What happens after a property boom?

[pickle pickle]

What happens after a property boom? I'm quite young so I have no idea. I know with shares that after a boom generally the prices slowly come down and splash there is a big correction (IE. loose 25%-50% value).

My head tells me that property in Melbourne can not keep going up like it is. With everyone now having an opinion on property in Melbourne at the moment, it looks like the market is starting to overheat (in shares this is what happens from my experience, so I'm assuming the same rule applies to property).

I can't see an end to this boom in the near future as I can't quite understand how prices are growing as rapidly as they are, however I think it will end, however when I don't know.

So assuming the boom ends, generally will property stay stagnate for years (like what seems to have happened from 1986-2000 in Melbourne on limited stats that I have) or b) there will be a crash (like a stock market crash and what's happening overseas in property) or c) property will keep growing.

 

[alexlee]

The simple answer is that no one knows. Either of the 3 (keep booming, stagnate, crash) can happen. There are too many variables.

Personally, I don't try to predict the market in the short term. I try to stay as flexible as possible. That means maintaining my exposure to property, but keep a healthy buffer in offset accounts, and keep refinancing to withdraw equity and put it into the offset accounts. That way, if the market booms I'll catch some of it, if the market stagnates or crashes I have the funds to keep holding and maybe buy more at cheaper prices, waiting for the next boom.

 

[Propertunity]

Also, it is not at all uncommon for property to go up 40-50% in a single year, then stagnate, then go up 5%, then drop 10%, then go up 20%, then drop 15%......overall the trend is mostly up.

Most property genius's I see, buy property which goes up 40% in a single year.
Most people I see who lose money in real estate sell after it drops 15% after they buy it (for example).

As alexlee said, you can't predict movements over the short term.

Just because Melbourne had 17% CG last year does not make it unsustainable.

 

[VYBerlinaV8]

One approach which I've used a couple of times is to buy property in areas that seem 'due' for a price increase, but still plan to hold them long term. That way you generally get some good growth early on and can then hold the property at lower LVR over the longer term.

Booms, busts, stagnation can all happen. The question is whether you are prepared for each scenario. Manage your risks!

 

[Oscar]

What happens after a property boom?

If you leveraged wisely you generally become a lot wealthier.

 

[Monopoly]

The simple answer is that no one knows. Either of the 3 (keep booming, stagnate, crash) can happen. There are too many variables.

Actually there are 2 things "after" a property boom (almost full marks Alex) stagnate or crash.

As rightly ponted out though....no-one (short of a crystal ball) really knows for certain, but if you manage your risks properly you should be able to weather whatever storm or calm is ahead.

 

[BV]

What happens after a property boom?

If prices go up too fast and are way too high then they'll stagnate and can even fall but if they are not too high (by measure of affordability for the people who live there) then I suspect that they'll continue moving upwards but perhaps not as fast as before. (following CPI).

The reason for not having a correction this time around are:
tighter lending criteria
the fact that interest rates won't be going to 10% anytime soon.
the shortage of rentals which forces some renters to buy their own place

There is a direct connection between the rental shortage, the amount people pay in rent and the demand to buy property which controls property prices.

I was speaking to a tenant the other day and he said that his mate was given notice to vacate and because he could not find anywhere to rent (he had applied 7 times and was unsuccesful) he decided to buy a property instead.

 

[BV]

If you leveraged wisely you generally become a lot wealthier.

I would have written this as "if you're leveraged aggressively and you time your entry correctly you generally become a lot wealthier "

 

[Bargain Hunter]

If prices go up too fast and are way too high then they'll stagnate and can even fall but if they are not too high (by measure of affordability for the people who live there) then I suspect that they'll continue moving upwards but perhaps not as fast as before. (following CPI).

Thanks BV for the wording. Affordability as measured by the people who live there or more precisely want to live there. If an area is desirable the rest of the market may have little effect on that area. Hence Sydney prices could crash, while properties with harbour views may not be affected. Those who can affored to live there will still pay a premium to do so.

 

[alexlee]

The question is what's causing the increases, whether those factors are sustainable and if not, how fast those FACTORS pull back.

So, if rising prices is caused by loosened lending criteria, is that sustainable? If so, the boom keeps going. If it's not sustainable, how fast does it pull back? The 4 worst-hit states in the US (California, Nevada, Florida and Michigan) this time says it's a fast pull back, which causes prices to crater.

Sydney circa 2003 was different. The market got ahead of itself, and there was oversupply. But the broader economy was still ok, so prices just stagnated as the market digested the oversupply.

The early 00's boom in Perth was triggered by the mining boom, but it had been dead for years before that so there was a lot of pent up demand. The same LEVEL of growth was not sustainable and by around 2006 prices started to fall. But once it looked like China wasn't going to tank with the US, Perth started growing again.

I don't know what the exact reason is for Melbourne's boom at the moment, but generally, the economy is decent but not stupidly booming. Interest rates are low but rising, and lending criteria isn't that loose.

 

[MTR]

Alexee
the interesting thing about the Perth property boom was that it started in 2001 and peaked at 2006, resi and commercial/industrial were all booming.

The boom went on for so long no one really thought it would end, riding on the back of resource boom.

When Perth started to peak late 2006, it was regional areas that suffered first, and prices started to drop back, then outer metro areas started to fall back. The environment changed from no stock to an oversupply. It happened very quickly, but human nature as it is many continued to purchase ignoring the warning signs.

However blue chip held its own for about 12 months before it also got hammered.

The Melb market has been very interesting - 2007 inner city boomed, then I think early 2008it fell back, with inner city dropping 10%+. Early 2009 - 10-25km, middle ring booming and now everywhere. Please correct if I am wrong here.

I will be very interested to see how Melb pans out, I believe it has a way to go yet and not until we see further IR increases will it start to go sideways. Just my thoughts.


http://www.domain.com.au/Public/Art...om town glad rags tell only part of the story

Cheers, MTR

 

[Harris]

Deja vu

http://www.somersoft.com/forums/showthread.php?t=11113&highlight=bust

7 year old thread but you could ignore the dates and it reads like it is all fresh

Bears with 50% decline projections, Economist report talking about overvalued Aus residential market and 30% decline being inevitable and talk of unsustainable property prices...

Enjoy !!

What happens after a property boom? I'm quite young so I have no idea. I know with shares that after a boom generally the prices slowly come down and splash there is a big correction (IE. loose 25%-50% value).

My head tells me that property in Melbourne can not keep going up like it is. With everyone now having an opinion on property in Melbourne at the moment, it looks like the market is starting to overheat (in shares this is what happens from my experience, so I'm assuming the same rule applies to property).

I can't see an end to this boom in the near future as I can't quite understand how prices are growing as rapidly as they are, however I think it will end, however when I don't know.

So assuming the boom ends, generally will property stay stagnate for years (like what seems to have happened from 1986-2000 in Melbourne on limited stats that I have) or b) there will be a crash (like a stock market crash and what's happening overseas in property) or c) property will keep growing.

 

[perky29]

I remember that thread.
Someone who lived in Brisbane predicting falls of 45 to 60% , just before it REALLY took off.

Interesting to note the thread was posted middle 2003 - just as Sydney had peaked and was about go downhill for the next 5 years.
I wonder when the next thread will be thats similar? End of 2012 perhaps when property has had a 20%+ rise and the RBA is trying its hardest to stop inflation?
I guess time will tell - IMO when the next building cycle peaks , then it may be time to cash up / reduce lvr's.
This graph is a few months old , but gives a good picture of previous building cycles. If you delve deeper , you can see how building peaked in 2003 before going downhill.

 

[Sailesh Channan]

Property booms usually end around three years after it starts. The initial gains are usually in the inner suburbs and it quickly spreads to the outer suburbs.

Property booms usually start when the interest rates are low and the economy starts to strengthen. There is also a shortage of supply at the start of the boom.

The opposite is true at the end of a boom. At some stage prices get so high that buying a property becomes unsustainable the activity level slows down and sellers overly optimistic sales prices cannot be met. High interest rates also effect businesses which in turn leads to higher unemployment. This can lead to a recession.

Therefore you will typically see a recession at the end of a property boom.

 

[devo76]

Another thing that happens.

Some investers sell a few of there properties and use the funds to pay of the remainder. They then proceed to enjoy life on there terms independent from the 9 to 5 job............ Well that's the common dream that many aim for

 

[alexlee]

Another thing that happens.

Some investers sell a few of there properties and use the funds to pay of the remainder. They then proceed to enjoy life on there terms independent from the 9 to 5 job............ Well that's the common dream that many aim for

Someone who doesn't do the sums properly on this sort of strategy may find that their income gets killed by inflation and they don't have enough capital appreciation because they've sold off some of their properties.

 

[Sailesh Channan]

Another thing that happens.

Some investers sell a few of there properties and use the funds to pay of the remainder. They then proceed to enjoy life on there terms independent from the 9 to 5 job............ Well that's the common dream that many aim for

Property is usually regarded as a long term investment. As an investor we need to understand cycles so we do not get caught up in the hype around boom times and end up paying too much for a property.

Ordinarily, we should be buying properties as soon as banks are prepared to lend you money to purchase in a good location. Keep doing this on a regular basis and you will be amazed on what is possible.

If an investor starts investing at an age of 30 then the investor could possibly see at least five property booms as well as inflation growth over their investing life. Therefore, it pays to hold on to well performing assets as a hedge against inflation as well as getting a reasonable rate of return.

 

[devo76]

Hey guys it was a light hearted over simplified view of a possible post boom outcome. Of coarse there is more to it and possible risks. But I stand by it as a option.