the occurence of a NEGATIVE TIME VALUE OF MONEY (deflation) just makes no sense to me.

Regards

Mark