The future of Australian property prices

[lurker123]

Reporting that experience from that time does not logically translate into my being 'a property bull'. I would absolutely not be buying property as an investment at present because capital gains are far from assured and the yield is pathetic, at least in the area where I live.

What? Where have I advocated going into property and/or getting into debt?
I have done nothing of the sort. Perhaps you could explain the source of your conclusion about what I am advocating?

My apologies, I got ahead of myself and assumed you were a bull due to your support of Beej's comment on how as long as the price of property keeps rising your better off buying sooner rather than later.




To reiterate my stance, I wouldn't recommend anyone buy a property now, sell a property now or stay out of the market, in the end you need to make your own decisions.

I can only say that in my view house prices don't look sustainable, so I myself wouldn't be buying. On the otherhand beej has brought to light for me the problem of inflation and there exists a high possibility of the government inflating all our debts away. So if you don't get in now you won't benefit from your debt decreasing significantly in real terms due to inflation. In the end everyone needs to make their own decisions.

 

[sptrawler]

I can only say that in my view house prices don't look sustainable, so I myself wouldn't be buying. On the otherhand beej has brought to light for me the problem of inflation and there exists a high possibility of the government inflating all our debts away. So if you don't get in now you won't benefit from your debt decreasing significantly in real terms due to inflation. In the end everyone needs to make their own decisions.

Sums it up perfectly, the time frame and how far the prices pull back are the only issues. Get it right and you will do o.k.

Now is the time for research and saving up some cash.

 

[Julia]

My apologies, I got ahead of myself and assumed you were a bull due to your support of Beej's comment on how as long as the price of property keeps rising your better off buying sooner rather than later.

Thanks, lurker. No problem. I probably sounded a bit terse because I'm anything but a property bull at the moment.
I'm actually close to settling on a block of land and having a house built and am less than thrilled about the difference in what I'll get for my present place and the cost of the new one.

Glad to see you can see Beej's point about inflation.

 

[Uncle Festivus]

The difference between us and them is we have a chance to pay ours off.

We are one of the only western countries with a growing population and a growing G.D.P.

Take the U.K. 59 million people, no manufacturing left to speak of, no raw materials to sell, minimal fuel reserves. They are dependent on the financial services sector and overseas investments. This has to support a massive social welfare system that is falling apart at the seams.
The U.K though is in great shape compared to Greece who have nothing to sell.

But in my opinion, to think that we are going to go the same way as the above mentioned countries, just doesn't add up. Like I said IMO

We are totally reliant on resources now, exporting dumb dirt, which means reliant on China.

As for GDP............

Australia's economy slowed more than expected in the December quarter, increasing the likelihood that the Reserve Bank will cut interest rates again to bolster demand.

• Annual GDP grows slowest since 2008
• Quarterly growth half of expectations
• RBA rate cuts to hinge on jobs strength
• Construction shrinks for 21 months in a row

The economy expanded 0.4 per cent in the quarter, compared with the revised 0.8 per cent pace reported for the September quarter, according to the Australian Bureau of Statistics. Economists had tipped economic growth of 0.8 per cent for the December quarter.
"It's a disappointing result relative to expectation and the 1 per cent figure the Reserve Bank had in its forecast,’’ said Michael Blythe, chief economist for the Commonwealth Bank.


That's a massive miss by the (supposedly) top economists in the country, who have consistently gotten it wrong so far.

 

[sptrawler]

We are totally reliant on resources now, exporting dumb dirt, which means reliant on China.

As for GDP............

Australia's economy slowed more than expected in the December quarter, increasing the likelihood that the Reserve Bank will cut interest rates again to bolster demand.

• Annual GDP grows slowest since 2008
• Quarterly growth half of expectations
• RBA rate cuts to hinge on jobs strength
• Construction shrinks for 21 months in a row

The economy expanded 0.4 per cent in the quarter, compared with the revised 0.8 per cent pace reported for the September quarter, according to the Australian Bureau of Statistics. Economists had tipped economic growth of 0.8 per cent for the December quarter.
"It's a disappointing result relative to expectation and the 1 per cent figure the Reserve Bank had in its forecast,’’ said Michael Blythe, chief economist for the Commonwealth Bank.


That's a massive miss by the (supposedly) top economists in the country, who have consistently gotten it wrong so far.

I understand where you are coming from and I agree our growth has slowed, the same as everyone elses. But as your post above state we are still in growth and yes it is mainly due to selling minerals and some food.
However unlike U.K and most of Europes problem economies at least we have something to sell.
It is o.k to be doom and gloom, but do you think it may cause you to miss a buying opportunity. I am not saying now or next month or next year is the best time to capitalise on buying opportunity.
But what I am saying is growth will return and by the time the plebs know it is happening the opportunity has gone.
As Julia above states she is building a house, I personaly have just bought a free standing double storey property, next to a marina in city cetre, 500m to everything, for under $300k. Yes it may go down further and I may do my dough, but it is half of what it was in 2010, I can easily afford it and it gives me lifestyle choices in retirement.
So do I sit back and wait for the crash or say well at that price in that location I think it is fair value.
Only time will tell meanwhile I will sit on the balcony watching the sun go down over the ocean with a glass of shiraz in my hand and worry about it later.

 

[Uncle Festivus]

It would be interesting to know how many on here have actually experienced a recession - that's when you buy.....just need to have patience. Apparently the magic formula for avoiding the dreaded R word is to stimulate & subsidise and hope the debt can be paid off on the other side in better times. The only problem is that there looks like it will be a double dip and the gamble will only have made the situation worse.

The fact is we have just had 25 years of expansionary money supply to feed bubbles, biggest of which is housing, specifically investment property. That bubble started to deflate about the time Robots bought his last IP (or have you bought more since?)

 

[sptrawler]

It would be interesting to know how many on here have actually experienced a recession - that's when you buy.....just need to have patience. Apparently the magic formula for avoiding the dreaded R word is to stimulate & subsidise and hope the debt can be paid off on the other side in better times. The only problem is that there looks like it will be a double dip and the gamble will only have made the situation worse.

The fact is we have just had 25 years of expansionary money supply to feed bubbles, biggest of which is housing, specifically investment property. That bubble started to deflate about the time Robots bought his last IP (or have you bought more since?)

The other thing to put into the equation is wages, the chances of wages going down are fairly remote. Rent is also linked to wages, in relation to the property i have bought it is returning 5% and the tenant loves it.
The down side with cash is inflation as you know, if like a friend of mine, you wait for the bubble to burst it is possible to miss out.
When houses jumped to $150k he sold and waited for the bubble to burst. Well 10 years later he is getting closer to retirement and has just built about 30klm's out on cottage block for $350k.
Do you think that his original house 10klm's out of the city centre is going to go back to $150 or even $200k? If that happens I will pick up 10 and become a slum lord. Because houses like that rent out for between $300 - $400 p/w. So that would be a gross return in the vicinity of 10%.
It is fun to speculate on what happens if the bubble bursts, but what is plan B if it doesn't?
In retirement you still have to make money to live and try to cover for inflation.

As for your question 'who has lived through a recession' I've been through a couple, did my apprenticeship in the early 70's. Who is to say we are not going through a recession right now, I for one think we are.LOL
Like I said earlier, by the time the plebs hear about it it is over.LOL,LOL,LOL

 

[Julia]

As Julia above states she is building a house,

But this despite the economic conditions, a personal decision about where I want to live, not at all because it makes good financial sense. If I thought the housing market would improve fairly soon, I'd hold off.

 

[sptrawler]

But this despite the economic conditions, a personal decision about where I want to live, not at all because it makes good financial sense. If I thought the housing market would improve fairly soon, I'd hold off.

If you couldn't afford to do it or it didn't make sense for your situation, you wouldn't do it. The one thing we all run out of is time, as happened with the friend off mine in the earlier post.
It may take 10 years for house prices to rise again, who knows? That doesn't mean it doesn't make sense to buy one.

By the way, can't you just rent out your existing house, untill things pick up?

It is a bit like everyone saying the banks are going to go broke,LOL. I'll put money on with anybody that their pay is still going into a bank in 10 years also they will still be borrowing from the bank to buy a house.
If you don't have banks that the government can regulate, who holds the money, the corner shop?LOL

In answer to your bold print Julia, like I said I think we are in a recession now. It may not be a technical recession, but if you take out mining , it's a recession.

 

[Julia]

If you couldn't afford to do it or it didn't make sense for your situation, you wouldn't do it. The one thing we all run out of is time, as happened with the friend off mine in the earlier post.
It may take 10 years for house prices to rise again, who knows? That doesn't mean it doesn't make sense to buy one.

By the way can't you just rent out your existing house, untill things pick up?

Yes, I suppose I could. But I won't. I don't see too many tenants keeping it to the standard I do, thus best presentation for sale. Plus I can't be bothered with all the hassle of making two moves. Plus I have a large dog = difficulty in finding good rental accommodation.

Would rather drop the price on existing house than stuff around with rental.

 

[Knobby22]

Seeing you and I are only an hours drive from Sydney I thought I'd do a quick search for government jobs in the Sydney area. I found heaps of jobs going begging, no shortages there. I didn't know a lollipop man can get $24 p/h. That's good money for doing a bit of community work.

Here's the link, I got my eyes on the Mosman job:http://mycareer.com.au/jobs/sydney/defence-essential-services/state-government/

Yes, there does seem to be a lot of jobs out there for 'Australians". Could it be mainly the Indian and Chinese immigrants having trouble getting a good job?

 

[Starcraftmazter]

Wages have a small influence on costs??

On real construction costs - yes, they are the smallest source of increase in construction costs. If it were not for the housing bubble inflating wages, they would be even smaller (ie. they should be smaller still).

What about the fact, that I now have more income to spend and therefore more inclined to make a more expensive purchase (such as property). I've now increased the demand for housing by 1. Unless supply rises to meet the new demand, prices will go up. Have you been paying attention in your economics classes lately? Or did you fail your uni subjects last year?

Housing demand should never increase house prices costs - and it doesn't in well functioning land markets like Germany, Texas, etc. If it does - then that is a sure sign of a bubble.

Of course should wages and assets stay the same in real term, the net change is 0 (despite an increase in price). However as Knobby22 pointed out, according to your chart wages rose in real terms - there is therefore more money in real terms to spend on assets, which is quite significant. To suggest that this would not have an impact on prices is absurd.

No, it is not absurd. The price of a house and land package is the cost of land (which should never go up in real national average terms in a well functioning market) and the cost of building a house. Beyond the wages that have to be payed to construction workers, wages have zero impact on the cost of a house and land package.

 

[Klogg]

Housing demand should never increase house prices costs - and it doesn't in well functioning land markets like Germany, Texas, etc. If it does - then that is a sure sign of a bubble.

Isn't that just a sign of an open/unregulated market? (i.e. demand > supply, price goes up?)
Regardless of whether it's in land or any other asset...

 

[Starcraftmazter]

Isn't that just a sign of an open/unregulated market? (i.e. demand > supply, price goes up?)
Regardless of whether it's in land or any other asset...

No, and there are countless counter-examples - electronics for instance.

In the contrary, when you have a housing market in which house prices rise as a result of demand shocks, it is a sign of perverted government interference - due to idiotic regulations, supply is not able to meet demand fast enough and the price of land goes up. This is done in Australia through urban growth boundaries and fascist state and local governments which refuse to release land to developers.

That's just the beginning though. In phase 2, the government encourages speculation through tax incentives like negative gearing and the first home owners grant. It also ensures that foreigners are allowed to speculate on land.

At this stage, the mechanics of supply and demand have absolutely no relation to house (or land) prices - a bubble is born, as the housing market turns into the ultimate ponzi scheme which relies speculators to buy houses form other speculators for ever increasing amounts of money. The entire country leverages up to the neck in bad debt which is not even half supported by real equity.

Extremely overinflated house prices send incorrect signals to the market, and the market responds with overcapacity - building massive amounts of houses and apartments. We can see this is most prominent in Melbourne. This goes on and on until there are no longer enough speculators to absorb the overcapacity.

Eventually prices stall and begin modest falls. Negatively geared people (of which there are many) ask themselves why they are losing money on their "investment" and decide to sell out. Foreign speculators realise they've been duped and sell out. There over 70,000 empty houses owned by foreign speculators sitting in Sydney alone. They didn't even bother to rent them out - such was their arrogance.

In Australia it is even worse. The housing bubble has been supported by demographics - the baby boomers. They own over 50% of all properties and are already retiring. They hold over 2/3 of all investment properties, and amazingly many are negatively geared as they move into retirement.

Overall a massive exodus out of our housing market is upon us, as demographics change and oversupply kicks in.


No bubble has ever stood the test of time, and demographics drive long-term boom and bust cycles. These are clear and simple facts property bulls or bubble naysayers fail to understand.

 

[Glen48]

This is what has happened before and will and happen again.. its called GREED take out Tulips and insert Australia housing thiis is the history of Aussie properties for the next 10 yrs , it has nothing to do with houses, construction etc just houses turned into an icon like the plastic Hot rod on a Monopoly game :

The peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble (or economic bubble),[3] although some researchers have noted that the in 1619–22, a Europe-wide chain of debasement of the metal content of coins to fund warfare, featured mania-like similarities to a bubble.[4] The term "tulip mania" is now often used metaphorically to refer to any large economic bubble (when asset prices deviate from intrinsic values).[5]
The event was popularized in 1841 by the book Extraordinary Popular Delusions and the Madness of Crowds, written by British journalist Charles Mackay. According to Mackay, at one point 12 acres (5 ha) of land were offered for a Semper Augustus bulb.[6] Mackay claims that many such investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock. Although Mackay's book is a classic that is widely reprinted today, his account is contested. Many modern scholars believe that the mania was not as extraordinary as Mackay described, with some arguing that the price changes may not have constituted a bubble.[7][8]
Research on the tulip mania is difficult because of the limited data from the 1630s””much of which comes from biased and anti-speculative sources.[9][10] Although these explanations are not generally accepted, some modern economists have proposed rational explanations, rather than a speculative mania, for the rise and fall in prices. For example, other flowers, such as the hyacinth, also had high prices on the flower's introduction, which then fell dramatically. The high prices may also have been driven by expectations of a parliamentary decree that contracts could be voided for a small cost””thus lowering the risk to buyers.
Wikipedia

 

[Agentm]

Regarding the argument on which data is accurate on unemployment



Which way Australian unemployment?

by Steve Keen on February 16th, 2012 at 10:32 pm Posted In: Debtwatch




The most recent ABS data implies that unemployment is falling, and that those who saw the economy as either stable or booming were right. Both the seasonally adjusted and the trend estimates fell, and the seasonally adjusted unemployment is now 0.2% below the peak it reached in August 2011 of 5.3%. This looks good””though not as good as conventional Neoclassical forecasters were expecting a year ago: in the 2011-12 budget, the Treasury, using its TRYM model, predicted a smooth fall in unemployment from 5% in June 2010 to 4.75% in June 2011 and 4.5% in June 2012.
Figure 1: ABS Unemployment Data and Treasury Forecasts

Clearly the Treasury didn’t expect the rise in unemployment that occurred in mid-2011. But the last five months of seasonally adjusted ABS data appear to imply that this deterioration was an aberration, and the expected recovery is on its way once more.
Figure 2: Treasury forecasts (& projections of a return to equilibrium) in the 2011-12 MYEFO

Or is it? As I noted in my most recent post, the definitions of employment and unemployment are now seriously compromised. The formal definition of unemployment used by the ABS is:

Persons aged 15 years and over who were not employed during the reference week, and:

• had actively looked for full time or part time work at any time in the four weeks up to the end of the reference week and were available for work in the reference week; or
• were waiting to start a new job within four weeks from the end of the reference week and could have started in the reference week if the job had been available then.

The definition of “actively looked“:

Includes writing, telephoning or applying to an employer for work; answering an advertisement for a job; checking noticeboards; being registered with Centrelink as a jobseeker; checking or registering with any other employment agency; advertising or tendering for work; and contacting friends or relatives.
​

The definition of employed is:

All persons aged 15 years and over who, during the reference week:

• worked for one hour or more for pay, profit, commission or payment in kind in a job or business, or on a farm (comprising employees, employers and own account workers); or
• worked for one hour or more without pay in a family business or on a farm (i.e. contributing family workers);

On these definitions, people who are discouraged by the job-seeking process””so that they haven’t applied for a job in the previous 4 weeks””are not unemployed. If they have worked for one hour or more in the previous fortnight, they will be classified as employed; if not, they will be “Not in the Labour Force”.
As noted in the previous post, these definitions disguise the real level of unemployment, and they inspired Roy Morgan to conduct its own survey with a rather more straightforward definition:

The Roy Morgan survey, in contrast, defines any respondent who is not employed full or part-time and who is looking for paid employment as being unemployed. ” (Roy Morgan, September 2001)
​

When Roy Morgan reports a trend in unemployment, this can be taken seriously””with caveats about the smaller size of the Roy Morgan sample (4,500 versus 30,000 for the ABS), and the fact that the data is not seasonally adjusted. When the ABS reports a trend, it could be a trend, or it could be an artefact of its definitions.
Curiously, the ABS itself implied in today’s statement that its unemployment data should be taken with a grain of salt. They recommended instead using the ratio of employment to population

A different method of analysis that removes the effect of population growth is to compare average employment to population ratios for each year… This analysis provides an alternative comparison of employment between years, as the influence of change in the underlying population in each year is removed.
​

The ABS’s definition of employment is not above reproach””including as employed people who worked a ludicrous 1 hour in a fortnight (and unpaid at that, if in a family business or on a farm)””but it lacks the additional distortion of its unemployment definition, which classifies the discouraged unemployed as “not in the workforce”. Curiously, the trend to falling unemployment in the last 5 months of ABS data isn’t mirrored in the employment to population ratio: though it blipped up in the most recent month, it has been steadily falling since the beginning of 2011.

 

[Agentm]

Figure 3 illustrates this by graphing the employment to population ratio and unemployment together, and inverting the unemployment data (putting low unemployment at the top and high at the bottom).
Figure 3

A smoothed plot makes the trends in both series more obvious: the employment to population ratio is still trending down””implying rising unemployment””while the recorded unemployment rate is falling.
Figure 4: The data in Figure 3 smoothed

Roy Morgan’s measure of the unemployment rate, however, is clearly increasing.
Figure 5

Roy Morgan’s estimate that 10.3% of the workforce is unemployed is now more than twice the ABS’s estimate of 5.1%, and the gap between the two is the largest it has ever been.
Figure 6

Part of this huge gap in the January 2012 figures is undoubtedly due to the fact that the Roy Morgan data is not seasonally adjusted, and January necessarily involves a huge boost to actual unemployment as school leavers enter the workforce. But the trend in the gap can’t be explained away, and that gap is now the biggest it has ever been.
Figure 7

So it’s too early to declare that unemployment is falling””especially when that call is based upon data with a dodgy definition.
Oh, and that Treasury forecast shown in Figure 2, of rising unemployment from mid-2012””with it returning to 5% from the forecast low of 4.5%? That’s not a forecast: that’s an assumption. Built in to the TRYM model””and every other neoclassical macroeconomic model on the planet””is the assumption that the economy will return to a long run equilibrium rate of growth after any short term “shock”. The Treasury happened to assume that this long run equilibrium includes an unemployment rate of 5%.
This assumption is a classic example of the adage that “to assume makes an ASS out of yoU and ME”. Neoclassical economists have been getting away with this sort of behaviour for decades, because the public didn’t challenge them before the Global Financial Crisis when the economy seemed to be doing well. I hope now that, after the crisis, the public will be as critical of such assumptions as Roy Morgan has been of the ABS’s dicky definition of unemployment.

 

[young-gun]

For an IP, no I wouldn't be even considering it.
For Lurker: the above sentence is purely a personal view and does not in any way constitute advice to anyone about anything.

Just to clarify i wasnt seeking any advice, and although the situation resembles mine, i was merely trying to get users to separate themselves from the one thing that can swing the argument in favour of a bullish property market. i have a game plan and im sticking to it. and good advice bill, im not in the market to buy, but plan on carrying out similar research to that stated by yourself before buying.

 

[Agentm]

China drop to hit house prices hard

Peter Cai

March 9, 2012

House prices in Melbourne fell 1.4 per cent in the three months to December last year.

THE predicted slowdown in China's economic boom could cause Australian house prices to plunge by more than 5 per cent this year, according to one of the world's most influential credit rating agencies.
Standard & Poor's warned that efforts by the Chinese government to deliberately slow its economy over the next 12 months will have a major impact on Australia's exports throughout Asia.



Read more: http://www.theage.com.au/business/c...prices-hard-20120308-1un4w.html#ixzz1oYqh5d9h

 

[KurwaJegoMac]

On real construction costs - yes, they are the smallest source of increase in construction costs. If it were not for the housing bubble inflating wages, they would be even smaller (ie. they should be smaller still).

What brings you to that conclusion? From what I've seen, some of the biggest costs in building are the labour costs - which is driven by the labour's wages. Whether it be Residential or Commercial, sparky or chippy, labour costs are high.

Perhaps some of the more regular property developers can weigh in, maybe I'm wrong about this. Julia - you mention you're looking at building a house, what is your take on wages? Do you see labour wages being a major part of your construction costs?

No, it is not absurd. The price of a house and land package is the cost of land (which should never go up in real national average terms in a well functioning market) and the cost of building a house. Beyond the wages that have to be payed to construction workers, wages have zero impact on the cost of a house and land package.

You're skipping around the question when talking about what should happen. I'm not asking you how things should be (which is the region of academics) because as per the paragraph you quoted I agree that with infinite supply, theoretically wages and assets should stay the same in real terms.

Of course should wages and assets stay the same in real term, the net change is 0 (despite an increase in price).

What I'm asking you to explain is how you believe an increase in wages in real terms, which results in increased capacity to spend does not have an impact on asset prices.

However as Knobby22 pointed out, according to your chart wages rose in real terms - there is therefore more money in real terms to spend on assets, which is quite significant.

As you say in your signature: "Economics is the science of satisfying unlimited demand with limited resources." ~ Peter Schiff

If resources are limited and I have increased purchasing power in real terms, how does this have no impact on prices?