The future of Australian property prices

[Intrinsic Value]

I have been predicting a big housing correction for years.

I refused to get my self into big debt in the 80s and 90s paying what i though were over the odds prices for property in Sydney. Most of my friends have now retired on the back of havng three of four properties negatively geared over that period and making huge capital gains through a series of strong upswings in the housing market.

So I am reluctant to predict any crash in the market for a number of reasons.

Firstly the tax system makes it more attractive to get into debt to make money than is it to save money. Hence why many invest in property.

Secondly there is a relative shortage of premium locations with an ever increasing population.

Next there is something in the national psyche that reveres home ownership. It is a cultural phenomenon if you like.

Then there is the boost to the makets from cashed up overseas Asian investors. Is this likely to stop? I dont think so.

Then there is government policy which has always favoured home ownership and is very electoral sensitive to any falls in house prices.

Having said all of this I still think house prices in Australia are ridiculous and I certainly wouldnt pay the money that many would for crappy housing but it seems I am in the minority and always have been. And further to this I think it has been detrimental to the Australian economy as a whole with too much money been sunk into housing.

So a big crash is probably not going to happen.

 

[DB008]

Yes it does, it's called labour mobility. And yes, they are roughly the same. The price to income ratios are extremely high in all major cities in Australia. Look at Germany and they are literally 3-4 times cheaper. Now that's a difference in prices which does not exist in Australia.

Look at the differences in wages between Germany and Australia
Look at the differences in property tax concessions between Germany and Australia (i.e., Negative gearing).

 

[Beej]

Well Gillard is against big Australia isn't she?

The net O/S arrivals have come down drastically since the LNP peaks around 2005, and are now about half of what they were. I don't think it's something to worry about considering the fast pace of construction activity in Australia and the massive oversupply in Melbourne, not to mention a lot of these are immigrants flown in by the mining companies.

Here's the actual migration and population growth numbers based on the department of immigration and ABS population figures:



So apart from an obvious ramp up during 2007 / 2008 (Rudd maybe?), current net overseas immigration and population growth in general are even now running above the average pace of most of the past decade. Also - I can see no 2005 peak in that chart as you claim to be the case?

And here's a quote from a recent ANZ report (picked up from http://christopherjoye.blogspot.com.au/2012/01/anz-population-growth-about-to-surge.html):

"After slowing in 2009-10, leading indicators suggest a rebound in net overseas migration is imminent. In annualised terms, net international movements are currently running at 267,000 net arrivals, which is consistent with net overseas migration rebounding to 230,000 during 2011-12. This will lift population growth to 1.75% by June 2012, from 1.4% y/y in June 2011."

Ignore anything politicians say publicly about population growth - they all know and believe that Australia can only prosper if our population grows - population growth = bigger economy = bigger domestic markets = more opportunity and global economic clout. That's why our immigration intake remains high no matter who is running the country.

 

[Starcraftmazter]

Look at the differences in wages between Germany and Australia
Look at the differences in property tax concessions between Germany and Australia (i.e., Negative gearing).

Once again, I am not comparing absolute prices but median price to median wage ratios.

And yes, the tax system in Australia is retarded and that is a major culprit of the bubble.

Here's the actual migration and population growth numbers based on the department of immigration and ABS population figures:

That looks like it doesn't account for emigration. Ie. flawed.



You can see that the LNP opened up the immigration floodgates in 2005 to prop up the housing bubble, but then the GFC came along and immigration crashed as emigration rose.

Ignore anything politicians say publicly about population growth - they all know and believe that Australia can only prosper if our population grows - population growth = bigger economy = bigger domestic markets = more opportunity and global economic clout. That's why our immigration intake remains high no matter who is running the country.

That's all a load of crap. And indeed I prefer to pay attention to their actions, and ALP has recently tightened the immigration professions to reduce immigration.

This is apart from the fact there is more than enough construction activity to house everyone. Australia has one of the highest rates of new housing construction per capita as a result of bad price signals sent to the market by the housing bubble.

So the amount of housing overcapacity in this country is ridiculous.

 

[DB008]

Once again, I am not comparing absolute prices but median price to median wage ratios.

When l visited Berlin a few years ago, l asked a friend what she earned a year. She was on 17k Euro p.a. She said it was a average wage.

 

[Klogg]

And yes, the tax system in Australia is retarded and that is a major culprit of the bubble.

Doesn't that imply that this is partly the reason for the higher property prices in Australia, and until they are removed, the portion of the price that is added as a result of these taxation laws will still remain?

Therefore, unless negative gearing laws (and other related laws) are changed, the bubble will remain forever inflated...
I don't see negative gearing going anywhere after the last time they tampered with it.

 

[young-gun]

Howard was pouring people into this country through immigration and not much has changed with labor. Remember the 'Big Australia' plan of doubling the population.

america had hoards of people immigrating also.

 

[lenny]

Thanks guys for responses!

My quandray is that i sold my house about 6 months ago and achieved my my exact asking price and plan to upgrade in the next ?????? How long???????.

I am renting at present and my capital gain i made on my house sale would be eroded in rent in about 6 years.

House prices are soft in my vic regional town but far from a crash, buyers market yes

When talking turkey i feel i could get a deal of around 5-10% discount to pre GFC price in prime location in my town, average locations have probably declined more but i'm not interested in average locations.

My problem is how long do you wait for the market to crash?

I am getting the feeling sitting on the sidelines paying rent waiting for a possible housing crash to occur isn't the way to go.

I guess similar to the stock market nobody rings a bell at the bottom.

 

[young-gun]

I have been predicting a big housing correction for years.

I refused to get my self into big debt in the 80s and 90s paying what i though were over the odds prices for property in Sydney. Most of my friends have now retired on the back of havng three of four properties negatively geared over that period and making huge capital gains through a series of strong upswings in the housing market.

So I am reluctant to predict any crash in the market for a number of reasons.

Firstly the tax system makes it more attractive to get into debt to make money than is it to save money. Hence why many invest in property.

Secondly there is a relative shortage of premium locations with an ever increasing population.

Next there is something in the national psyche that reveres home ownership. It is a cultural phenomenon if you like.

Then there is the boost to the makets from cashed up overseas Asian investors. Is this likely to stop? I dont think so.

Then there is government policy which has always favoured home ownership and is very electoral sensitive to any falls in house prices.

Having said all of this I still think house prices in Australia are ridiculous and I certainly wouldnt pay the money that many would for crappy housing but it seems I am in the minority and always have been. And further to this I think it has been detrimental to the Australian economy as a whole with too much money been sunk into housing.

So a big crash is probably not going to happen.

in 1980 the average wage was 12500 a year, the median house price was 37000, a ratio of roughly 3 times more. in 2011 average wage was 67k, median national house price was 431k, approx 6.5 times the average income.

i wonder if this means that, in 2040, houses are going to be 13 times our income? i think not, the 'correction' you have been waiting for is here.

 

[DB008]

From a property investor point of view, demand is still high, i.e., renting the property. Once a property is purchased, the price paid isn't the most important factor (to me), it's the rent l receive, unless l'm looking to offload the property, which l'm not at the moment...


Not saying we should believe everything we read/hear, but demand is still strong in Sydney.

http://www.news.com.au/money/property/growing-city-is-in-rental-crisis-as-population-boom-puts-pressure-on-housing/story-e6frfmd0-1226315015730

Real Estate Institute of NSW data shows vacancies in the inner suburbs fell to 1.5 per cent, while the number of properties located up to 25km from the CBD dropped to 2.0 per cent.

The Australian Bureau of Statistics latest population figures released yesterday revealed NSW had 76,700 new residents to the year ending September 2011 - an increase of 1.1 per cent.

Supply and demand at work.

 

[Starcraftmazter]

When l visited Berlin a few years ago, l asked a friend what she earned a year. She was on 17k Euro p.a. She said it was a average wage.

Yes, Germany is a very good country indeed. Since they have good economic governance they have had no housing bubble, and as a result they have not experienced the same wage inflation Australia has due to it's need to service monstrous mortgages, and thus it has maintained it's manufacturing competitiveness - even though their currency is higher valued than the aussie.

However still your friend is incorrect, the average salary in Germany is €42,535:
http://www.thelocal.de/money/20110203-32865.html

Doesn't that imply that this is partly the reason for the higher property prices in Australia, and until they are removed, the portion of the price that is added as a result of these taxation laws will still remain?

Not at all, tax systems do not change housing valuations. They can help create bubbles, but once the bubble bursts prices will return to normal.

Therefore, unless negative gearing laws (and other related laws) are changed, the bubble will remain forever inflated...

That is not at all possible. The bubble is a ponzi scheme - it only remains inflated for as long as there are more idiots able and willing to buy into it. That is what drives all ponzi schemes.

I am getting the feeling sitting on the sidelines paying rent waiting for a possible housing crash to occur isn't the way to go.

It is absolutely the way to go! Use that money to trade the market, or at least chuck in a long dated term deposits.

Wait at least 5 years. Buying anywhere near Melbourne is pure insanity at the moment, Melbourne house prices are in free-fall.

 

[Starcraftmazter]

The Irish are getting worried about immigrating to Australia:

But as we in Ireland know, the demand for houses is not a result of the growth in population but the growth in, and availability of, credit. The key driver for house prices is debt. No debt means there's no house- price inflation -- plain and simple. If the banks are financing every Tom, Dick and Harry there will be an unsustainable boom. When prices start to fall, the credit dries up and the market collapses.

http://www.independent.ie/opinion/c...lias-crash-will-reach-our-shores-2984954.html

 

[Klogg]

That is not at all possible. The bubble is a ponzi scheme - it only remains inflated for as long as there are more idiots able and willing to buy into it. That is what drives all ponzi schemes.

You've said that Australian tax laws are one of the reasons why property prices have been inflated and maintained at such high levels - yet their contribution to the prices can't be expected to be maintained until they're removed?

Adam Smith tells me otherwise.

 

[Klogg]

The Irish are getting worried about immigrating to Australia:



http://www.independent.ie/opinion/c...lias-crash-will-reach-our-shores-2984954.html

Agree with your point 100%.

What they fail to say is each time house prices have crashed, the root cause has been high unemployment.

Fundamentals tell you that unless someone is willing (or in the Irish/American cases, forced) to sell their stock for a lower price, they just won't sell it.

 

[moXJO]

Well Gillard is against big Australia isn't she?

The net O/S arrivals have come down drastically since the LNP peaks around 2005, and are now about half of what they were. I don't think it's something to worry about considering the fast pace of construction activity in Australia and the massive oversupply in Melbourne, not to mention a lot of these are immigrants flown in by the mining companies.

I think it is roughly around the 170k a year mark intake with WA the highest growth -probably what you mentioned above. I think both sides of government will keep raising the population to keep up the tax revenue

 

[Glen48]

Germans also had to put down a substantial deposit on houses's not like the others 110% loans which commonsense told them or they would have a bubble.

Owning a house in OZ is one way so showing off like a bloke driving a Merc you don't know if he owns it out right, on lease for more than what its worth, stole. fiber glass kit car or his father owns it the whole housing thing is a charade a lot would have been better of buying a Roller for 400k at least it will be worth more in yrs to come..

 

[moXJO]

I think it is roughly around the 170k a year mark intake with WA the highest growth -probably what you mentioned above. I think both sides of government will keep raising the population to keep up the tax revenue

Nvm everyone posted a chart

 

[Starcraftmazter]

You've said that Australian tax laws are one of the reasons why property prices have been inflated and maintained at such high levels - yet their contribution to the prices can't be expected to be maintained until they're removed?

Inflated yes, maintained no - has nothing to do with it.

Agree with your point 100%.

What they fail to say is each time house prices have crashed, the root cause has been high unemployment.

No - that is a myth. Housing crash comes first, unemployment comes second. It is a lagging indicator, and if you look at any bubble crash you will see that house prices began to crash long before unemployment started to go up.

 

[moXJO]

america had hoards of people immigrating also.

Yeah they don't have our minimum wage structure, IR or tax system.

 

[McLovin]

Firstly the tax system makes it more attractive to get into debt to make money than is it to save money. Hence why many invest in property.

Except that people are now saving more and shying away from debt. It's easy to look like a genius when you go and buy a place wait five years and sell it for double, having only put 5-10% down. Unfortunately, all other things being equal it requires whoever you sell it to to take on even more debt but absolute and relative to their income. From 1992 to 2007 household debt grew at ~15%/annum. We went from having a relatively debt free household sector to a heavily indebted one. The tax incentives, IMO, encouraged risk taking behaviour. That is unraveling now.

Secondly there is a relative shortage of premium locations with an ever increasing population.

This I agree with and I think is the reason why the bottom won't fall out. Australia needs more mid-size cities with white collar job opportunities. I'm talking about cities of between 750k-1.5m. In NSW, Newcastle and Wollongong should both be developed in to 1m population cities.

Next there is something in the national psyche that reveres home ownership. It is a cultural phenomenon if you like.

I don't see that as much in people of my generation as I do in older generations. People seem more interested in going overseas and traveling rather than spending their 20s trying to pay off an oversized mortgage. Fewer people are getting married and fewer are having children. Household formation has changed.

I agree with the general premise of your post; I don't think house prices are going to collapse but I still don't see how people can afford to keep bidding up house prices.

Here's an interesting article from this weekend about the reluctance to not take on debt and how it's effecting the economy.

http://www.smh.com.au/business/nati...oc-for-house-and-contents-20120330-1w3do.html

ETA: I also think that underemployment is happening below the surface and if things stay like they are it will start to show in a higher unemployment rate.