The future of Australian property prices

[sinner]

Is the Australian economy the world?s largest Ponzi scheme?
Written by Oliver Yates

Anyone check out this article posted by Agentm? The chart of debt with 1 year or less maturity is scary! 50% of total!

...a significant proportion of demand fuelling “growth” is debt driven; debt-financed demand has constituted around 20% of total demand in the Australian economy.

 

[medicowallet]

Ultimately the replacement cost of property puts a floor under property prices.

Materials + Labour

Materials = strong Aussie dollar = plenty of room to move.

Labour = grossly overinflated for 10 years = plenty of room to move.

Land = artificially inflated by council and developers = plenty of room to move potentially.

 

[FxTrader]

Margaret Lomas, in a just released newsletter, has her say on talk of price bubbles and a massive correction in the housing market...

"I'm over talk of a bubble in the same way that I easily get over eating the same cereal every morning - after a while it tastes like cardboard and I've just got to have something different or I won't eat breakfast at all!

Concerns about a house price bubble have been responsible for all manner of people getting in on the bandwagon with their comments and predictions, none more prolifically than economists who, in my opinion, should be sticking to what they do know and leaving property well alone. I'm a big subscriber to the notion of the obvious impact of micro economics on area values, but if you're trying to overlay a global or national economy onto a single suburb or regional town, then you're doing little more than proving how ignorant you are.

Adding to the countless number of ill-informed comments about our impending property meltdown is a media which causes alarm by reporting on a single property market and then comparing this to the international situation. These reports ignore the fact that our thousands of individual property markets behave in their own manner, and it's not uncommon to find pockets all over the place which are behaving counter-cyclically - that is, in an opposing fashion to the greater economy.

In a survey in The Economist magazine, the summary was that Australian houses are ''overvalued'' by 56 per cent - the highest in the world - on a historical ratio of rents to house prices. This survey ignored our advantageous tax treatment for property investors which significantly changes the bottom line numbers as it adds to after tax cash flow through a range of valuable deductions.

Some economists claim that debt levels are too high and this will be the single factor which results in that catastrophic, now legendary claim of a 40% price crash. The thing is, we are already proving we can sustain the debt and as long as interest rates don't run away (and there is simply no economic data which exists to indicate they will) we'll all probably sit and cop it without selling down in a panic.

For property prices to collapse, we'd need a lot more than high debt levels, and this would include rampant unemployment, a slowdown in our mining boom, a stagnant population growth, cut in migration rates and a sudden distaste of property ownership by the population, en-masse. This is like waiting for that eclipse where all the planets align at once - a one in a few thousand year occurrence which is not likely to occur, at least in our investing lifetime.

We'd also need the members of the Reserve Bank board to experience temporary insanity and forget how to quickly and decisively implement monetary policy - recently credited with saving our butts during the GFC.

Even Glen Stevens, Reserve Bank Governor, wants us to know that, from the Reserve Bank's perspective, a housing bubble is a myth perpetuated off the back of ill- informed alarmists. He is quoted as saying that a lot of things keep him up at night, and falling house prices is not one of them!

Anyone who knows what they are talking about agrees that economic growth is strong and in many pockets, very strong, and house price growth is certainly going to lag behind this growth for a couple of years yet. This bodes well for not only a return to affordability, but for investors who want to grab some good buys right now, during one of the best buyer’s markets I have seen for some time, and sit and wait for a year or so until price growth tries to catch up with our bullish economy."

An interesting perspective from an investor/advisor/author of her stature. I tend to agree that the conditions for a 30-40% price decline across the board do not currently exist. However, I don't share her confidence in perpetual and sustained ecomonic growth and the manageability of household debt levels that are far to high. She seems to signal at least a slow down in price growth and "return to affordablity". What affordability means to her isn't cited but it surely can't be related to growth in average household disposable income since this has not kept pace with house price growth for years.

 

[Quincy]

Margaret Lomas, in a just released newsletter, has her say on talk of price bubbles and a massive correction in the housing market...

Adding to the countless number of ill-informed comments about our impending property meltdown is a media which causes alarm by reporting on a single property market and then comparing this to the international situation. These reports ignore the fact that our thousands of individual property markets behave in their own manner, and it's not uncommon to find pockets all over the place which are behaving counter-cyclically - that is, in an opposing fashion to the greater economy.

I agree with this point of view. You can't just generalise by placing all Australian property into a single market. There are thousands of individual markets represented by suburbs, towns, cities and regions.

eg. Gold Coast / Sunshine Coast is tanking but Sydney North West (my area) hasn't missed a beat.

 

[trainspotter]

Margaret Lomas, in a just released newsletter, has her say on talk of price bubbles and a massive correction in the housing market...

For property prices to collapse, we'd need a lot more than high debt levels, and this would include rampant unemployment, a slowdown in our mining boom, a stagnant population growth, cut in migration rates and a sudden distaste of property ownership by the population, en-masse. This is like waiting for that eclipse where all the planets align at once - a one in a few thousand year occurrence which is not likely to occur, at least in our investing lifetime.

We'd also need the members of the Reserve Bank board to experience temporary insanity and forget how to quickly and decisively implement monetary policy - recently credited with saving our butts during the GFC.

Anyone who knows what they are talking about agrees that economic growth is strong and in many pockets, very strong, and house price growth is certainly going to lag behind this growth for a couple of years yet. This bodes well for not only a return to affordability, but for investors who want to grab some good buys right now, during one of the best buyer’s markets I have seen for some time, and sit and wait for a year or so until price growth tries to catch up with our bullish economy."

Which is what I have been writing for 22 months, 3100 posts and over 251 pages.

 

[medicowallet]

Which is what I have been writing for 22 months, 3100 posts and over 251 pages.

Is this the same strong economic growth that was around when the sharemarket tanked?

I am sorry, but the fundamentals of property are even more out of whack than the sharemarket was at the time.

A correction, over the short to medium term is imminent. Whether this will be painful or benign I do not know, just that I am prepared, I know it will not be for me.

People should prepare for a fall and expect stagnation imo. Anything less than that is purely gambling in my books.

 

[KurwaJegoMac]

Which is what I have been writing for 22 months, 3100 posts and over 251 pages.

And I suspect you'll be doing the same for the next 22 months, 3100 posts and over 251 pages :

For property prices to collapse, we'd need a lot more than high debt levels, and this would include rampant unemployment, a slowdown in our mining boom, a stagnant population growth, cut in migration rates and a sudden distaste of property ownership by the population, en-masse.

Trigger, trigger, trigger... As i've said before - you need a trigger for a crash, not just people perceiving an asset to be overvalued. You need forced selling!

We have:
Low unemployment
Low interest rates
Mining boom
Tax Advantages for property investment
Relatively tight rental market

You need one or more of the above to fail in a spectacular fashion in order for a large crash to occur. Otherwise people will just sit on the asset and wait. People will not sell property unless they have to...

...trigger trigger trigger

 

[sinner]

And I suspect you'll be doing the same for the next 22 months, 3100 posts and over 251 pages :



Trigger, trigger, trigger... As i've said before - you need a trigger for a crash, not just people perceiving an asset to be overvalued. You need forced selling!

We have:
Low unemployment
Low interest rates
Mining boom
Tax Advantages for property investment
Relatively tight rental market

You need one or more of the above to fail in a spectacular fashion in order for a large crash to occur. Otherwise people will just sit on the asset and wait. People will not sell property unless they have to...

...trigger trigger trigger

A wise man once said:

Can events in complex systems ever be predicted?
No...and yes. No, because the precise timing and details can never be predicted. Yes, because we can be certain that anything that is unsustainable will someday cease to continue and things that are horribly imbalanced will someday topple. We can also be certain that the change, when it comes, will be rather sudden and abrupt, rather than gentle and linear. That is, we can easily predict that a complex system will shift, and that it will probably do so rapidly, but not exactly when or by how much.

--

and that is how I view the situation. The triggers are infinite. I can think of at least 3 which you didn't list just off the top of my head. None of them actually matter.

What matters is that the system has changed from simple to complex, from sustainable to unsustainable, from transparent to opaque.

I am certain that when the change comes, it will be "sudden and abrupt" and the resulting change in standard of living will catch most, even those who call themselves "bears" completely unaware.

We are far beyond the point of "stagnation" being a possibility, that is a slow linear change. Good luck with that thesis.

 

[kingcarmleo]

Would it be unrealistic to a buy a decent house in vegas for under 400k?

 

[white_goodman]

Would it be unrealistic to a buy a decent house in vegas for under 400k?

you cereal? for what u get in sydney you could get 10 in vegas

 

[Reasons]

An interesting perspective from an investor/advisor/author of her stature. I tend to agree that the conditions for a 30-40% price decline across the board do not currently exist. ...I don't share her confidence in perpetual and sustained economic growth and the manageability of household debt levels that are far to high….What affordability means to her isn't cited but it surely can't be related to growth in average household disposable income since this has not kept pace with house price growth for years.

I agree with your perspective on her article. It is more emotive than factual or professional.

Margaret Lomas, in a just released newsletter, has her say on talk of price bubbles and a massive correction in the housing market... (Margaret Lomas) "I'm over talk of a bubble in the same way that I easily get over eating the same cereal every morning …!

I subscribe to a number of property spruikers to keep tabs on where their thinking is being directed and I am observing far more frenetic email activity, soothing words about having to be selective in the areas you buy, how now has never been a better time to buy, acknowledgement that there even may be issues, more difficulties filling seminars, etc, in recent months. There is a higher level of perceived angst amongst some, not all.

( Margaret Lomas) Concerns about a house price bubble have been responsible for all manner of people getting in on the bandwagon with their comments and predictions, none more prolifically than economists …. I'm a big subscriber to the notion of the obvious impact of micro economics on area values, but if you're trying to overlay a global or national economy onto a single suburb or regional town, then you're doing little more than proving how ignorant you are.

Yep, that is what many of the others in her profession will say too and who is to say she is not right? The yanks thought that some of their better areas were immune also, and it did take longer to affect some like Seattle, but eventually it did, and very ‘nicely’ to boot.

( Margaret Lomas) Adding to the countless number of ill-informed comments about our impending property meltdown is a media which causes alarm by reporting on a single property market and then comparing this to the international situation. These reports ignore the fact that our thousands of individual property markets behave in their own manner, and it's not uncommon to find pockets all over the place which are behaving counter-cyclically - that is, in an opposing fashion to the greater economy.

This is just emotive speak and opinion based on unsubstantiated ‘fact’. She assumes (rule number one is assume nothing) several things here in a very incoherent way. Internationally I can only guess she means bubbles and in her opinion that is not the case here; that there are markets within markets that don’t get affected ever. Once again she could be right, but she is attempting to denigrate anyone with an alternative view with emotive words, not a professionally balanced view. As they say, the good thing about opinions is, regardless of who you are, you can have one.

( Margaret Lomas) In a survey in The Economist magazine, the summary was that Australian houses are ''overvalued'' by 56 per cent ... on a historical ratio of rents to house prices. This survey ignored our advantageous tax treatment for property investors which significantly changes the bottom line numbers as it adds to after tax cash flow through a range of valuable deductions.

This of course is a very naive statement for someone in her position and profession as the tax concessions she refers to only relates to IPs and not the PPOR. The majority of concerns are PPOR based, not IP owners. As PPORs get no input tax concessions until they sell, it is irrelevant and still leaves the question of overvalue wide open.

( Margaret Lomas) Some economists claim that debt levels are too high and this will be the single factor which results in that catastrophic, now legendary claim of a 40% price crash. The thing is, we are already proving we can sustain the debt and as long as interest rates don't run away (and there is simply no economic data which exists to indicate they will) we'll all probably sit and cop it without selling down in a panic.

As she points out, ‘proof’ is as long as interest rates don’t run away. Australian banks raise huge amounts of capital from OS investors to sustain the Aussies property market. The assumption on her part is that funding will remain cheap and indeed always be there, because that is what always happens (doesn't it?). But what if the central bankers have made a tactical error in all their acquired debt to get over the GFC or one of a hundred other international expectations we assume will keep happening because they always do, but doesn’t? But she has a point about economists, who would not know which way is up.

( Margaret Lomas) For property prices to collapse, we'd need a lot more than high debt levels, and this would include rampant unemployment, a slowdown in our mining boom, a stagnant population growth, cut in migration rates and a sudden distaste of property ownership by the population, en-masse. This is like waiting for that eclipse where all the planets align at once - a one in a few thousand year occurrence which is not likely to occur, at least in our investing lifetime.

She assumes here again that what has happened in the past will perpetuate into the future. Black swans did not exist until someone sailed into Perth. In other words the probability of a known being proved wrong is increased the longer that known has existed. The Aussie property market has defied gravity for possibly 70 years based on increased credit availability, without any significant correction. It might go for another 70. It might not. We all have to make investment decisions based on what we think that probability to be. Wild emotive statements about ‘a few thousand year occurrence’ will not save you if you make a tactical timing error with gearing or debt into the wrong investment.

( Margaret Lomas) Even Glen Stevens, Reserve Bank Governor, wants us to know that, from the Reserve Bank's perspective, a housing bubble is a myth perpetuated off the back of ill- informed alarmists. He is quoted as saying that a lot of things keep him up at night, and falling house prices is not one of them!

With all due respect to central bankers, I think the US Fed’s similar position back in 2007/8 puts paid to any mention of these experts being an authority on the subject and frantically grasping at straws to substantiate her argument. Our own RBA was putting interest up as the global economy tanked during the GFC.

( Margaret Lomas) Anyone who knows what they are talking about agrees that economic growth is strong and in many pockets, very strong, and house price growth is certainly going to lag behind this growth for a couple of years yet. This bodes well for not only a return to affordability, but for investors who want to grab some good buys right now, during one of the best buyer’s markets I have seen for some time, and sit and wait for a year or so until price growth tries to catch up with our bullish economy.

Once again just an emotive and condescending argument , ‘Anyone who knows what they are talking about agrees’; in other words anyone who has the same way of thinking and capital or business risk as her. Based on her being right, this is a great time to buy. She could be right, but if someone is buying and heavily geared or in debt, you have to look at the probability of property being higher or lower in 10 years’ time or gone sideways, as opposed to down.
It just comes down to risk/reward. Can you afford not to be in it, or can you afford to be in it at all if highly indebted or geared, should the naysayers be right?

Which is what I have been writing for 22 months, 3100 posts and over 251 pages.

It took 70 years to get to where we are and could take 70 more, or it might not. A few years here and there are irrelevant to find out. It is the asset risk you might have if your stand is emotive like Margaret’s that matters. When there are multiple options to make similar gains, you have to weigh up the risks and rewards of purchasing an asset that could become highly illiquid.

Is this the same strong economic growth that was around when the sharemarket tanked? I am sorry, but the fundamentals of property are even more out of whack than the sharemarket was at the time. A correction, over the short to medium term is imminent. Whether this will be painful or benign I do not know, just that I am prepared, I know it will not be for me. People should prepare for a fall and expect stagnation imo. Anything less than that is purely gambling in my books.

I could not agree more; you can get great returns elsewhere with very high liquidity. Gambling is different from investing or buying your PPOR and anyone considering gearing or borrowing heavily against property at this point in time needs to consider all the pros and cons, and the risk/reward of doing so. Emotiveness has no place in investing or trading.

And I suspect you'll be doing the same for the next 22 months, 3100 posts and over 251 pages :
Trigger, trigger, trigger... As i've said before - you need a trigger for a crash, not just people perceiving an asset to be overvalued. You need forced selling!

Waiting to see the trigger is fine; will you be quick enough to dodge the bullet if your assets are at risk?

 

[Mr Z]

Would it be unrealistic to a buy a decent house in vegas for under 400k?

Less... much less in some cases.

From 15K...

 

[Reasons]

Can events in complex systems ever be predicted? No...and yes. No, because the precise timing and details can never be predicted. Yes, because we can be certain that anything that is unsustainable will someday cease to continue and things that are horribly imbalanced will someday topple. We can also be certain that the change, when it comes, will be rather sudden and abrupt, rather than gentle and linear. That is, we can easily predict that a complex system will shift, and that it will probably do so rapidly, but not exactly when or by how much.

Absolutely. Look at the Middle East. I don’t think Mubaruk in Egypt and his counter parts in other countries envisaged the cronyism systems they installed over decades being demolished and within days. Yet they were and it’s spreading. That would have toppled the wealth and power of many overnight (except the top ones leaving with all the State’s bullion); I wonder how many saw the trigger, and if so, did it do them much good?

And that is a whole country, not just an asset class.

and that is how I view the situation. The triggers are infinite. I can think of at least 3 which you didn't list just off the top of my head. None of them actually matter.

So very true. We all try to be clever and predict the future using simple elements that we know, even though we are all aware how well economists do at that. It is the complexity and interconnectedness of many systems that we don't/can't ever understand that will usually get us. How quick we forget recent history and the GFC.

I am certain that when the change comes, it will be "sudden and abrupt" and the resulting change in standard of living will catch most, even those who call themselves "bears" completely unaware.

Yup; that is the known unknown and the perplexing high-risk bit.

 

[KurwaJegoMac]

A wise man once said:

Can events in complex systems ever be predicted?
No...and yes. No, because the precise timing and details can never be predicted. Yes, because we can be certain that anything that is unsustainable will someday cease to continue and things that are horribly imbalanced will someday topple. We can also be certain that the change, when it comes, will be rather sudden and abrupt, rather than gentle and linear. That is, we can easily predict that a complex system will shift, and that it will probably do so rapidly, but not exactly when or by how much.

--

and that is how I view the situation. The triggers are infinite. I can think of at least 3 which you didn't list just off the top of my head. None of them actually matter.

What matters is that the system has changed from simple to complex, from sustainable to unsustainable, from transparent to opaque.

I am certain that when the change comes, it will be "sudden and abrupt" and the resulting change in standard of living will catch most, even those who call themselves "bears" completely unaware.

We are far beyond the point of "stagnation" being a possibility, that is a slow linear change. Good luck with that thesis.

I agree, the system is incredibly complex and I have no hope in being able to pinpoint a precise list of triggers - no one can. If a crash does occur it will be 'sudden and adrupt' and will catch most unaware. The GFC hit harder and faster than most would anticipate and there's no reason why it can't happen that way with property.

As Reasons mentioned:

Waiting to see the trigger is fine; will you be quick enough to dodge the bullet if your assets are at risk?

I doubt most would be quick enough to 'dodge the bullet'. After all, it is a relatively illiquid asset. Personally, I wont even be trying to time the market - i'll just be minimsing my risk as much as possible. I do see more risk in the property market now then say 10 years ago but not at a level that will turn me off from IP... just yet

 

[trainspotter]

Yup; that is the known unknown and the perplexing high-risk bit.

This kind of known unknown or the Arab kind?

 

[Reasons]

This kind of known unknown or the Arab kind?

Having read through this thread I am obliged to go for the former because Rummy's logic is at least correct.

 

[Agentm]

past performance is not an indication of future returns..

the bulls are enraged and desperate to fight the tide of change.. but its a fact..

markets are today

fantasy and dreams of yesteryear doesnt mean a rosy future will follow..

the bubble is here.. and its not going to be a happy journey south.. no matter what speed it drops..

 

[KurwaJegoMac]

past performance is not an indication of future returns..

the bulls are enraged and desperate to fight the tide of change.. but its a fact..

markets are today

fantasy and dreams of yesteryear doesnt mean a rosy future will follow..

the bubble is here.. and its not going to be a happy journey south.. no matter what speed it drops..

Coming from another perspective:

You say past performance is not an indicator of future returns - so by that logic one could argue that you cant call this a bubble yet as the main argument for the bubble is high median house price relative to median income relative to what it's been in the past. Rental yields are still the same as decades passed, as is capital growth. Still getting the same returns albeit at a greater capital outlay.

This bubble talk is ridiculous - heres a tip: house prices rise exponentially. Throughout your entire life you will see higher and higher prices. Our inflation is exponential too and ideally should be in line with the pace of housing. Have a peek at a graph trainspotter (i think) posted a few pages back showing the annual growth rate of property. Shock, horror it's been roughly the same for the last50 years. Exponential growth makes the situation appear more ominous then it really is.

Now i want to make this clear - i am not suggesting prices will always rise - they wont. We will hit some point of stagnation for a few years sometime in the future as wages catch up to property prices (they are expensive now no doubt about that). Property has been going through the same cycle for decades and will continue to do so (its the same cycle as most assets).

Too many people are pinning their hopes on a crash so that they can jump into the market. We have media, most ASF posters, most economists and most average joes spouting the 'bubble' line for the past 10 years - the market is still going against what the majority thinks. Get out on the ground and see what it's really like - it'll open your eyes.

Personally i see us at or near the top of the standard property cyclical phases. Expecting at some point soon a mild pullback in prices 5-10% from peak before a period of stagnation. But still buying another IP anyway - positive cashflow and dont give a fluff about the end price, already factored in to risk analysis.

 

[KurwaJegoMac]

Before anyone jumps down my throat about buying property now - i have a minimum 20 year view for holding it. Im not naive enough to think that i can predict the market with any degree of accuracy, nor be able to time a purchase with 20 year minimum holding time. So im not even bothering to forecast when making purchases so capital gains and losses are not a big factor in my decision (although they do impact m cash flow analysis so capital losses are accounted for in my risk assessment)

 

[Greedy_Kev]

past performance is not an indication of future returns..

the bulls are enraged and desperate to fight the tide of change.. but its a fact..

markets are today

fantasy and dreams of yesteryear doesnt mean a rosy future will follow..

the bubble is here.. and its not going to be a happy journey south.. no matter what speed it drops..

It's funny how for property u say past performance is not an indicator of the future, yet for shares it seems like that theory is being push out alot.