When will OZ residential property prices reach its next peak?
- Thread starter JIT
- Start date
Michael,
* The current massive under-supply of houses.
This happened in UK and supposedly US too, but the undersupply if it really exists in Australia wont prevent house price falls as this clearly did not prevent them in the UK
* The lag before new property can come online.
The lag is the normal part of the property cycle and from what I have ready construction is underway anyway, so the lag wont be around much longer
* The impact of low rates.
This is temporary and is artifically low so its hard to include this as having any significant longer or even medium term effect because interest rates will simply go back up soon and quickly in the event of ANY sign of a property boom
* The economic recovery and the construction led property boom.
It's too early to say the economy is actually recovering, as it may dip again, and the construction led property boom is a statement not backed up by facts and contradicts your earlier statement about a property lag
Just trying to be constructive here in a meangingful manner
Tim
An undersupply on its own probably wouldn't prevent falls, but an undersupply together with record low interest rates, looser credit (compared to UK), record high population growth, government stimulus and strong economy, probably would prevent Australia from following the UK experience (certainly has done so far anyway). UK prices have been rising strongly all through 2009 by the way, even despite their much lower population growth, weaker economy, and tighter credit conditions.
Do you believe the RBA would sacrifice the wider economy (higher interest rates for business and personal loans) just to keep a lid on house prices? I don't believe low house prices are at the top of the RBA's agenda - they are more interested in keeping inflation in check, and ensuring that the wider economy does not fall into a major recession, depression, or deflationary environment.
Tim (and others),
Shadow's last point is an important one, and I'm going to elaborate slightly as its central to our current economic juncture...
The main reasons Australian property prices did not collapse are as follows:
Firstly, too much of our national wealth is stored in our properties. This gives them a sort of protected species status with the government and the RBA. If prices collapse then the wealth effect has a negative feedback loop on the rest of the economy. So the government and the RBA will do everything they can to underpin prices in times of economic trouble.
Secondly, both the government and the RBA had heaps of scope to move coming into this economic turmoil period. They both moved and moved big. In doing so they put a solid floor under the property market and actually went a bit far and lit a flame under it. Watch out!
Thirdly, despite the RBA's concern about exploding prices, there's actually not much they can do about it. The government's stimulus is "spent" money, even the stuff that is still flowing through into the economy. They're not going to pull any of it now. And as Shadow points out, the RBA won't move on rates if they fear slowing the greater economy. Property will get a free kick for quite some time. The G20 just agreed to keep global stimulus in place for the foreseeable future. The RBA will tow the line.
Another point I want to make is that the share market is transacted in real time and residential properties are a lot less liquid. This means that equities are a bit of a canary in the coal mine indicator of trouble. The RBA saw what was happening and could move quickly to underpin the economy. Fortunately for the property markets their lack of liquidity meant these actions supported them before any negative feedback loop ensued. Not so for the stock exchange. This will no doubt reinforce for the uninformed masses the "only ever goes up" falacy of property as the better asset category.
Its not so much that property is special as an asset category in that it is immune to corrections, its just that due to the points above, it is much more likely to be supported. The more it is supported, the more "special" it becomes. Its a bit of a protected beast with an unwritten government-backed guarantee as a store of wealth. I'll bank on that preferential treatment and go overweight this asset class. Particularly now with all of the key elements for a medium term boom now in place: low rates / easy affordability, improved investor sentiment in this asset class, good demand/supply fundamentals. As media reporting of improving prices gain traction, the sentiment will only improve further. Coupled with the weight of money on the sidelines argument, including use of private super money, this will create one hell of a positive self-fulfilling feedback loop on prices.
I genuinely think the current biggest risk for the Aussie resi property market is a full blown boom running way too far before rates start to rise. But I'll address the risks to my portfolio should that eventuate and my properties double from here in the next three years. At that point, liquidating to cash to protect my net worth might be an action worth considering. But today, I see no reason not to be confident of a very strong property market in the medium term.
Cheers,
Michael
Shadow's last point is an important one, and I'm going to elaborate slightly as its central to our current economic juncture...
The main reasons Australian property prices did not collapse are as follows:
Firstly, too much of our national wealth is stored in our properties. This gives them a sort of protected species status with the government and the RBA. If prices collapse then the wealth effect has a negative feedback loop on the rest of the economy. So the government and the RBA will do everything they can to underpin prices in times of economic trouble.
Secondly, both the government and the RBA had heaps of scope to move coming into this economic turmoil period. They both moved and moved big. In doing so they put a solid floor under the property market and actually went a bit far and lit a flame under it. Watch out!
Thirdly, despite the RBA's concern about exploding prices, there's actually not much they can do about it. The government's stimulus is "spent" money, even the stuff that is still flowing through into the economy. They're not going to pull any of it now. And as Shadow points out, the RBA won't move on rates if they fear slowing the greater economy. Property will get a free kick for quite some time. The G20 just agreed to keep global stimulus in place for the foreseeable future. The RBA will tow the line.
Another point I want to make is that the share market is transacted in real time and residential properties are a lot less liquid. This means that equities are a bit of a canary in the coal mine indicator of trouble. The RBA saw what was happening and could move quickly to underpin the economy. Fortunately for the property markets their lack of liquidity meant these actions supported them before any negative feedback loop ensued. Not so for the stock exchange. This will no doubt reinforce for the uninformed masses the "only ever goes up" falacy of property as the better asset category.
Its not so much that property is special as an asset category in that it is immune to corrections, its just that due to the points above, it is much more likely to be supported. The more it is supported, the more "special" it becomes. Its a bit of a protected beast with an unwritten government-backed guarantee as a store of wealth. I'll bank on that preferential treatment and go overweight this asset class. Particularly now with all of the key elements for a medium term boom now in place: low rates / easy affordability, improved investor sentiment in this asset class, good demand/supply fundamentals. As media reporting of improving prices gain traction, the sentiment will only improve further. Coupled with the weight of money on the sidelines argument, including use of private super money, this will create one hell of a positive self-fulfilling feedback loop on prices.
I genuinely think the current biggest risk for the Aussie resi property market is a full blown boom running way too far before rates start to rise. But I'll address the risks to my portfolio should that eventuate and my properties double from here in the next three years. At that point, liquidating to cash to protect my net worth might be an action worth considering. But today, I see no reason not to be confident of a very strong property market in the medium term.
Cheers,
Michael
Sorry if i sounded a bit cynical in my above post, but i think polls on this sought of topic are dangerous.
As an online community, its great to get a touchy feely feeling accross the board, but just because a bunch of, for the most part, amature investors (myself included) might agree on some future date, this has a high degree of probability of not correlating to actual reality.
Just look at some of the earlier polls done on interest rate predictions.
Therefore such polls can give a false sense of security.
Somersoft is a great source of community knowledge. But that knowledge must be adapted to an individuals specific circumstances.
I understand sometimes where Daz is comming from when he expresses frustration at all the 'academic to and fro' about whether property prices are peaking, whether we are going to have a crash etc.
For some of the smart somersofters they can spot an opportunity and use their skill set to make the transaction work for them with a high probability of success, regardless of where the overall market is trending.
Y33,
I apologise for the lack of supportive analysis, but my reading has suggested that they won't. Well, not in any significant way anyhow. They might add 0.1% or 0.2% but that's not material. They're still padding their margins since competition has been destroyed in their marketplace.
They will, however, continue to increase their fixed term rates as term funding is still relatively expensive though falling. They lend their term rates at a margin above their term funding so these are still expensive. Short term money is still pretty cheap so variable rates can afford to follow that trend. They're also sitting on some pretty conservative capital ratios sub 25x now. All the new BASAL rule changes won't affect the Big 4 over here as they're very conservatively capitalised. In fact, I expect them to ease their lending criteria towards the end of the year to capture some more market share and lever up their earnings. The more they lend, the more margin they make on those dollars and the more they can pay their shareholders. Being too conservative impacts their bottom line.
As mentioned in a few threads, variable rates will probably max out in the mid 7's through the next up cycle and will probably take years to get there. We're at 5% today so that's a lot of little hikes along the way. 5 year rates are mid 7's today, so why would anyone contemplate fixing at a rate likely to represent the peak in the next rate cycle?
I wouldn't be surprised to see variable rates sneak up to 5.5%-6.0% pretty quickly, which is a hike of 50-100bp. But, in all seriousness, is that such a big deal? If you were offered a 5 year fixed rate at the top end of that scale at 6.0% today would you take it? That's right, 6% is still cheap and its 100bp above today's ludicrously low rate. As banks start inching up rates there will be a lot of media noise and government chest beating, but at the end of the day its off a mega low base and will not be a material change to the current setting.
All just my humble opinion.
Cheers,
Michael.
Michael is on fire! Such logic! The warm weather must be agreeing with you? or is wearing dress shorts to meetings the diff
Seriously, he is wise. Anyone with any brains is paying 5.1% with package variable. 1% rise is, OMG 6.1%!!! Nothing!!!!!
God bless the battlers who will go ACA when rates rise 0.25% and squeal "but me new Holden needs a wash and now I cannot afford it and willhave to sell meee house, Wezz doomed" for they are the one who vote in marginal seats accross our Country and influence all the Pollies. God bless em
Much too sarcastic, time to go home, Peter
Seriously, he is wise. Anyone with any brains is paying 5.1% with package variable. 1% rise is, OMG 6.1%!!! Nothing!!!!!
God bless the battlers who will go ACA when rates rise 0.25% and squeal "but me new Holden needs a wash and now I cannot afford it and willhave to sell meee house, Wezz doomed" for they are the one who vote in marginal seats accross our Country and influence all the Pollies. God bless em
Much too sarcastic, time to go home, Peter
Appreciate your points chilliaa and you are probably correct there!
Yes, I know, in fact, I started most of these polls, guilty as charged!
Some very good points on here, although I can't help but wonder when an actual correction wil take place. I've said here before that I suspect our correction will come in the form of several years worth of stagnation (and frankly I hope I'm right).
Any ideas as to when that might start? There is, ultimately, a level above which most people simply cannot front the necessary funds to purchase a property, and I suspect we are getting close-ish to that point now.
Thoughts?
Any ideas as to when that might start? There is, ultimately, a level above which most people simply cannot front the necessary funds to purchase a property, and I suspect we are getting close-ish to that point now.
Thoughts?
How about in January 2010 when the FHOG drops to $7k for any purchase and it is far harder to come up with a deposit?
Tim
I'd argue that there isn't a level where people can't afford a property. 70% of the population already have a property & with time they'll have significant equity in it. That equity will enable them to put down a large deposit on the upgraded PPOR. Their servicability of the loan will be good. Approx half of that 70% own their PPOR outright - they are in a v. strong position to upgrade.
If property doubles every 10 yrs then they'll be able to put down a 50+% deposit on the next place & keep their repayments at a reasonable level.
It's the FHBs that need to build up equity to get into that position... and a good way to do that is to buy something they can afford to service in the outer ring... and wait.
The RBA has stated that housing is currently more affordable than at any time in the last 10 years, it's cheaper to own than rent in several suburbs.
The FHOG is very important however to keep prices moving up, because there always needs to be new buyers entering the market. If they need to wait too long to get into the market, then the market itself can stagnate while wages catch up with prices.
Tim
God bless the battlers who will go ACA when rates rise 0.25% and squeal "but me new Holden needs a wash and now I cannot afford it and will have to sell meee house, Wezz doomed" for they are the one who vote in marginal seats accross our Country and influence all the Pollies. God bless em
Much too sarcastic, time to go home, Peter
You just knew I'd chime in here with... I LOVE IT!
No, and yes. Genworth recently did a survey - they found that only 25% of FHB were significantly influenced the the FHOG, the rest were going to buy a house anyway or thought it was a nice bonus. Investors will replace that 25% of FHB, if they can find c/f neutral IP.
Banks have been ignoring the grant & boost for several months now & only looking at genuine savings. The end of the FHOG Boost will have absolutely no effect on house prices at the bottom end.
The housing market has stagnated for the last 6 yrs, while wages have risen by 4%pa, and discretionary income by 6-7%pa. The RBA tells us that housing is more affordable (for the 25-35 age group ie FHB) than at any time in the last 10 yrs.
Thanks for the responses guys, some great food for thought.
For those who already own property, especially outright, it probably isn't that much of a stretch to upgrade by a few hundred thousand, especially for baby booomers who have been working for a while. I'm very interested as to how we get through the next 10-12 years, since after that we have about a 10 year period where Gen-X hits their peak spend.
(And yes you can probably guess who's book I've been reading lately).
For those who already own property, especially outright, it probably isn't that much of a stretch to upgrade by a few hundred thousand, especially for baby booomers who have been working for a while. I'm very interested as to how we get through the next 10-12 years, since after that we have about a 10 year period where Gen-X hits their peak spend.
(And yes you can probably guess who's book I've been reading lately).
