Will Australia's next property boom be the greatest boom we've ever seen?

[Shadow]

Shadow, do you see ANY negatives for the property market in the short or even medium term (say up to 3-5 years)?
Alex

Alex,

It depends on the city in question...

For Sydney, no, I don't see any negatives. And to practice what I preach, as they say, Sydney is where I am investing. Sydney is coming off a low base compared to the rest of Australia right now. It just has to grow, otherwise it would be overtaken by Melbourne & Brisbane, which would be ridiculous.

Melbourne and Brisbane's strong growth in 2007 has taken most people by surprise. Can it continue... I think yes, for a couple more years. But these cities are not as safe a bet as Sydney, simply because the past years have already seen such strong growth in Melbourne & Brisbane, whereas Sydney has stayed quite flat.

Adelaide & Canberra may soon be approaching their peak. I would not be investing here. But these markets are small compared to the rest of Australia. Future stagnation here won't significantly affect Australia as a whole.

For Perth and possibly Darwin, I see a few years of stagnation before the next boom. I wouldn't be investing here.

This is all my opinion only. I could be wrong. It does look like the US may announce a (technical) recession shortly. I don't believe this will have a major impact on Australian property markets (stock market, yes), but we'll just have to wait and see.

Cheers,

Shadow.

 

[FHB]

I too doubt that prices will drop overall - however, rents, wages, pop growth, inflation, credit availabilty, govt policy, etc will change & those are what will make it a great time to start. And those things usually creep up on people, so 'suddenly' IP looks attractive even though prices (which make the headlines) haven't changed much.

And that's the key, we need to see everything else increasing, while property increases at a lower rate to make it attractive again. If you can invest in everything else (or something else) in the mean time, you are in a good position to buy property when it gets overtaken.... in theory.

The other key is not to wait for the news papers to report the fact property is attractive again, by then it is normally too late. If you have a brain you can see it happening far earlier, just as you did with shares in 03.

Hopefully I'll be in your 2001 position when the next boom hits, and it may happen in 2010, in which case I will jump on board and test your strategy. I can't see the case for it happening yet, but Shadow may be right, I'll watch for it.

 

[alexlee]

So, inflation from food and energy prices, potential US recession, tightening liquidity decreasing available loans, potential higher unemployment and lower consumer sentiment due to a recession..... you don't think any of these will impact the property market even in the short term? You don't believe a falling stockmarket will affect the economy as a whole?
Alex

 

[Shadow]

The other key is not to wait for the news papers to report the fact property is attractive again, by then it is normally too late.

Hopefully I'll be in your 2001 position when the next boom hits, and it may happen in 2010, in which case I will jump on board and test your strategy. I can't see the case for it happening yet, but Shadow may be right, I'll watch for it.

The growth is already happening... Look at Melbourne and Brisbane growth in 2007. Look at the curve for Sydney just starting to head in the upwards direction. It is already happening. Now is the time to get in, before the newspapers all start reporting on it... yes the actual 'boom' part may hit in 2010, 2011, but growth will still be strong in 2008-2009. If you wait until 2010 to buy, I believe prices will be up to 20% higher than they are right now.

 

[FHB]

The growth is already happening... Look at Melbourne and Brisbane growth in 2007. Look at the curve for Sydney just starting to head in the upwards direction. It is already happening. Now is the time to get in, before the newspapers all start reporting on it... yes the actual 'boom' part may hit in 2010, 2011, but growth will still be strong in 2008-2009. If you wait until 2010 to buy, I believe prices will be up to 20% higher than they are right now.

I agree Sydney is looking better than it has, but increased growth is not an indication of better fundamental support for prices. If we get 20% growth between now and 2010 we will be moving further away from the wage and income support for prices we've just been discussing, and has existed for the past 50 years, on and off.

The mitigating factors of lower interest rates and millionaires migrating to our cities have not happened yet. And as Alexlee is pointing out we have a few downside risks to this sort of growth outlook.

If I buy upper market I might be able to reduce my exposure to these issues, but take on greater gearing risk.

 

[DadOfSam]

"Superstar" Cities

Interesting thread. Those GHPC folks are an uncivilised lot aren't they! I may have to join up there and post some threads in the manner of my alter-ego below

http://www.somersoft.com/forums/showthread.php?t=37986&page=5



Yes... so even the highly-desirable areas/cities do have a limit on price growth - i.e. after they have been populated only by the very rich, and those very rich people's wages are no longer increasing significantly, then there is a limit on further growth. But Australia has quite some way to go before our cities are inhabited only by the super-rich. Hence my expectation for exponential growth until we get to that stage. Once we do get to that stage, it's time for the high-density development to take over (as per Manhattan, London etc.)

Cheers,

Shadow.

Hi Shadow,

Jit had brought no end of amusement to GHPC, but no longer it seems. My absolute FAVORITE topic of his was the superstar city theory. Unfortunately for him and the other believers 2 of the 3 theory's authors have now backtracked on it. It seems (if I have read their comments right) that for the "superstar" cities in the US that the above average rise in prices due to the controlled supply just lead to a surge in prices above the "fundamentals", and therefore a larger than average fall, as "They'll take a disproportionate hit in overall demand, not just from sub-prime, but the fact that it's going to be more expensive across the spectrum to get capital for housing". They now believe that the housing boom was due to the greater availability of credit, "that housing markets really have fundamentally, in the last decade, been driven up in price by the availability of credit. And, in some markets it was clear that prices were unexplainable,"

Given that the superstar cities were mainly about constrained supply, it appears that supercharged demand led by cheap credit can help prices exceed their greater fundamentals, which in turn lead to further investment & RE speculation. SO when that demand dries up, as it has in the states, superstar cities fall back to trend. My guess is that people who owned prior to the boom will be happy, those that bought during the boom & failed to realise their cap gains won't.

I find your interpretation of superstar cities strange. Where are there cities inhabited only by the super rich? Monaco? Even they need low wage workers to keep things humming. I don't believe it's possible to attain a super rich city (except for the new mining towns maybe), so waiting for that to occur as the market top is optimistic IMO. Certainly that won't happen in Sydney - your tip.

No the Superstar City theory has been debunked. Jit is mischievious to continue to support it online after he's been shown that it's authors have backed away from it. Credit has shaped house price gains above the good Oz fundamentals, credit tightening will change the market, as it already has, so don't believe fundamentals are immune. I am sure there are other better RE market theories, ignore this one.

 

[Shadow]

So, inflation from food and energy prices, potential US recession, tightening liquidity decreasing available loans, potential higher unemployment and lower consumer sentiment due to a recession..... you don't think any of these will impact the property market even in the short term? You don't believe a falling stockmarket will affect the economy as a whole?
Alex

High food & energy costs: Didn't prevent strong Melbourne & Brisbane growth last year. I believe inflation will fall in late 2008, hence lower interest rates.

Potential US recession. Potential is the key word. And if it does happen I don't think it will be a major recession. Why should it impact Australian property prices?

Tightening liquidity: Australian banks do not have massive exposure to sub-prime. I think Australian interest rates will peak mid-2008, then fall. Remember our rates are already much higher than USA and UK, who are both lowering rates.

Potential higher unemployment: Coming off historically low unemployment this is inevitable. OK, so unemployment might increase to the levels seen during the last boom. It didn't prevent the last boom though, did it? And with the massive skills shortage (hence high overseas immigration) I don't think we are in for high unemployment.

Lower consumer sentiment: This doesn't change the fact that people need somewhere to live, and there is a shortage of housing.

Falling stockmarket: Investors will need somewhere else to park their money. A rising property market seems to fits the bill.

Cheers,

Shadow.

 

[Shadow]

I find your interpretation of superstar cities strange. Where are there cities inhabited only by the super rich? Monaco? Even they need low wage workers to keep things humming. I don't believe it's possible to attain a super rich city (except for the new mining towns maybe), so waiting for that to occur as the market top is optimistic IMO. Certainly that won't happen in Sydney - your tip.

Hi DadOfSam,

I didn't talk about the 'superstar' cities being inhabited only by the super rich. I said only the super-rich could afford to buy property there.

Yes, low-wage people do still need to live there, but they rent, and they rent shoeboxes, they don't own. I think it will happen in Sydney eventually, as it has already happened in the following places:

- Countries: Hong Kong, Monaco, Singapore
- Cities: Manhattan, London, Paris, Rome, Moscow


'There were 798,144 housing units in Manhattan as of the 2000 Census, at an average density of 34,756.7/sq mi (13,421.8/km²).[1] Only 20.3% of Manhattan residents lived in owner-occupied housing'

http://en.wikipedia.org/wiki/Manhattan#Housing


'Singapore has grown at least 100 square kilometres from its original size before 1819. The urban planning policy demands that most buildings being constructed should be high-rise, with exceptions for conservation efforts for heritage or nature.'

http://en.wikipedia.org/wiki/Urban_planning_in_Singapore


Sydney to become a Megacity by 2100... http://www.somersoft.com/forums/showthread.php?t=38322

 

[keithj]

The growth is already happening... Look at Melbourne and Brisbane growth in 2007. Look at the curve for Sydney just starting to head in the upwards direction. It is already happening. Now is the time to get in, before the newspapers all start reporting on it... yes the actual 'boom' part may hit in 2010, 2011, but growth will still be strong in 2008-2009. If you wait until 2010 to buy, I believe prices will be up to 20% higher than they are right now.

Prices MAY be up 20%, but if rents have risen 50% by 2010, then it's a lot less risky time to enter the market then. It's also less financially painful for the 2 years until then. It's also possible that other (better yielding) investments will also return 20% up until then.

It's not necessarily a matter of pursuing the best performing investment, but the best investment adjusted for risk. Right now, some pessimists are suggesting extended price stagnation, some optimists are suggesting rampant growth, some fence sitters are waiting for good value to appear. No-one really knows for sure...... I believe NOW is a more economically uncertain time than usual, v. little makes good investment sense to me ATM. I'll wait till rents HAVE risen and IP is less -ve geared, even if it costs me 20% growth. Then I won't have to speculate on future short term growth, because it's a no-lose scenario with no financial stress. My servicability will be better & I'll be 2 yrs closer to the steep part of the boom.

 

[FHB]

Sorry to butt in here, but

Potential US recession. Potential is the key word. And if it does happen I don't think it will be a major recession. Why should it impact Australian property prices?

Lower US consumption feeds through to Asia's growth, and our exports. Less exports means less domestic growth, perhaps lower interest rates, but also less employment and banks tightening their belts.... possibly, no one has a crystal ball.

Tightening liquidity: Australian banks do not have massive exposure to sub-prime.

No but they are competing with lenders who do, they have reduced their margin to compete, and the borrower has benefited. If the bank's competition have to start charging more due to more expensive credit markets, the banks can afford to increase their margin and make more money for their shareholders. That might be required if the stock market goes belly up.

I think Australian interest rates will peak mid-2008, then fall. Remember our rates are already much higher than USA and UK, who are both lowering rates.

If we have to drop interest rates, I expect it will be because business activity is falling, people may be losing their jobs, and less able to take on more debt.

Potential higher unemployment: Coming off historically low unemployment this is inevitable. OK, so unemployment might increase to the levels seen during the last boom.

The difference during the last boom was that unemployment was falling, people feel comfortable about spending and borrowing. Unemployment rising has a different effect, if it does occur.

And with the massive skills shortage (hence high overseas immigration) I don't think we are in for high unemployment.

There won't be a skills shortage if business starts holding back on expansion projects due to increased costs of borrowing, and less demand for their exports. If that is eventually the case. This could also affect immigration rates, in theory.

All a bit gloomy, but possibilities.

 

[JIT]

...now isn't the best time to start...And those things usually creep up on people, so 'suddenly' IP looks attractive even though prices (which make the headlines) haven't changed much.

Cheers Keith

Be sure to give us a heads up when you find this magical time for property investing...

 

[FHB]

I believe NOW is a more economically uncertain time than usual, v. little makes good investment sense to me ATM. I'll wait till rents HAVE risen and IP is less -ve geared, even if it costs me 20% growth. Then I won't have to speculate on future short term growth, because it's a no-lose scenario with no financial stress. My servicability will be better & I'll be 2 yrs closer to the steep part of the boom.

Good points, it would take a bit of faith in capital gain magic to invest now, unless you have particular special knowledge or ability to increase value through development, etc.

I'm unsure on asset classes ATM too, you can get a guaranteed 8% tax free by minimising debt. That can compound nicely.

 

[Shadow]

I'll wait till rents HAVE risen and IP is less -ve geared, even if it costs me 20% growth. Then I won't have to speculate on future short term growth, because it's a no-lose scenario with no financial stress. My servicability will be better & I'll be 2 yrs closer to the steep part of the boom.

Fair enough, we have to balance the risk. However Sydney growth could surprise us. Look at what happened in other Australian cities last year - that growth took everyone by surprise. I'm not saying everyone should go out and leverage themselves to the max on Sydney property. What I am saying is that the fundamentals are all there for good growth in Sydney over the coming years, and that the next boom could be even bigger than the last one, and that it might just sneak up on us very quickly.

 

[alexlee]

I’ll still be buying, but in small increments (relative to my gross portfolio value) and in selected areas only. I don’t think it would be wise right now to buy with the expectation that a boom is around the corner. We may well see higher interest rates and falling property prices before the next boom, and that might be 5+ years away. In fact, that’s the environment I’m planning for. So why am I buying now, you ask? Because I buy for the long term, and relatively to my gross portfolio I’m just doing bite-sized purchases. If I’m wrong and there IS a boom around the corner, I’ll have some new purchases catching the wave. If I’m right and the boom is 5 years away with a slump until then, I’ll just dollar cost average my way into the slump.

I sure wouldn't back up the truck at this point.
Alex

 

[FHB]

Going back to long term growth trends and superstar cities, what will the effect of retiring BBs be on demand for inner city properties? I can see how future demographic chages will benefit coastal areas and lifestyle locations, but will growth rates in cities be reversed? Perhaps immigration will become even stronger to provide a work force to cater for the retiring masses, even then many service based workers will be located out of the cities.

Sorry if this is boring anyone, I find it interesting!

 

[Shadow]

I'm surprised Michael Yardney hasn't popped in here yet, since Michael is another proponent of the next big boom.... hello Michael... are you out there?

Also Bernard Salt has predicted one last massive boom for Australian property followed by a long long period of stagnation from 2020 as the baby boomers die off.

Of course, one boom is all it takes to get rich.

Cheers, Shadow.

 

[keithj]

Be sure to give us a heads up when you find this magical time for property investing...

It happened in 1999-2001, maybe it'll happen again in 2010 - I'm pretty sure it won't be happening for a couple of years. I won't be the one to tell you about it - there are far more informed posters here who will.

 

[JIT]

Prices MAY be up 20%, but if rents have risen 50% by 2010, then it's a lot less risky time to enter the market then. It's also less financially painful for the 2 years until then. It's also possible that other (better yielding) investments will also return 20% up until then.

If you were sensible you'd have this money in the bank or fixed interest investments, as I'm sure FHB probably does.

If you were foolish enough to put cash that is intended to be used to purchase a property towards another investment returning 20% (with commensurate risk), as you suggest, then you could quite easily lose the lot in the space of 2 years...?!

Perhaps I mis-interpreted though?

I'll wait till rents HAVE risen and IP is less -ve geared, even if it costs me 20% growth.

Fair enough, 'less negatively geared' sounds more sensible.

That's what I aim for.

Seems like you've changed your stance then from 'very close to costing me nothing to hold and paying for itself'......which is a bit different.

My servicability will be better & I'll be 2 yrs closer to the steep part of the boom.

Really, but if you don't think prices will crash, and we haven't yet reached the steep end of the boom, people in Melbourne/Brisbane/Adelaide who have invested over the last 2-3 years in the 'wrong type of boom' will be laughing when we hit the steep part...?!

 

[Shadow]

Going back to long term growth trends and superstar cities, what will the effect of retiring BBs be on demand for inner city properties? I can see how future demographic chages will benefit coastal areas and lifestyle locations, but will growth rates in cities be reversed? Perhaps immigration will become even stronger to provide a work force to cater for the retiring masses, even then many service based workers will be located out of the cities.

Sorry if this is boring anyone, I find it interesting!

Not boring to me! Check out this article...

http://www.propertyupdate.com.au/ar...s-will-need-to-reinvent-themselves/Page1.html

'There is also a huge sea change phenomenon with many baby boomers moving to the coast which means that many coastal towns will have to reinvent themselves to cope with the influx of people.

Another one million people are tipped to move to coastal towns in the next 15 years as baby boomers retire, yet local councils were not coping with the current population boom, with growth rates 60% higher than the national average.'


Incidentally, this is another reason why I consider Sydney's Northern Beaches to be such a great spot to invest... a long strip of leafy coastal towns, very close to our biggest city, bordered by harbour and ocean, and with no geographical room for expansion!

 

[FHB]

Incidentally, this is another reason why I consider Sydney's Northern Beaches to be such a great spot to invest... a long strip of leafy coastal towns, very close to our biggest city, bordered by harbour and ocean, and with no geographical room for expansion!

Yep, those cities close to lifestyle locations, like Sydney and Brisbane may do well out of this change..... northern regional towns like Cairns and Townsville might be well positioned too.....?