The future of Australian property prices

[Bill M]

Money Morning is fee you should join up and get with the programme.

You got to be kidding, how's those $1.60 Gin and Tonics going.

 

[McLovin]

Do you have an answer as why every other time property prices have fallen by a few percent over a year or two that they haven't subsequently crashed? Or is it "different this time"?

Serious question, until the GFC had US property prices ever crashed? I don't know the answer to this, although from what I've seen the answer is no.

The way I see it, we've had a lot of events that won't be repeated starting from the mid-70s.

- The baby boomers needing homes
- Women entering the workforce (all of a sudden households went to double income)
- Debt being made more easily available.
- Various incentives to encourage property investment
- Massive productivity increase which killed off inflation but maintained wage growth

Maybe I am being over simplistic, but these events to some extent would have driven property prices. Where is the next catalyst to keep property on an upward trajectory? On top of that, Australia has become increasingly unaffordable. Excluding property, our major capitals are ~50% more expensive than the big cities in North America and Europe.

As I have said previously, I'm not in the "property will collapse" camp, I think it will moderate for an extended period though.

 

[Starcraftmazter]

You guys just take in all this bearish outlook stuff without any real thought or analysis don't you? Two problems:

Believe me buddy - I've put a hell of a lot more thought and analysis into this than you have.

1) The data on that chart looks suspect to me, and I notice it doesn't cite a source? From the ABS here: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Dec 2011?OpenDocument you can see that the national house price index has fallen from it's last peak of 149.8 in the June 1/4 2010 to 141.6 in the Dec 1/4 of 2011 - so 18 months, the period implied on Keen's chart. By my reckoning, that's a fall of 5.5% -whereas Keen's chart implies Oz is 9% down after 18 months, which is factually wrong based on ABS data.

Maybe you should learn how to read a chart. If you look at the Y axis label on the chart, it will say "Real Price Index" - or is it that you are unfamiliar with the definition of "real"?

2) All this chart is really saying is that every time property prices have fallen 5% in 12 months, that "this is what the start of a crash" looks like.

It is merely comparing the crashes the US and Japan have had with our own current experience. If you have trouble comprehending that, it is no reason to smear the names of good economists like Steve Keen.

We have nothing like Japans demographic problems

A very large proportion of the population calling "baby boomers" who own over 50% of all property have started moving into retirement. Pretty sure we do.

 

[Glen48]

Bill M You are saying if you propertie/s drop by say 70% and stay flat for along time you are happy with that.

House prices have risen about only about 3% a year for the last 40 yrs.



There's one thing we have learnt from history, it's that we don't learn from history.
Nothing I say is a recommendation or advise, do your own research.

Research read up on depression you will find we have one about every 75 yrs and find out what caused them.
1930 tanking was cause by feds tampering and housing and in a day when you had to put down 20+ % deposit not -10%.

 

[YELNATS]

Research read up on depression you will find we have one about every 75 yrs and find out what caused them.

Isn't that a bit like saying we have a bad earthquake every 75 years, it's 75 years since we had one, so we're due to have one now. :

 

[Knobby22]

A very large proportion of the population calling "baby boomers" who own over 50% of all property have started moving into retirement. Pretty sure we do.

I know some Baby Boomers and older who have moved into retirement and they tend to keep holding onto the properties. I think it may take death to prise them from their hands. I don't think they will come onto the market as much as we all would hope. They may also sell to their children as investments so they stay off the market for another generation.

I am talking perfectly located inner city property by the way.

 

[Knobby22]

Research read up on depression you will find we have one about every 75 yrs and find out what caused them.
1930 tanking was cause by feds tampering and housing and in a day when you had to put down 20+ % deposit not -10%.

The Depression was caused by a complex array of factors.
Bubble behaviour and excessive debt in assets and restriction of trade combined with lax regulation were the main causes in my view.

 

[Starcraftmazter]

I know some Baby Boomers and older who have moved into retirement and they tend to keep holding onto the properties. I think it may take death to prise them from their hands. I don't think they will come onto the market as much as we all would hope. They may also sell to their children as investments so they stay off the market for another generation.

Few things;

First of all, baby boomers hold a disproportionately large amount of investment properties. Even if they choose not to sell their main property (where they live), they will have to sell these to fund their retirement - there is simply no choice.

Additionally, for those whom do not hold IPs or otherwise, it is quite sensible to downsize their property and perhaps move to a quieter location.

In terms of their children - they may not have enough children to flog off their properties to, their children may not want them in the first place (rightly understanding now is not the time to buy), or they could simply disagree on price too much, or their children may already have a property, or they may not want to buy a property of the quality or location which their parents have.

 

[Glen48]

Yelnats,
Read up on the Tulips scam, South Sea Island just keep deduction 75 from each event and see the pattern it won't work for earth quakes.

 

[Knobby22]

Few things;

First of all, baby boomers hold a disproportionately large amount of investment properties. Even if they choose not to sell their main property (where they live), they will have to sell these to fund their retirement - there is simply no choice.

Additionally, for those whom do not hold IPs or otherwise, it is quite sensible to downsize their property and perhaps move to a quieter location.

They do have a choice, collect the rents. maybe they will sell one but many own a few.

The baby boomers that tend to downsize are the poorer ones, not the investors. There are many elderly widows living in big mansions with many empty rooms.

Finally, I didn't say all would sell to their children, but some will, especially the wealthy ones with kids who went to private school and also have good jobs.

I'm not saying your wrong, just that it will probably not be as ideal as you hope.

 

[Starcraftmazter]

They do have a choice, collect the rents. maybe they will sell one but many own a few.

Why collect the rents on a property through a property crash when you can sell now and lock in better term deposit rates? These are important matters, if you're a person too old to work, but will probably live for a few more decades, then would you really be able to take such a big risk, would you really be able to sleep through the stress? Seems much better to me just to sell.

The baby boomers that tend to downsize are the poorer ones, not the investors. There are many elderly widows living in big mansions with many empty rooms.

Finally, I didn't say all would sell to their children, but some will, especially the wealthy ones with kids who went to private school and also have good jobs.

I'm not saying your wrong, just that it will probably not be as ideal as you hope.

I get the impression you are referring to a specific demographic within the boomers whom are exceedingly wealthy. I question whether it is large enough to hold up the property market single-handedly.

My view of baby boomers is that largely they do not have much wealth and very little super. The only thing they have is "perceived wealth" through properties - which they will have to sell in order to fund their retirement.

 

[Knobby22]

Why collect the rents on a property through a property crash when you can sell now and lock in better term deposit rates? These are important matters, if you're a person too old to work, but will probably live for a few more decades, then would you really be able to take such a big risk, would you really be able to sleep through the stress? Seems much better to me just to sell.

Their experience with property has been good, they will sleep well.
Also it is a hedge against inflation, something term deposits are not.

 

[Starcraftmazter]

Their experience with property has been good, they will sleep well.

Alright let's say this, you are a baby boomer and you are retired living with your wife in an average house. You have one IP.

You turn on the news, and month after month you are told that house prices have gone down. With time these falls begin to accelerate. Suddenly the man on the news says that house prices have dropped for the longest time in decades.

Can you really go to bed knowing that your investment is safe? Can you really feel financially secure?

Now this is a point which is different for many people. Some get stressed out easily, others will refuse to accept that property does anything accept go up in price in the longer term.

But overall, I would suggest that one by one people get nervous and start selling out. You get a Minsky moment, then before you know it everyone is selling.

Also it is a hedge against inflation, something term deposits are not.

In a country like say Germany where real house prices have been per perfectly stable for over 40 years, I do agree it is a good hedge against inflation and a smart way to build your wealth without having to resort to risky endeavours in more volatile markets.

But that's only because Germany has the most perfect housing market in the world where real prices basically never go up or down.

But in a country like Australia with one of the world's worst housing markets, which is highly susceptible to boom and bust cycles, how in the world can property be considered a hedge against inflation during a bust like the one we are having now, whereby a property owner's best hope would be that the value of his property doesn't exceed in it's price fall by more than inflation?

 

[McLovin]

Why collect the rents on a property through a property crash when you can sell now and lock in better term deposit rates?

Because if you own a debt free property, why do you care, unless you think rents will crash, what the property is worth? Why try and second guess the market and lock yourself into a term deposit which might get eaten away at inflation when you have a inflation protected income stream that will fund your retirement.

 

[Starcraftmazter]

Because if you own a debt free property, why do you care, unless you think rents will crash, what the property is worth?

So what you are saying is, holding an asset, why do you care if that asset will drop in price...

Like...I don't know, maybe I guess because people don't like losing money? Like you know, it's seen as not such a good thing to happen because more money is always better - right?

Why try and second guess the market and lock yourself into a term deposit which might get eaten away at inflation when you have a inflation protected income stream that will fund your retirement.

I don't know, maybe because getting eaten away with inflation is a lot better than getting eaten away at a rate far exceeding inflation?

Rent is not an inflation protected income stream either, in housing downturns rent goes down just as well as prices. Rent has little to do with inflation.

 

[McLovin]

So what you are saying is, holding an asset, why do you care if that asset will drop in price...

Like...I don't know, maybe I guess because people don't like losing money? Like you know, it's seen as not such a good thing to happen because more money is always better - right?

Most people are happy with the income stream. Especially once they hit retirement. There's a reason retirees buy bonds. It's not because they hope that the price of the bond will appreciate it's because they want a steady earnings stream.

Rent is not an inflation protected income stream either, in housing downturns rent goes down just as well as prices.

No it doesn't, unless rents have spiked which they haven't (iirc they have risen ~30% in real terms since the 70s). Infact, one of the main bear arguments against the property market is the fact that real rents have remained relatively flat while property prices have surged. Even in the US, despite the massive surge in home prices and subsequent collapse, rents have remained flat in real terms. Quite simply, in a bubble, people trade off income for capital growth. As a someone who spent most of my investing life in the stock market, I see it as a scenario of property being an ex-growth stock on a high PE. Over time the PE will compress the E will keep rising but the P will stay flat.

 

[Mr Z]

Isn't that a bit like saying we have a bad earthquake every 75 years, it's 75 years since we had one, so we're due to have one now. :

No, it is closer to a cycle... more reliable, predictable and better understood.

Think debt super cycle & Nikolai Kondratiev long wave cycles. They where typically in the neighborhood of 60 years but we are better at "pretend and extend" these days so we are pushing that out quite a bit.

 

[sinner]

For the record,

I currently live in a house which is rented. The landlord is one of three sons of an old Greek lady and her (late) Italian husband.

When the husband died and the lady was unable to take care of herself, the sons did not sell the property, they looked for someone who could pay the rent. In that way they ensured a good income stream to pay their mothers retirement village fees.

They could have sold the property, or even put it in reverse mortgage, but they chose to rent it out.

Just my on the topic above.

 

[Mr Z]

I know some Baby Boomers and older who have moved into retirement and they tend to keep holding onto the properties. I think it may take death to prise them from their hands. I don't think they will come onto the market as much as we all would hope. They may also sell to their children as investments so they stay off the market for another generation.

I am talking perfectly located inner city property by the way.

While that may be the case the stats say that less than 1% of them will be self funded in retirement. On the whole they will need to deleverage and sell assets to maintain income.

 

[Mr Z]

The Depression was caused by a complex array of factors.

It is not that complex, in the end it is all about excessive debt.