Prospect of a sudden & dramatic drop in prices should not be ignored

[our obsession]

My stepsister 20 yrs ago noticed the house next door to her(s), (relatively close to Mildura cbd), came up for sale and bought it.

She thought she would buy the house the other side of her 12 months later.

Then bought two units a street over.

The she bought some commercial (doctors rooms) 2 streets over.

Then she kept buying some more houses over the years.

She knew nought of bubbles and markets, she knew nought of bears and antelopes?.

It did take her 20 years but she and her partner are cruising around australia, overseas, doing what they want, when they want, how and why and with whom they want...(in a legal sense).

Financial independence through accumulating appreciating assets in a regional city.

My friend in Horsham had a servo and made some money from his business, thought he might buy a house or two, (same timeframe as my stepsister).

He kept buying houses and because he is handy with a hammer and paintbrush he added some value along the way. He knows nothing of bubbles or squeak, he knows little of bears apart from he loves to go hunting and shooting and fishing.

He is financially independent too, he is off with his girlfriend (who also invested in property!) touring around whatever part of australia takes their fancy.

He ended up with 14 IP's and also a couple of businesses other people work in for him and he does whatever he feels like.

I like what my stepsister did and my friend did, and I know little of bubbles and bears, but I know I like accumulating property.

Investing is fun. I reckon if I do it enough I will reach my financial independence status too. With a little tweaking and diversifying.

Yeah! to property.

 

[random]

My stepsister 20 yrs ago noticed the house next door to her(s), (relatively close to Mildura cbd), came up for sale and bought it.

She thought she would buy the house the other side of her 12 months later.

Then bought two units a street over.

The she bought some commercial (doctors rooms) 2 streets over.

Then she kept buying some more houses over the years.

She knew nought of bubbles and markets, she knew nought of bears and antelopes?.

It did take her 20 years but she and her partner are cruising around australia, overseas, doing what they want, when they want, how and why and with whom they want...(in a legal sense).

Financial independence through accumulating appreciating assets in a regional city.

My friend in Horsham had a servo and made some money from his business, thought he might buy a house or two, (same timeframe as my stepsister).

He kept buying houses and because he is handy with a hammer and paintbrush he added some value along the way. He knows nothing of bubbles or squeak, he knows little of bears apart from he loves to go hunting and shooting and fishing.

He is financially independent too, he is off with his girlfriend (who also invested in property!) touring around whatever part of australia takes their fancy.

He ended up with 14 IP's and also a couple of businesses other people work in for him and he does whatever he feels like.

I like what my stepsister did and my friend did, and I know little of bubbles and bears, but I know I like accumulating property.

Investing is fun. I reckon if I do it enough I will reach my financial independence status too. With a little tweaking and diversifying.

Yeah! to property.

With whom they want , this isn't gonna be more farm animals is it !!!!!!

Couldn't resist

 

[our obsession]

sssshhh or you'll have winnie the wolf back here chastising me.

Nope, neither of them are animal people, strictly investors...one rather likes to shoot

i am the only dr doolittle in the family

 

[lizzie]

In this scenario prices can disconnect from costs of production as has happened in the USA and Spain. When this happens very few houses will be built for a time till prices again return to cost levels with immigration this will eventually occur. This is precisely why in the USA they are counting the days till the overhang is sold off.

we have had this occur in australia a few times - but in isolated areas.

sydney, around 2000, there was a massive oversupply of new unit developments near the cbd and couldn't be given away. took about 2 years for these to be absorbed back up.

docklands in melbourne is another example when it first came online (can't remember the exact timeframe). thousands bought off the plans, but when came time to settle there was such an oversupply of people trying to sell for profit the prices there also plunged and bankrupted more than a few. again, too around 2 years for the oversupply to be sopped up.

had an oversupply of over 55's villas in newcastle a few years back - offering free cars and cashbacks to sell them.

can't see it happening australia-wide tho. what happens is that the oversupply hits, the developers stop building, undersupply kicks in a few years later, developers start building again.

 

[BV]

undersupply kicks in a few years later, developers start building again.

Except for now when we have an undersupply but there aren't enough developers building due to the low profit margins and the limited finance.

Considering the above, and the fact that there are almost zero (0.5-1%) rental properties available, some renters will be forced to buy so demand in affordable suburbs will be maintaned and some price increases are not unlikely

 

[myoung]

Unemployment is the key to any big fall going to occur here IMHO. Until we have a large increase in unemployment, any market wide falls will be limited to short term 10 to 15% dips similiar to the when the GFC hit.

 

[lizzie]

very true ...

 

[tom32]

Unemployment is the key to any big fall going to occur here IMHO. Until we have a large increase in unemployment, any market wide falls will be limited to short term 10 to 15% dips similiar to the when the GFC hit.

Absolutely.

An undersupply can turn into an oversupply on the back of a change in affordability.

People can utilise existing housing stock more than it is but this will only occur if something changes.

I think the potential reasons for a drop in demand below existing stock levels could be any or a combination of the following:

Unemployment
Cost of Credit
Access to Credit
Sentiment

(Edit: Sorry clearly all of these relative to price! You could have all four turn against but demand will still always be there at the right price.)

These 4 factors have all been in properties favor, maybe sentiment has turned in the last 6 months and this is why I think clearance rates are dropping. Surely interest rates at below 2007 prices is not causing the current weakness in isolation?

While I think it is possible demand drops below existing stock levels if a macro factor like any of the ones above turns, it would in a growing population like Australia's be taken up shortly after in our capitals at least.

My concern is what happens to unemployment when the people involved in home building are then out of work, this will be a major feedback from the start of any house price falls. If the government moves on their taxes in development to prop up activity by making house production cheaper it will just feed the bust further.

I can see why when their are signs of weakness in housing they always hit the demand side to fuel activity not typically the supply side.

 

[Ausprop]

Unemployment is the key to any big fall going to occur here IMHO. Until we have a large increase in unemployment, any market wide falls will be limited to short term 10 to 15% dips similiar to the when the GFC hit.

I see you are posting from Melbourne, so perhaps your outlook is more bullish due to the bizarre run up in prices that melbourne went thru. Even in the growth states where unemployment was very low the drops were much greater than 15% in some segments. With Melbourne prices sitting right up there and the mining boom about to split the nation into the haves and have nots I would hold concerns about investments in the south east.

 

[PeterC]

I can see why when their are signs of weakness in housing they always hit the demand side to fuel activity not typically the supply side.

has always seemed a bit silly hasnt it. only reason i can think of is if buyers have the extra $20K (whatever), then it keeps prices artificially higher compared to the builders able to make something $20K cheaper. (and of course in terms of politics you win a lot more votes giving out money to people, than you do to the 'greedy corporations!')

 

[myoung]

I see you are posting from Melbourne, so perhaps your outlook is more bullish due to the bizarre run up in prices that melbourne went thru. Even in the growth states where unemployment was very low the drops were much greater than 15% in some segments. With Melbourne prices sitting right up there and the mining boom about to split the nation into the haves and have nots I would hold concerns about investments in the south east.

Yep, i am pretty Melb centric in my views. I understand Perth shot way up and landed with more of a thud than 10-15% in a lot of areas.
My best mate made 75% in 2 years on his PPOR in Applecross that cost $1m. Would hate to be the person who bought it @ $1.75M! as i would guess they are a fair bit backwards now 3 years later.

I am referring mainly to the median prices. There will be pockets less affected and other areas more affected.
I had a bet a few years back with a friend of mine over the Melbourne median, He is a PhD in Economics and a Steve Keen Fan too(tragic really), he was listing everything under the sun calling the property crash( for the last 5yrs - as in it will happen any day now) even after banks tightened their LVR 's by 5%. I still think if we have a major fall, it will require high unemployment to do it.

I'm not barracking either, as my PhD friend accuses me of regularly, i am lowly geared(< 25% LVR) and am happy to go shopping should it turn into a firesale. I'm not what i would call bullish, i think it will be flat/stagnant/slight downturn for the next couple of years. I just dont think it will be in the realms of the 40 - 60% calls, unless you are talking VERY high end properties.

Just an opinion, I have largely lurked on here for 5 yrs, thought i would start throwing my 2 cents in here and there

 

[Aaron Sice]

My main reason is based not on economic theory, but my gut feel for the psychology of my fellow Australians. Australians are far more property-minded than in either the US or UK. Home ownership, and thus housing prices, are really an obsession with Aussies, relative to other countries, where it's not discussed by the "average Joe" to anywhere near the same extent. Property investing is also nowhere near as common for "Mum and Dad" investors in either of those countries; far more commonly, landlords are professional landlords with a whole portfolio of properties, or housing authorities. The Australian situation where one rents their home from another average family, is much less common in both those countries.

Consequently, we have a far greater proportion of the population who are property owners, and thus invested in keeping property prices high. Therefore, the political will to prevent a housing collapse is much greater in Australia.

agreed and kudos. so many folk seem to gloss over the aussie psych when it comes to property. sentiment rules in every market - economic fundamentals be damned.

 

[Perp]

agreed and kudos. so many folk seem to gloss over the aussie psych when it comes to property. sentiment rules in every market - economic fundamentals be damned.

Spiderman has since corrected me that home ownership rates are in fact almost identical in UK and USA to Australia (69-70%), but I think my point about "Mum and Dad" investors is still valid. And in Australia, property is considered a wealth creation / retirement income vehicle much more so than in the USA and UK, too.

I'm struggling to find a better way to verbalise my thoughts in a better way than "It's the vibe of it... ".

 

[Aaron Sice]

Spiderman has since corrected me that home ownership rates are in fact almost identical in UK and USA to Australia (69-70%), but I think my point about "Mum and Dad" investors is still valid. And in Australia, property is considered a wealth creation / retirement income vehicle much more so than in the USA and UK, too.

I'm struggling to find a better way to verbalise my thoughts in a better way than "It's the vibe of it... ".

like i said, fundamentals be damned, sentiment rules the game.

some of the biggest share market bull rallies have STARTED in overbought territory - explain that one!

In summing up, it's the Constitution, it's Mabo, it's justice, it's law, it's the vibe and ........ no, that's it ..... it's the vibe!

 

[evand]

There is no under supply. Its a myth constantly peddled by self intrerest parties to convince punters to keep buying property.

Absolutely.

An undersupply can turn into an oversupply on the back of a change in affordability.

.

Kudos Aaron. When sentiment turns, all logic goes out the window. Fundamentals mean squat. And price falls can and do occur.

 

[devo76]

There is no under supply. Its a myth constantly peddled by self intrerest parties to convince punters to keep buying property.



Kudos Aaron. When sentiment turns, all logic goes out the window. Fundamentals mean squat. And price falls can and do occur.

Not wanting to start a fight here but can you explain why there is no shortage. I have seen many faceless forum members ignore the info available and say there is no shortage. What information is available to them that is not available to the rest of Australia.
I believe as stated that interested parties will push the shortage but if there is no shortage then why isn't it on the news right now. Media loves gloom also so where is the coverage.
I think the severity of the shortage is open to discussion but I just do not believe it's a myth.not what I'm seeing at the coal face anyway.

 

[evand]

Because if there was a shortage (now) don't you think rental vacancy rates would be zero or close to zero?

Its not a shortage of houses for sale but a shortage of places to live that is the so called under supply.

If people cant buy they'll rent. And if there was a shortage of places to rent, rents would be going through the roof. Thats obviously not the case.

Also, supply/demand is a funny thing. It varies in different areas and suburbs in one city even.

The govt. can release land on the outskirts of (eg) Sydney to help the supply side. But not many want to live there. Thats why properties are cheap there. So there is an oversupply in these places.

Where as closer to the city, prices are high and demand is higher and the equation is the opposite. And a thousand variables in between these two extremes (or areas).

3rdly (but not so important imo) is that immigration will be curtailed in the near future, starting in 2011. This is the long held argument that supports the increasing under supply/ over demand argument.

It was never about just immigration. Its about where they live and create demand.

Anyway, net immigration will be much less going forward. So there goes that one.

The undersupply argument is bunk imo.

Not wanting to start a fight here but can you explain why there is no shortage. I have seen many faceless forum members ignore the info available and say there is no shortage. What information is available to them that is not available to the rest of Australia.
I believe as stated that interested parties will push the shortage but if there is no shortage then why isn't it on the news right now. Media loves gloom also so where is the coverage.
I think the severity of the shortage is open to discussion but I just do not believe it's a myth.not what I'm seeing at the coal face anyway.

 

[Amadio]

I think the severity of the shortage is open to discussion but I just do not believe it's a myth.not what I'm seeing at the coal face anyway.

Depends on where your coalface is.

Some places in Oz have houses for sale and rent which are sitting unloved for yonks.

There's a current thread on a property in Bulleen, Vic which has been struggling to find a tenant for 8 weeks.

If there was a shortage wouldn't it have been rented in a day?

 

[Propertunity]

If there was a shortage wouldn't it have been rented in a day?

Not necessarily! evand makes the point that there is no undersupply and uses vacancy rates to support that argument (fair enough), but that is not the whole story.

Ask any PM what the rental demand is like in their area and you'll get the same answer "we don't have enough rentals for the demand coming through the door". Then get yourself an IP in this same area and look at the applications you get from prospective tenants

I had this experience recently. HUGE demand for one of my IP's but I (and my PM) rejected dozens and dozens of applications. I just won't rent to people with no references, no long term job history, bad references, or even putting these aside, I won't put a family of 6 into a 3brm house of mine because "that is all they can afford". Many of these prospective tenants tell stories of living in cramped conditions with parents or other family members.

So I reject the notion that there is plenty of supply to satisfy demand - there is not.....and you cannot measure thins by vacancy rates alone. But there may well be a shortgae of 'quality tenants' in some areas.

 

[.toe]

Because if there was a shortage (now) don't you think rental vacancy rates would be zero or close to zero?

Its not a shortage of houses for sale but a shortage of places to live that is the so called under supply.

If people cant buy they'll rent. And if there was a shortage of places to rent, rents would be going through the roof. Thats obviously not the case.

Also, supply/demand is a funny thing. It varies in different areas and suburbs in one city even.

The govt. can release land on the outskirts of (eg) Sydney to help the supply side. But not many want to live there. Thats why properties are cheap there. So there is an oversupply in these places.

Where as closer to the city, prices are high and demand is higher and the equation is the opposite. And a thousand variables in between these two extremes (or areas).

3rdly (but not so important imo) is that immigration will be curtailed in the near future, starting in 2011. This is the long held argument that supports the increasing under supply/ over demand argument.

It was never about just immigration. Its about where they live and create demand.

Anyway, net immigration will be much less going forward. So there goes that one.

The undersupply argument is bunk imo.

Evand can you please explain some of this, I'm not seeing some of these figures the same way. Over the past decade there has been more growth in the number of households than houses and the forecast is for that gap to widen. Also over the past decade prices are up way more than trend, especially in areas close to jobs. How is this not a shortage of housing?

Rental vacancies are tightening in every capital city in the last year, and they are tighter in every capital city than in 2005. Vacancies dont have to go to zero to signal undersupply. Tightening is a sign of moving toward undersupply and that we have price inflation, or will have.

In the fed election both parties promised to cut back imigration, but according to the Financial Review, the treasury has warned the government that would be a mistake which will result in increased wages inflation and IR rises. The mining industry alone will be 33,000 jobs short of requirement over the next 5 years on current projections, never mind if we cut imigration. My political forecast is for the government to do whatever it can to weedle out of that promise, perhaps we'll see some actual infrastructure?