This move by the banks confirms bubble

[wylie]

Exactly what I was thinking joanmc. Those two examples are NOT dipping your toe carefully in the property market .

The unit my son has paid $290K for might drop to $200K. If it does, that will be annoying, but he is not paying much more than he would pay to rent it. In fact with his friend helping, he is paying less than he would in rent for this particular unit on his own.

I would not be as thrilled if he was trying to get a three bed/two bath apartment close to the city for $550K where his mortgage payments would be so much more than his rent.

 

[VYBerlinaV8]

If you don't believe there is a big downturn then the advice to get on the property ladder is quite sound. However even if there is only flat nominal prices for a few years people like Beebop should be wary of buying somewhere they hate just to get on the property ladder. Because then they face the possibility of actually having to *live* there for at least a few years for prices to start rising and then another few years for prices to rise high enough to upgrade. I personally though think if Beebop really does want to buy he is being a bit fussy and he is ignoring good advice such as to go over and rent for a while in the area or see how noisy it is himself. He may actually quite like the place.

Beebop has suggested that property that's reasonably well located (15-20 mins to Canberra City) is out of his price range. This has been substantially disproven through specific examples.

I don't think Australia is in for a big downturn in property, as the fundamentals don't seem to support it, especially unemployment.

 

[Fifth]

I know of people in their 50s with enormous mortgages, car/credit card debts, no savings, few assets, and so forth. Their superannuation will be lucky to pay off their PPOR. They spend ludicrous amounts of money on holidays, eating out, and all the other 'lifestyle' fluff. Their idea of a retirement plan is to write a 'Things To Do Before I Die' list and stare blankly if one should ask how they intend to fund these lavish 'goals'.

Whilst I agree that some FHBs overextend themselves, the 'me syndrome' and the 'now syndrome' are by no means unique to Generation Y.

In the two examples Tehanu gave, well, it's hard to feel sympathy. This isn't a age/generational issue so much as a stupidity issue. To have taken out such large mortgages they were chasing capital gains and/or attempting to emulate a lifestyle beyond their means. I shan't cry for them. Nonetheless, if their purchases had turned out a success, and they had gone on to build impressive property portfolios, they would be praised on this forum for their can-do attitude. The difference between being 'greedy' and being an 'inspiration' has everything to do with timing when it comes to investing.

 

[Deltaberry]

Can't really compare Ireland against Japan.

In Japan, the tide turned and the country financially collapsed and entered a financial mess the next four decades. Forget about house prices, you were lucky to even have a job at the start of the lost decade.

In HK, during the Asian Financial Crisis 1997, house prices dipped like they did in Ireland. Many people were in the position of that Irish girl, including my cousin, my friend and my parents' friends. In 2003 during SARs, the prices crashed even more and at Bel Air No 8 it was selling for ~$4000 per sq feet. Fast forward to today, all these people have made all their money back and Bel Air No 8 is now selling at close to $20000 per sqm feet, a 5-fold increase in 7 years. The same thing happened in Singapore, Taiwan, Seoul (the four Tigers), yet these three cities have also roared back and achieved higher highs.

What I'm saying is that it's too naive to make a call on Ireland/US and for people to compare it with Japan ,and then extrapolate that UK/Australia will enter a similar phase, is perhaps a bit misguided and shows an inept lack of understanding about finance and economics. Anyway probably too many examples, probably lost halfway through this post anyway and haven't read this far.

Perhaps a better comparison point would be to ask yourself whether the state of the economy and house price metrics (eg price-to-rent, price-to-wages) are comparable to the 1989-1991 bubble and eventual collapse? Even then, it wasn't that severe and only the mortgage belt and highly geared got flushed out.

 

[VYBerlinaV8]

Whilst I agree that some FHBs overextend themselves, the 'me syndrome' and the 'now syndrome' are by no means unique to Generation Y.

This true. I'd add, though, that because so many GenXer's and older people see GenYer's with 'stuff' that they never had at that age, it's easy to jump to the conclusion that it's a Gen Y thing.

That said, I don't know too many GenYer's that I would consider to be go-getters (and I know a few).

 

[Tehanu]

Exactly what I was thinking joanmc. Those two examples are NOT dipping your toe carefully in the property market .

The unit my son has paid $290K for might drop to $200K. If it does, that will be annoying, but he is not paying much more than he would pay to rent it. In fact with his friend helping, he is paying less than he would in rent for this particular unit on his own.

I would not be as thrilled if he was trying to get a three bed/two bath apartment close to the city for $550K where his mortgage payments would be so much more than his rent.

Actually the sort of property your son is buying will likely dip a fair bit: apartments especially if they are badly located are fairly risky.

Also it is obvious the Japanese guy at least could afford to pay the mortgage - he's been doing it for the last couple of decades, probably while raising a family. The Irish girl is struggling but managing.

While your son can pay it off well now, if property goes into a prolonged downturn he may not be able to sell it if he needs to e.g. he gets married and is looking to have kids and a small unit is no longer suitable. This is the sort of situation people in Japan and now US find themselves in. A possibility is then he rents it out while he rents elsewhere but there is an enormous opportunity cost and likely large psychological stress.

I guess I didn't choose the best example for Ireland, but in Ireland they had the big commuter suburbs too and shoebox apartments (too small to even have a kitchen!) just because they were the only things people could afford. How do you raise a family in a shoebox aparement? They are stuck there now.

The key thing is if you buy near the top and there is a prolonged downturn you may end up being stuck where you are. Hence the plunging housing mobility rates in the US amongst home owners (though not renters). So if you think there might be a chance of a prolonged downturn or even an extended period of no growth and you are still determined to buy it is best to buy somewhere you will be comfortable living.

People who work hard don't necessarily win in the end and just because you feel that you've sacrificed your happiness for a few years by living in a place you are miserable in the gamble that your house/unit price will go up so you can upgrade doesn't mean that fate will reward you. In fact in some cases it will likely punch you in the gut and then kick you while you are down. A common saying here is that life is not fair and it is also true the other way around.

 

[Tehanu]

Can't really compare Ireland against Japan.

In Japan, the tide turned and the country financially collapsed and entered a financial mess the next four decades. Forget about house prices, you were lucky to even have a job at the start of the lost decade.

Actually unemployment didn't really increase that much in Japan. Construction workers got hit hard. However the Japanese companies tried as hard as possible to not lay off workers due to a feeling of social responsibility.

However young people who graduated during that era were not able to find permanent positions. They managed to scrap a living chaining together temporary positions though. They weren't really unemployed though.

In HK, during the Asian Financial Crisis 1997, house prices dipped like they did in Ireland. Many people were in the position of that Irish girl, including my cousin, my friend and my parents' friends. In 2003 during SARs, the prices crashed even more and at Bel Air No 8 it was selling for ~$4000 per sq feet. Fast forward to today, all these people have made all their money back and Bel Air No 8 is now selling at close to $20000 per sqm feet, a 5-fold increase in 7 years. The same thing happened in Singapore, Taiwan, Seoul (the four Tigers), yet these three cities have also roared back and achieved higher highs.

Yes, and Australian property dipped back further back to. As did American house prices. This is known as the property cycle.

However the areas which have dipped recently - US, Ireland, Spain, etc. are in deep economic crap due to the failures of their banking system due to their heavy debt levels due to the dependency on people speculating on property using high amounts of leverage such that small decreases in property prices caused the financial systems to seize up. In Japan I think it was more commercial property leverage that caused the banks to seize up. Which one is Australia's current system more similar to? Anyway, in the last couple of decades there has been banking deregulation and a massive worldwide credit binge which is now reversing.

What I'm saying is that it's too naive to make a call on Ireland/US and for people to compare it with Japan ,and then extrapolate that UK/Australia will enter a similar phase, is perhaps a bit misguided and shows an inept lack of understanding about finance and economics. Anyway probably too many examples, probably lost halfway through this post anyway and haven't read this far.

You can think what you like. The key thing here is the banking system and its chances of seizing up. Personally I think the most likely weakness is the foreign lenders.

Perhaps a better comparison point would be to ask yourself whether the state of the economy and house price metrics (eg price-to-rent, price-to-wages) are comparable to the 1989-1991 bubble and eventual collapse? Even then, it wasn't that severe and only the mortgage belt and highly geared got flushed out.

Actually in terms of house market as a percentage in terms of GDP I believe Australia is way about 3 - that is the housing market is about 3 times GDP. I think only a handful of countries have ever reached that point. China currently. Japan just before it crashed. HK just before it crashed. And that's it. The US before it crashed only had a housing market about 1.5 times its GDP. The reason why this ratio is important is because it is an indicator of how easy it is for the government to support the housing market if it starts falling.

In the end the key point is this - it doesn't matter how personally responsible you are - it's all the nitwits who aren't that will bring you down in a housing bubble. Count the number of people you know or see who you think are idiots in their property purchasing choices. If there is enough of them that it what will bring the housing bubble down because it will seize up the banking sytem and this will also bring down the value of your own property too.

 

[Tehanu]

Beebop has suggested that property that's reasonably well located (15-20 mins to Canberra City) is out of his price range. This has been substantially disproven through specific examples.

I don't think Australia is in for a big downturn in property, as the fundamentals don't seem to support it, especially unemployment.

The point is not how affordable it is - the point I was trying to make was if he wasn't happy there (and I do agree he may be too fussy at that point) he may not actually be able to sell to do the "live in a place you are not happy with so you can upgrade later" get on the property ladder meme that seems to be popular in Australia (and other places before their property crashed).

A popular line here is that life is not fair. So you should all know that just because you worked hard, lived in a flat you hate for a few years, and save your pennies and did nothing for a few years doesn't mean the fates will actually reward you by allowing you to reap the rewards of your sacrifice by being able to upgrade. In fact you should all be able to recognize the possibility of fate kicking you while you are down. Another thing about unfairness is that it is all the people who you think are idiots who will bring you down with them in a housing bubble crash. And the foreign lenders and banking executives will probably end up living in the lap of luxury.

And I've pointed out many many times that unemployment is a lagging indicator in a housing bubble crash.

 

[willair]

And I've pointed out many many times that unemployment is a lagging indicator in a housing bubble crash.

That's only one item,you will need several more then that too kick start a full blown property bust in Australia with all the distortions that are in the media,every day the silent evidence is out there for those who can see it..

 

[VYBerlinaV8]

The point is not how affordable it is - the point I was trying to make was if he wasn't happy there (and I do agree he may be too fussy at that point) he may not actually be able to sell to do the "live in a place you are not happy with so you can upgrade later" get on the property ladder meme that seems to be popular in Australia (and other places before their property crashed).

To be honest, I've never lived in a place I didn't like. My first residence after leaving home a small shoebox in the 'burbs (rented) and we still live in the house we built after that.

I take your point about not being able to easily sell on a property without loss, but that's where some thinking and value add should generally get of trouble.

As for the economic discussion, it's probably easier to just agree to disagree (and continue to argue the points).

 

[wylie]

Actually the sort of property your son is buying will likely dip a fair bit: apartments especially if they are badly located are fairly risky.

It is an extremely well located unit in a small block in a great area, 4km from the city. It is a very good buy at the price, and I looked at every unit within a 5km radious (on the net - some in person). If the price "dips a fair bit" then a lot of other people will be in much bigger trouble. His mortgage is probably $70 per week more than he could get in rent for it right now, so we are all quite comfortable.

While your son can pay it off well now, if property goes into a prolonged downturn he may not be able to sell it if he needs to e.g. he gets married and is looking to have kids and a small unit is no longer suitable.

We did look at future scenarios. No issues with that. My guess is that down the track if this is ever to small for him, he will rent this out and either rent elsewhere or buy again when he wants to (IF he wants to).

So if you think there might be a chance of a prolonged downturn or even an extended period of no growth and you are still determined to buy it is best to buy somewhere you will be comfortable living.

Agree totally. I know this son would never be happy to pay rent, so his options were to stay under our roof (very comfortable, but at his age, he wants some independence) or buy. It is not a shoebox. It has a huge main bedroom (he is moving into the smaller second bedroom), a good sized kitchen and living room and a nice little extra laundry off the kitchen. It is a good unit. There is a family of four living in it now.

To be honest, the worst thing I believe that could happen is that values will not rise for several years. Meanwhile, our son is paying a bit more into his mortgage than he could if he rented. As rents rise, that extra becomes negligible.

If rents fall, then, as I said before, we are all in for a rough ride.

If the value of the unit falls, he will keep paying the mortgage like everybody has done when prices have dipped before.

On balance, he is taking a small risk, and with our blessing.

 

[Aaron Sice]

no offence, but $290k and sharing the mortgage payments via subletting isn't exactly a huge risk - especially if the mortgage payements are similar to rent.

i'd say that's a well-calculated risk.

we can't avoid risk. i think people need to remember this. you will never eradicate it. you can only draw a circle around it and manage it.

we're not doing an economics major here, we just want somewhere to live. a PPOR should be exempt from all this garbage thought process because it's an emotive buy for 95% of the population.

and if you're buying an IP, just assess the risk and invest accordingly. you can't stop a GFC anymore than you can stop a truck with no brakes coming up behind you.

 

[Beebop]

290k when you only earn 35k is a huge risk. Maybe no one wants to rent a dirty tiny room in a crap shack with a male in his early 20s ?

 

[Beebop]

Beebop has suggested that property that's reasonably well located (15-20 mins to Canberra City) is out of his price range. This has been substantially disproven through specific examples.

I don't think Australia is in for a big downturn in property, as the fundamentals don't seem to support it, especially unemployment.

No it hasn't.

 

[Tehanu]

To be honest, I've never lived in a place I didn't like. My first residence after leaving home a small shoebox in the 'burbs (rented) and we still live in the house we built after that.

I take your point about not being able to easily sell on a property without loss, but that's where some thinking and value add should generally get of trouble.

As for the economic discussion, it's probably easier to just agree to disagree (and continue to argue the points).

That sounds good

 

[Tehanu]

To be honest, the worst thing I believe that could happen is that values will not rise for several years. Meanwhile, our son is paying a bit more into his mortgage than he could if he rented. As rents rise, that extra becomes negligible.

If rents fall, then, as I said before, we are all in for a rough ride.

If the value of the unit falls, he will keep paying the mortgage like everybody has done when prices have dipped before.

On balance, he is taking a small risk, and with our blessing.

OK, when you explain it, it does sound like fairly good risk management if you are intent on buying.

I likely still wouldn't have bought it because I believe prices will go down a lot and why buy now when I can buy later (unless it was a really good bargain IP). However given that you and your son don't then according to those beliefs you seem quite responsible.

Though if Beebop is right and your son only earns $35,000, a $290,000 property is a bit risky. But it does seem you and your son have considered the risks and have accepted them and in some cases that is the best we can do.

 

[VYBerlinaV8]

No it hasn't.

Yes, it has.

 

[wylie]

290k when you only earn 35k is a huge risk. Maybe no one wants to rent a dirty tiny room in a crap shack with a male in his early 20s ?

You really have no idea. It is not a huge risk, but you really have me worried now . It is not a dirty or tiny room in a crap shack. It is a nice sized two bedroom unit overlooking suburban views, 4km from the city in a great suburb. You got most of it right, but you did get it right about a male in his early 20s. He is way more mature than you.

Kvetch, kvetch, kvetch. I just learnt a new word, and I immediately thought of you .

 

[wylie]

Though if Beebop is right and your son only earns $35,000, a $290,000 property is a bit risky. But it does seem you and your son have considered the risks and have accepted them and in some cases that is the best we can do.

He was offered finance from two major banks. We have considered the risks and I believe even if the bottom drops out of the market, he still is only paying a little more than he would rent the same place for.

But I don't believe the bottom will drop out of the market. I believe it will be slow for a while. Meanwhile our son gets independence whilst getting to own a bit of his place, bit by bit, and we get a spare room .... don't tell my mother-in-law .

 

[Tehanu]

He was offered finance from two major banks. We have considered the risks and I believe even if the bottom drops out of the market, he still is only paying a little more than he would rent the same place for.

But I don't believe the bottom will drop out of the market. I believe it will be slow for a while. Meanwhile our son gets independence whilst getting to own a bit of his place, bit by bit, and we get a spare room .... don't tell my mother-in-law .

A spare room might be considered priceless