Will the WA/Perth Housing Market Bubble Burst?

[kero]

hope you guys are right with the land property going up cos i'm expecting my parents to share their sale of their house to buy at Nedlands or Applecross

i think there's not many free hold property in s'pore anymore. and the new ones release are not free hold as well... does anyone know whether sentosa cove which is selling land (and house?) for crazy price like $14m is free hold?

 

[<KS>]

1) The Perth market IS slowing down.
2) Although some say that the mining boom cannot go forever, I retort by saying - Yes it can, if demand goes on forever.
3) 10%+ of ALL employed people in WA have links to the mining industry and WA is one of the most mineral rich places in the world...
4) Dont forget WA is BIG BIG BIG. Sub-economies and selective areas will be effected differently by interest rises etc. For example even when the economy slows down, living/buying where millions are still be spent on infrastructure is still going to attract those not crippled by the slowing economy.
5) Linked to the 10% working in the mining industry......where will they spend all that money? Well if they want a house, even $500k is not a big ask for someone earning 100k+/year.

Essentially what I am saying is - dont panick.

If the area you have invested in is still growing and being built up then the odds are that even in a slowing market the growth if offset any possible decline.

For my current portfolio to sharply decline in value then the local and state government would have to cancel about $150 million worth of projects and the rapidly increasing population would have to suddenly stop growing to reduce the demand for housing.

It would take somethign very drastic for the above to occur.

<KS>

 

[AUSPROP.]

or in summary.. only bubbles burst!

 

[Kennethkohsg]

or in summary.. only bubbles burst!

**************************************
Hence, my first question to members, "is there a housing "bubble" within the WA/Perth property market or not?" in the first place?

If yes, why do you say that?.. and where are the areas which are presently "bubbling" too fast and its supporting evidences/indicators?

If no, why?.. Is the present Perth booming market truly supportable by its underlying market fundamentals? What would the supporting evidence/indicators for this market perception.

Cheers,
Kenneth KOH

 

[TheBacon]

This Thread is in the Wrong Section

Should be in the general section as it provides general discussion about an area. The thread is not about purchasing in Perth per se.

 

[geoffw]

I've moved the posts about Singapore into a new thread. I've also moved out a number of posts which were getting very personal.

 

[gooram]

10 good reasons why the bubble won't burst:

(taken from the Property Wizards... who are buyers agents... however they make a good case )

1) The media

While the mainstream media can be a useful tool for investors, it should not be used a primary means of information gathering and decision making. This is because news reports generally need to be brief and, in order to meet that requirement, information including research, predictions and statistics may be over-emphasised or out of context, often leaving investors with an unclear view of the big picture.

To understand what's actually happening in the market, professionals look at all the known facts and figures, drawn from a wide variety of sources. They analyse this data and reach considered, thoroughly researched views and opinions.

2) Perth median house price

Median house price data comprises information from all suburbs in the Greater Perth area. Within that, areas are experiencing different growth cycles, affected by different growth drivers. For example, Mandurah is in a growth cycle that is driven by factors totally independent of the recent property boom. On the other hand, some of the outlying and eastern suburbs may have been driven artificially high in the hype and they may have nothing to drive the growth as the cycle evens out.

The long-term growth of Perth median price has been 8.5% a year. Many market experts forecast a return to Perth's long-term growth level as the boom cycle slows.

Growth of 8.5% pa can create significant wealth in a geared property investment, and growth superior to the median even better.

3) The economy

The WA economy is strong and is tipped to continue to perform well, underpinned by:

· The mining boom (Sustainable due to long-term supply contracts)

· Strong jobs growth

· Strong population growth

4) Supply & demand

Currently, there are not enough homes to meet the needs of WA residents and the growing population. The building industry cannot build fast enough to meet this demand, and land developers cannot release land fast enough to meet the need. This drives up property values independent of any boom or other cycles.

5) 1989/90 – Similarities

In 1989, the Perth median house price increased by 50%. We have not had such a dramatic rise over the recent boom period. In 1989/90, interest rates were 18% and there was a recession. Now interest rates are 7.5% and the economy is strong. The current circumstances are very different and strong factors exist to support current property values.

6) Other states

While median house prices declined in both NSW and Victoria since their boom times ended a few years ago, it is critical to note that prices dropped in some suburbs, but that other suburbs continued to grow. The strong underlying factors driving growth in WA were also not present in those states – the property booms there existed in isolation.

7) Timing the market

It's well known amongst experts in the share market that you can't make money trying to ''time the market" i.e. nobody can pick the top of the market to sell at and pick the bottom of the market to buy at. Even though the growth of a good suburb may slow eventually, by trying to predict the peaks and holding off buying, you more often than not end up missing out on a good growth period, pay more in the long run or miss out entirely by being priced out of that suburb and having to accept a lesser opportunity.

8) Types of properties

Different types of properties will fare differently throughout the various phases of the property cycle. Some new or off-the-plan investments, as well as those without much land component, may potentially be heading for lower growth periods.

9) Advice for sellers

Even though as buyers we would love to have more properties on the market because there remains a limited supply of quality homes, if we were advising sellers, our advice would be: “If you have a good growth property, don’t sell as it's likely to cost you more to get back in to the market.”

10) The future

WA's population is expected to grow for the next 50 years. We are currently experiencing a unique and phenomenal period with our huge wealth in resources and, with much demand from massive developing countries such as China and India, the increase in wealth, population and jobs is set to drive property values in Perth for the next few decades.

In between, there will be slower and faster growth periods, and some suburbs will operate on their own cycles within the whole. Overall, the economic factors point to Perth property growth exceeding its long term historical level of 8.5% a year.

 

[geoffw]

10 good reasons why the bubble won't burst

Regardless of what you say and what I say, nothing will change. The bubble may continue to expand, stay the same, or burst.

My only contribution is that I have seen the same irrational exuberance in Canberra. I went to showings, just at the time when prices were booming, of unrenovated "opportunities". They went for irrational amounts- one I went to, 30 minutes after opening, had three offers above offer price.

Bubbles may well burst.

 

[Mark8888]

A post above has 10 reasons why the bubble won't burst.

Here is TWENTY reasons why it will:

1. Affordability Index at all-time lows. First time buyers out of market.

2. Interest Rate environment is rising. While not at 1989/1990 levels,
interest rates don't need to be, to have the same effect, cause
Australians are so much more in debt now.

3. Property Investment is the 'in-thing'. Everyone is doing it.
And history generally shows that when everyone is doing it,
you are at the top. Best indication of a market top is when a
taxi driver is talking about the stocks (or as is the case now
the properties) they own.

4. Growth way above historical norms. Perth has had commodity
cycles before. But poster above seems to think that this time
it is different, and that a new historical norm is about to come
along. Nope, don't agree.

5. The 'it is different this time' attitude, is a market-top sign.
Don't even have to have long memories for this one.
Remember tech stocks in 2000? It was different then too!

6. State Govt's finally look forced to address their land release
policies. Supply will finally come along. And knowing market
behaviour it will become over-supply.

7. China is increasing interest rates to slow economy.
There seems to be great assumptions being built up that China
and India will continue to power the world forever.

8. Real Estate Agents. They love to hype the market.
No different to Stock Brokers in a stock market bull phase.
They just add to the hype and the extortions.

9. Even if fundamentals are good (which they have been), markets
always tend to over-shoot (and under-shoot) in their bull
and (bear) phases. Currently Perth is over-shooting.

10. 8.5% average growth on a long term, per above poster is hardly
spectactular. When yields are so low and interest rates are rising
you need close to this growth to break-even. Last property I
sold required 6% growth per year, every year, to break-even as
opposed to money being in the bank at 6%. Interest rates are
rising. This equation could get worse.

11. Long term growth at 8.5% is a reason to get OUT.
You need much better returns to be IN.

12. Relativity - 1.
Perth is most expensive city in Australia, bar Sydney.
Historically this situation has never lasted long.

13. Relativity - 2.
Investors already looking to other markets in eastern states.

14. Infrastructure.
Lots of employment growth in WA is for infrastructure. While all of this
is good, what happens when infrastructure is complete? This sort
of employment growth is temproary in nature, not long term.

15. Risks.
Risks near market peaks must be greater than in trough's.
Market pricing is for everthing to continue rosy for as far as you can
see. One big shock...........

16. Market Timing.
Most expert investors will tell you that 'timing is everthing'. And it is.
The fact that 98% of the investing public are amatures and cannot
time markets is what makes people like Noel Whittaker recommend
'dollar cost averaging' and 'long term investing'. Because it works
for novices. For those that REALLY understand markets, the
big money is made in timing.

17. Loan Terms.
Loan terms have 'blown-out'. Even 50 year ones around now!
Dosn't allow the next generation to get set, create some equity, and
to buy the next (investment) property like the last generation.
So the few first time buyers in the market today, are much more
likely to be 1-time buyers (with their 50 year loans). Hence there
won't be the investment demand going forward.

18. Sellers & the Media
The media are resposible for a lot actually. They create the hype.
Now all sellers are holding off on the expectations of high returns.
Hence the demand/supply equation has been further stretched.
Just wait until all those waiting sellers (together) decide to sell.

19. Aging Population.
The high number of aging baby boomers are forecast to down-grade
their larger more expensive properties to life-style properties. Overall
this will put down-ward/supply pressure on the market. Although it
may create specific opportunities with certain types of property.

20. Finally, and not least, Australians, in particular West Austrailans, have
a litlle of a gambling mentality. Is is the state with the highest
amounts spent per capita on gambling. WA is well known for its
gambling on all the small mining stocks and the 'punter mentality'.
Right now all the 'gamblers' are on the property wave.

Unlike the poster above my 20 reasons are not from the Property Wizards (who no doubt have vested interests in the market staying strong). They are just from a average-punter(!) who really knows nothing, but has seen a number of market tops before, from property, to commodities, to stocks.

 

[alexlee]

IMHO it's all about jobs. If the commodities boom continues Perth can shoot right past Sydney and stay there.

IF the commodities boom continues. If Chinese demand for commodities drops, support disappears.

Does anyone believe that China will be able to keep growing at 10%, with all the internal issues that it has, without stumbling into a recession? Sure China will grow for the long term, but which country has ever managed to industrialise this quickly wihtout short term hiccups?

For Perth, it's all about commodities. If Chinese commodities demand is strong enough even 10% interest rates won't sink WA (but NSW and VIC will drop off the map).
Alex

 

[Ausprop]

the contracts are committed to - so long as they don't default I can't see what the issue is.

re this:

"17. Loan Terms.
Loan terms have 'blown-out'. Even 50 year ones around now!
Doesn't allow the next generation to get set, create some equity, and
to buy the next (investment) property like the last generation.
So the few first time buyers in the market today, are much more
likely to be 1-time buyers (with their 50 year loans). Hence there
won't be the investment demand going forward."

what is the hoo-ha about these 50 year loans? a loan eroded by 50 years of inflation would be jack anyway, but I can't see why they are so demonised vs an eternal interest only loan.

Re the "it's different this time mentality" - contrary to the popular opinion that one day is pretty much the same as the next, I would argue that one day is never the same as the next and things really are very different this time. When we pump the last drop of oil will there be a brigade of people chanting sarcastically "yeh right, it's different this time huh?". If you really do need comforting by history, I don't think there was a crash after the nickel boom (correct me if I am wrong). It is pretty hard to argue with this:

http://www.reiwa.com.au/res/res-sal...8030ff01c33f357f4773-23-Aug-2006-10:47:10:981

Whilst I accept the market may take a breather, I can't see any reason at all for us to think we are in a bubble that is about to pop. Cruise along, 8% or whatever... beats doing you dough on the stock market. I did quite like the comment that the market may dissect and different areas start going through different growth patterns.

Timing is for traders. I have often tried to time and 9 times out of 10 (actually more like 10 times) have lost out. Example - sold anchorage block in March for $190k thinkign the market had peaked and it couldn't possibly go any higher... copped a whallop on tax and the block went up another $50k in 2 months. and really what would my risk have been if i had stayed in... minimal growth... a 5% decline? nothing compared to the fat tax bill I am about to pay.

 

[alexlee]

I remember looking at a graph of Sydney median prices during the 90's recession. I was surprised that the median didn't really fall much, even though no one would dispute that it was a terrible time for all. Median prices can be seriously distorted.

e.g. you can have:
50 properties sold for $700k
51 properties sold for $500k

And have a $500k median.

In a downturn, you can have:
51 properties sold at $500k
50 properties sold at $300k

And STILL have a $500k median, even though the average has fallen by over 30%. At the start of a downturn (as you see in Sydney), a lot of sellers just withdraw their properties, causing a distortion in the median price because the number of properties that changes hands decreases. Doesn't mean the properties haven't fallen: it just means the sellers aren't putting them onto the market. At the bottom people just sit on their negative equity properties. A recession would FORCE sellers to put their properties onto the market.

Just as the median price during a boom doesn't reflect just how much prices rise, it also doesn't reflect the true state of the market during a downturn. You couldn't find anything decent at $500k during the peak in Sydney, and now even though the median has only dropped a little bit, anecdotal evidence suggests a lot more pain than is reflected in the median number.

My understanding is that commodities supply CONTRACTS are for a number of years but actual PRICES are determined annually? i.e. BHP may have a contract to supply for 20 years but if the spot price falls the price received under the contract will fall as well. If commodities prices fall just as costs spike (as we currently see with rapidly increasing salaries in WA), and you have bankruptcies in China from an economic slowdown.......

I wonder how much of the current copper, iron ore, etc prices are based on the assumption that China will keep barreling along? And how much of the price is jacked up by the flow of money from the hedge funds? i.e. how much of the current commodities price is actually based on sustainable demand without hedge fund pumping and psycho growth in China?

There is no such thing as a bulletproof economy.
Alex

 

[alexlee]

http://www.smh.com.au/articles/2004/03/01/1078117365582.html

The way I'm reading the terms is that long term contracts say that buyers are committed to buying a certain volume of ore, but at market prices to be (based on other readings) determined annually. This article is from 2004. That's why you had the brouhaha earlier this year about China refusing to agree to the high prices, etc.

How much will it cost BHP to build the infrastructure to produce this ore? Equipment, staff, etc costs are all skyrocketing in WA due to shortgages. Are the mining feasibility studies based on assumptions that current prices continue? Would any BHP exec just say 'heck, we expect ore prices to come back down soon, so what we'll do is instead of building mines ourselves at extravagent cost, we'll just buy it from the general market when we have to deliver' as opposed to 'ore prices are going to stay high. No matter how much these mines cost, no matter what the cost overruns, let's build them because China is going to keep the price up! Remember the increase we had last year?'

How much of the current iron ore price is from hedge fund buying (i.e. speculation, not actual industrial demand)?

I believe that iron ore prices might fall due to:
1) Economic slowdown in China
2) Hedge funds selling
3) Other producers (notably Brazil) ramping up their capacity

One interesting possibility is: what if China simply refuses to agree to the price set out by the Australian producers? This might happen if demand drops a bit, supply increases in other countries and China no longer 'needs' Australian ore. e.g. dropping Chinese demand spooks Brazil, say, to break ranks and supply China at a lower price, because it's afraid it'll be stuck with unsold ore. This year during the price talks, China had no choice but to take the price because they were over a barrel. For years mining companies were price takers. What if this happens again?

The commodities boom is not guaranteed to continue. The contracts just guarantee volume sales, not price. And the commodities prices are volatile because of hedge fund speculation.
Alex

 

[Ausprop]

the $20bn gas sale to China was locked in at too low a price it seems. Highlights the difference between this boom and those prior... the prior ones were based on one commodity, this is many commodities.

no economy is bullet proof. but I would rather be the guy that has the stuff than the guy that wants it. And in the unlikley event that all the planets line up and it all drops in a heap, then it's just back to normal.

 

[Ausprop]

"Median prices can be seriously distorted."

whilst this is true and is indeed true of all statisitics, it is difficult to distort it over a 30 year time frame and you have to use somehting. This is heading into a much deeper analysis... whereby you look at the inflation, cost of improvements etc etc and end up getting so involved that no one knows the answer. In the end the conclusion will just be that property is not homogenous and so long as the investment you own is working for you then go for it.

 

[stretchy]

1) The media

While the mainstream media can be a useful tool for investors, it should not be used a primary means of information gathering and decision making. This is because news reports generally need to be brief and, in order to meet that requirement, information including research, predictions and statistics may be over-emphasised or out of context, often leaving investors with an unclear view of the big picture.

To understand what's actually happening in the market, professionals look at all the known facts and figures, drawn from a wide variety of sources. They analyse this data and reach considered, thoroughly researched views and opinions.

The vast majority of property investors are not 'professionals'. Most investors pay atttention to what the media reports.

2) Perth median house price

Median house price data comprises information from all suburbs in the Greater Perth area. Within that, areas are experiencing different growth cycles, affected by different growth drivers. For example, Mandurah is in a growth cycle that is driven by factors totally independent of the recent property boom. On the other hand, some of the outlying and eastern suburbs may have been driven artificially high in the hype and they may have nothing to drive the growth as the cycle evens out.

The long-term growth of Perth median price has been 8.5% a year. Many market experts forecast a return to Perth's long-term growth level as the boom cycle slows.

Growth of 8.5% pa can create significant wealth in a geared property investment, and growth superior to the median even better.

Thats sloppy maths. If the market grows 30% in one year, and the average is 8.5%, then to maintain that average the market must contract by 17% the next year. Its a simplified example but shows the folly of expecting growth to return to long-term averages. The average has already been distorted by high growth - it cant simply 'return' to normal without a corresponding period below average. Thats why its called an average...

 

[<KS>]

Keep it up fellas - learning a lot here

My 2 cents again - DONT FREAK OUT!

Selling anything in Australia costs you a lot of money and I just dont see a real 'Burst' of any bubble on the horizon. Things would have to go REALLY bad for property prices in WA to drop significantly, and I think the likelyhood of that is minimal.

WA has been due for an increase in property prices for a long time and its economy has fueled Australia for an equally long time. Now in the last 5 years its just getting to the point where the state is reaping the rewards for its contribution.

If you disagree then take WA and its economy and resources away from the Australian economy as a whole and then do the maths.

<KS>

 

[gooram]

Thats sloppy maths. If the market grows 30% in one year, and the average is 8.5%, then to maintain that average the market must contract by 17% the next year. Its a simplified example but shows the folly of expecting growth to return to long-term averages. The average has already been distorted by high growth - it cant simply 'return' to normal without a corresponding period below average. Thats why its called an average...

What is being said is that, rather than the average 15% growth we've had over the last 5 years, growth will return to the long term average, i.e. ~8-9%

What it is NOT saying is that the long term average, which may now be 9.5% will return to 8.5%.

There is a big difference between the two as you have pointed out.

 

[alexlee]

On the other hand, you can also infer that because we've had such great growth in Perth for the last 5 years, to go back to the average it'll have to either come down or stay flat for a few years. Long term averages are based on decades of data. You can have very lumpy numbers for a number of years, and median prices masks that volatility. 20 years from now people will say Sydney has a long-term growth of x%, when we know that from 1999-2003 the median price shot up, followed by flat in 2003 - 2006. Holding in Sydney in 2002 would be fine from a long term point of view, but if you'd refinanced and invested in Perth back then.....

I have one IP that I bought in Perth at a significantly lower price than the current market price, and I have no intention of selling. Selling costs, loss of future capital gains, etc. Instead I'll refinance to 80% LVR and get the money out (signed it last week) and use the remaining 20% equity to keep my place at the table. If it falls 20%, I don't really care because I'm still in the black and long term it'll go back up. Bank won't call in a negative equity loan if I keep making the payments (because if a crash really happens, they'll have their hands full with people who AREN'T paying). I'm planning to use the equity and invest in the Eastern states.

The question is whether you would buy in Perth now. I wouldn't, because I think the chances of Perth being near the top of a bubble is greater than the chances of the commodities boom continuing for more than the short term. Also, with price weaknesses showing in Sydney, buying opportunities are starting to appear. Doing my search for my future PPOR, I'm seeing a lot more choices in my price range compared to a few months ago. Personal opinions only, of course.

I think as usual in booms there are a lot of details that have been glossed over. e.g. BHP says their long term supply contract is worth $x billion. What are they basing that on? Current prices? Expected future prices? What if the spot price falls (as it did a few months ago when the hedge funds gave it a jolt?) What about costs, which are skyrocketing (though the Sydney Morning Herald had an article about that)? What happens if market prices (much more volatile because they're publicly traded) fall just as input costs (far less elastic, since in their desperation for staff and equipment mining companies are likely to sign long term contracts with suppliers, give out signing bonuses, etc - you saw this with the dot-coms) rise?

For investors, it's not just whether Perth represents a good buy, but whether the other cities represent better buys. I'm always wary of buying a hot market when there are colder markets around. We can choose where to buy, unlike owner-occupiers. Especially if you work in Perth, your job is fairly tied into the mining boom anyway. Do you want all your eggs in one basket (in the last 5 years in Perth, yes, but I'm sure the Enron employees who put all their super funds into Enron stock said the same thing as the stock climbed to $80)?

So you not only have to ask whether the commodities bubble will burst (even if it's a soft landing Perth will probably go flat for a few years a la Sydney - and Sydney's downturn isn't done yet) and whether the eastern states represent better medium term to long term growth. This is especially relevant for people who aren't exposed to Perth at the moment.

It is entirely possible a commodities slowdown will cause Perth to go flat. By this time, pent up demand in Sydney and lower prices might cause the first home owners who missed out on the last Sydney boom to start buying, especially as rents rise making buying more desirable. From my point of view, buying Perth v buying Sydney is about buying into a market that may not have peaked yet, vs buying a market that hasn't bottomed yet.

But all this is just my read of it. If China manages to control its growth and sustains 8% growth or so, then Perth will easily surpass Sydney in median price.
Alex

 

[thedon]

I have one IP that I bought in Perth at a significantly lower price than the current market price, and I have no intention of selling. Selling costs, loss of future capital gains, etc. Instead I'll refinance to 80% LVR and get the money out (signed it last week) and use the remaining 20% equity to keep my place at the table. If it falls 20%, I don't really care because I'm still in the black and long term it'll go back up. Bank won't call in a negative equity loan if I keep making the payments (because if a crash really happens, they'll have their hands full with people who AREN'T paying). I'm planning to use the equity and invest in the Eastern states.

This is my first post to the forum so hello everyone from Dan In Perth.

Can you please explain this further?
My interpretation is - you are borrowing further against your IP and using those funds elsewhere?

I'm interested as I have a couple IP in Perth ($254,000 interest only on one house in edgewater) - valuation now around $350,000. I also owe $144,000 on my PPOR. Could I borrow more on the IP (say $50k) and pay that off my PPOR loan? Therefore maximismg my tax deductions and claiming $304,000 on the interest only loan . Sounds to good to be true?

Or more likely that $50k I use towards another IP? Therefore funding another property from this $50k ?? Assuming there is equity in the other investments that the bank is happy with.

I've got lots more quesitons and have enjoyed reading the many informative posts on here!

Thanks

Dan