Sydney house prices due for 87 style meltdown?

Hang in there Krisbarry.

I am renting an older style 2 bedroom house in a quiet street in a good suburb (Oatley, Sydney) for $280 / week. My partner keeps it very clean and it has a great backyard for the kids, dog, cat and now chickens to run around. The kitchen is on the small side, but that is fine as I prefer to outsource a lot of the cooking (LOL).

When we moved in (beginning 2003), I asked the R/E agent how much it would be to buy. He replied that with the size of the block and location, about $680,000.

You see the annomoly?

For the sake of argument, lets say the house is really worth $580,000, and we could have the rate increased to $300 p/w. The return on investment is only 2.7% (ignoring council rates). Hardly inspiring if further capital gains are uncertain as they are now.

Now the real rub. Everyone is focussing on interest rates with regards to house prices. But there is another even more important factor - unemployment rates.

We are currently sitting on record low (for recent times) unemployment rates. It is widely accepted that we are somewhere near the peak of our economic cycle, and we could expect unemployment to start increasing - especially if housing construction comes of the boil.

You now see whats wrong? For us electrical engineers, it is a classic (unstable) positive feedback oscillator.

A lot of the capacity constraint that the reserve bank is worried about has come from construction in this housing boom. But now the bank is increasing interest rates to over come this supply problem. When the scales tip, they COULD tip quite rapidly with devastating consequences for the economy.

And if unemployment rises 3-4% over the next few years, the banks and house prices are rooted.

I don't think interest rates will go up on wednesday.

Also I can only speak from my experience in Sydney. If I desperately wanted to buy a house now, I might look at Perth.

Also, I liked this quote from ABC business program on sunday.

"The meek shall inherit the earth, but not its mineral rights"

I think the whole anglosphere is in store for a house price shock.

IMO the whole housing market is like a complex mechanical / electrical system running with zero margin for error. As any tradesman or engineer will confirm, if you try and do that then sooner or later something goes wrong and the whole thing comes to a dramatic stop, explodes, catches fire, crashes, sinks or whatever.

The housing market has long past the point of sensible operating conditions. Pedal is firmly to the metal, gauges are well past the red line, things are getting hot and some rather nasty sounds are being produced. It might come to a halt peacefully, but would YOU like to be standing next to it if it doesn't?

Real estate always goes up? And money really does grow on trees...

Thought this link might of interest to people. Study done on property cycles. 24 pages of reading but interesting if you are into property.

http://137.151.62.168/finance/journal/papers/pdf/past/vol18n01/v18p151.pdf

Also quoting from the other link I posted (https://www.aussiestockforums.com/forums/showpost.php?p=9989&postcount=27) it didn't take much of a rate rise (6%) for the Japanese property to go bust.

"After the September 1985 Plaza Accord, the yen's appreciation hit the export sector hard, reducing economic growth from 4.4 percent in 1985 to 2.9 percent in 1986 (EIU 2001). The government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987. During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed.

The Nikkei stock market index fell more than 60 percent-from a high of 40,000 at the end of 1989 to under 15,000 by 1992. It rose somewhat during the mid-1990s on hopes that the economy would soon recover, but as the economic outlook continued to worsen, share prices again fell. The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession-by 80 percent from 1991 to 1998 (Herbener 1999)."

Although the interest rate rise rose by over 100% in Japan, 6% is still low. Even though Japan is a different kettle of fish compared to Japan, Japan sounds very similar to the current US situation (battling inflation). We won't experience the same amount of pain but if if inflation becomes a big worry, a rates rise to 6% (.5% increase) would mean a lot of people could be left hurting. As austrian theory points out, the longer the delay in going through the pain and the necessary recession/correction, the bigger the blow up. Also look at the result of the effect it had on the Japanese stock market. As said before, different kettle of fish compared to Australia but we do have an over inflated property boom.

Just my thoughts.

We Aussies are a special lots even though we are less than a few percent on the world economy scale .. House price never go down, resource super cycle is here to stay... Leverage to the hill as there are always jobs around.

When think don't work out like default on your loan, blame the government

Amen

Smurf1976 said:

IMO the whole housing market is like a complex mechanical / electrical system running with zero margin for error. As any tradesman or engineer will confirm, if you try and do that then sooner or later something goes wrong and the whole thing comes to a dramatic stop, explodes, catches fire, crashes, sinks or whatever.

Click to expand...

A jet engine falls into that category the odd one fails but 99.9% keep flying for life!

The housing market has long past the point of sensible operating conditions. Pedal is firmly to the metal, gauges are well past the red line, things are getting hot and some rather nasty sounds are being produced. It might come to a halt peacefully, but would YOU like to be standing next to it if it doesn't?

Click to expand...

Did in the 80s a well just wait until the crap hits the fan as it will and everyone will be patting themselves on the back.
A few of us will be looking for signs of stability and taking advantage of any anomaly.

Real estate always goes up? And money really does grow on trees...

Click to expand...

In the long term it sure does and in 15 yrs time these prices will be insanely cheap and the "House Prices to Stagnate" thread will have 2 million posts.A few will find that money does grow on trees if you can find plant and harvest the tree but most will keep on doing what they do best---sweet FA.

ROE said:

We Aussies are a special lots even though we are less than a few percent on the world economy scale .. House price never go down, resource super cycle is here to stay... Leverage to the hill as there are always jobs around.

Click to expand...

Group think is such that only simple ideas can be communicated, understood and held. The same group think occurs in the realist camp aka. the bear camp, only the rhetoric is along the lines of what a previous poster alluded toward: look at what happened to Japan nearly 2 decades ago, that's what all asset bubbles become.

"Men go mad in crowds, but come to their senses slowly, and one by one."----Charles Mackay.

How many of the-sky-is-falling property realists gave in and bought property during the last three years I wonder? One by one...

ASX.G

Get this, the bank rang me the other day asking if I would like to purchase an investment property thru one of their financial advisors

markrmau said:

Now the real rub. Everyone is focussing on interest rates with regards to house prices. But there is another even more important factor - unemployment rates.

Click to expand...

The real villan will be the under-employment rate, which is harder to calculate but have read reports this is in the double figures.

I can relate to your argument, as I bought an investment property a 2 minute walk from the house I rent. Earning almost double rent to what I pay (sharing with 1 other person), however I am paying 2.2% yield & earning 4.3% yield, and my holding costs & loan are tax deductable unlike a PPOR.
My situation is not uncommon amongst many I know, a form of slow moving property semi-arbitrage.

Hello all, don't forget I wrote that almost 3 years ago.

Just an update: that house was sold 1 year ago for about $560k.

And yes, I was completely wrong about the economic cycle - 3 years later we are still booming along with unemployment rates still apparently dropping.

I rent a slightly bigger house in an adjacent suburb for $290/wk. I could easily afford to buy a house but choose not to.

Cheers,Mark

markrmau said:

Hang in there Krisbarry.


You see the annomoly?

For the sake of argument, lets say the house is really worth $580,000, and we could have the rate increased to $300 p/w. The return on investment is only 2.7% (ignoring council rates). Hardly inspiring if further capital gains are uncertain as they are now.


Also I can only speak from my experience in Sydney. If I desperately wanted to buy a house now, I might look at Perth.

Click to expand...

What you are missing is the fact that rental yields and the value of the land operate in different circles,

Picture if for some ungodly reason a 1/4 acre block with a 4bedroom house was still available in sydney cbd, the house might only be able to be rented for $1000 a week but that doesn't mean that the land isn't worth $50million,

With 100,000 + migrants and 80% of them ending up in big cities, will keep big cities prices higher, longer.
Also let’s not forget that SMH was $0.20 in 1980 and now is $2.
Tim-tams were $0.60, so safe to say that $1,000,000 house is worth mere $100,000 to $200,000 in 1980 terms, hardly a fortune.

Yes, money grows on trees, but it also shrinks with time too.

Plant more trees.

Happy said:

With 100,000 + migrants and 80% of them ending up in big cities, will keep big cities prices higher, longer.
Also let’s not forget that SMH was $0.20 in 1980 and now is $2.
Tim-tams were $0.60, so safe to say that $1,000,000 house is worth mere $100,000 to $200,000 in 1980 terms, hardly a fortune.

Yes, money grows on trees, but it also shrinks with time too.

Click to expand...

Yes, half a mil' used to be something too...now it's just the price tag on granny's old house somewhere way out in the suburbs. You can see strange impact of periods of excessive inflation here in Sweden. My house is valued at several million....sheesh, I'm rich as hell! But a beer costs 50 kr a pint and petrol is 12-13 kr a litre too, hehe. It messes with you mind. But people feel richer when they hand over a piece of paper with 500 or 1000 written on it, and so they spend like dutiful little mass-consumers.

ASX.G

The Yields in Australia are not as good as many overseas.

This Website (www.globalpropertyguide.com) is tops for property investment research. I think that it illustrates either one of two things... rents are too cheap or prices are too inflated... You choose...

Aussie yeilds are about an average of 5%, Thailand is about 8%, Brazil is 7.5%, Dubai is 10.2%. So prices in Dubai would have to double for it to reach the levels Australia has...

If property falls then I will get a house of my own sooner...

insider said:

The Yields in Australia are not as good as many overseas.

This Website (www.globalpropertyguide.com) is tops for property investment research. I think that it illustrates either one of two things... rents are too cheap or prices are too inflated... You choose...

Click to expand...

Rents are cheap. Have been for a long time and continue to be, in spite of recent years where tenants are climbing over one another to get a lease contract.

insider said:

The Yields in Australia are not as good as many overseas.

This Website (www.globalpropertyguide.com) is tops for property investment research. I think that it illustrates either one of two things... rents are too cheap or prices are too inflated... You choose...

Aussie yeilds are about an average of 5%, Thailand is about 8%, Brazil is 7.5%, Dubai is 10.2%. So prices in Dubai would have to double for it to reach the levels Australia has...

If property falls then I will get a house of my own sooner...

Click to expand...

Dubai property market is booming.
A friend of mine who has been living there bought an investment property for AU$100k. Sold it 3 months later and doubled his money.

I dont think house prices will decline they may stay the same for a while but the reason i believe they will stay like this is becuase inflation will do the job of in real terms reduce the value of the housing market.

Lets say house prices remain the same for 3-5 years and inflation stays at 3% which is a good chance thats essentially a loss in value of 9 - 16%.

Because we have low vacancy rates and not enough supply it is highly unlikely that we will see a large reduction in prices as the US is.
There is still plenty of money out they looking for a home to invest in as the share market declines in many places around the world wheres the cash gonna go?

Just my opinion could be wrong. But i think with urban consolidation petrol price increases and cost of services rising there will be areas close to public transport and the cities where house prices go up. Western sydney and the outer burbs are screwed IMO if anything is going to go down its these places.

I'm never sure we always talk about exactly the same thing (not even sure if this is the correct thread). When we bought our home it was a three bedroom. It still is. However, since that time various "improvements" have been carried out: lounge/dinning area extended to about three times the original size; full length deck; landscaping; central heating installed; air-conditioning installed; rainwater tanks; solar heating; cellar. Definitely not the same house we originally bought.

Bit like buying a property for $800k, undertaking $400k of renovations and then, due to market conditions, selling for $1M. A real-estate agent would spruik "Look, a 20% capital gain!"

Way too many variables between individual properties, especially stand alones, to give an absolute view on what will or will not meltdown.

Judd said:

Way too many variables between individual properties, especially stand alones, to give an absolute view on what will or will not meltdown.

Click to expand...

Suddend drop of demand will do the trick.