House prices to keep falling for years

[Glen48]

House prices do nothing for years and then take of but over the long term say 70yrs they average about 3% PA. This credit bubble was the best chance for any home owner to make money in the last 60-70 yrs. BUT they had need to sold by now. Once the house prices start to drop it will be on for young and old.

 

[Beej]

Beej, I'm afraid 25 years of experience is not nearly enough for a once in a lifetime economic downturn. I honestly hope, for your sake, that you are not relying on just your experience.

One thing I know is that during every recession I can recall - 80s, 90s, even dot com crash, was at the time touted as a "once in a lifetime/worse since great depression" downturn. I'm told by my dad that the same things were said during the early 70s oil shock and resulting downturn. So I guess I tend to take such extreme categorizations with a big grain of salt, and instead observe what is happening for myself.....

Relevant case in point - house prices - if you were to believe the headlines (and many of the extreme comments here) you would think the market was awful and prices really had totally crashed. Reality, after a massive increase in 2007, national median prices have pulled back 3.3% year/year, and in Sydney and Melbourne many lower priced suburbs recorded decent price growth through 2008, plus as we now know the government is fighting tooth and nail to put a floor under further falls, measures which seem to be working as far as the demonstrated increase in FHB activity that we now see.

Unfortunately I disagree on this point.

Australia needs to generate 4% of GDP per annum to simply maintain its current household debt levels. I mentioned this as one of several points which required addressing by the housing bulls in the "rising for years" thread but none bothered to reply.

Inflating $40bn (4% of GDP, coincidence I think not) through debt creation and pumping it into the economy is a shell game. Especially when you consider it only moves money from household debt and adds to the percentile required to maintain our net foreign debt levels.

On this point - what exactly are you saying? Is it that 4% of our national GDP (ie approx $40B) is required to service the interest cost on the total residential mortgage value in the economy?

I read your post on the other thread, and amongst some other points that I simply don't agree with (such as your negative opinion towards the concept of government going into deficit to provide fiscal stimulus to a slowing economy), I saw these two points:

2. Australian household debt is 177% of GDP and this ratio is climbing fast as Australian manufacturing index declines for the 8th straight month. This is almost a world record level of debt:GDP ratio, and is simply unsustainable. Take a look at Japan for this week to get an idea of what happens when you go crazy on debt:GDP.
3. Another debt ratio closely related to point 1, net foreign liabilities (the majority of our net foreign liabilities are in real estate) is standing at roughly 60% of GDP (and rocketing upwards). As a country, we will have to generate 4% of GDP to continue our liabilities, twice the current required payment of the US.

Re 2. - I don't think that ratio is climbing fast at all anymore is it? What's more the cost of servicing that debt is decreasing so I would expect we should see that ratio fall over the next couple of years.

Re 3. That sounds like the factor you were referring to in the post I am replying to here, but still can you clarify what you are saying there? I am guessing it is that 4% of our GDP has to "leak" o/s to service the foreign sourced component of residential debt - is that your point?

Cheers,

Beej

 

[MrBurns]

One thing I know is that during every recession I can recall - 80s, 90s, even dot com crash, was at the time touted as a "once in a lifetime/worse since great depression" downturn. I'm told by my dad that the same things were said during the early 70s oil shock and resulting downturn. So I guess I tend to take such extreme categorizations with a big grain of salt, and instead observe what is happening for myself.....

Beej, I seriously think this is the big one, a friend of mine with "good" contacts has been saying for years that the US is a time bomb, well it's gone off.

And no matter what anyone says if the US goes heaven help us.

 

[lioness]

Beej, I seriously think this is the big one, a friend of mine with "good" contacts has been saying for years that the US is a time bomb, well it's gone off.

And no matter what anyone says if the US goes heaven help us.

Agreed Burns, this is the big one, but don't tell anyone as we will end up getting 50-80% off house prices if you just be quiet.

 

[MrBurns]

Agreed Burns, this is the big one, but don't tell anyone as we will end up getting 50-80% off house prices if you just be quiet.

Trouble is the banks wll have disappeared with our cash.

 

[gfresh]

How the lion has turned

Here is a couple of spreadsheets I'm looking at indicating deflationary scenarios on "bad case" for properties purchased now.. One is for a 330k unit/apartment which rents for approximately $300/wk. This is Brisbane based on what prices that are quite common presently for both sale and rent prices.

The second example assumes an entry level house at $400k, which presently rents for about $350/wk.

Extra costs count in rates + body corp + 8% rental manager fee. For the house it is rates + rental management fee. Obviously these costs can vary by area, but within range. Negative gearing is not factored in.

Both examples are small 10% deposit down. Interest rates are 6.3% which is close to what you can fix now for 3 years, or an average probably of what variable rates may be over the next 2-3 years.

Green row is approximately where prices on a purely gross yield basis is cashflow neutral. Orange = negative equity position. Extra costs at that point in at under $100/wk to me is pretty piddly to hold a property.

This assumes rent will stay constant. Thinking about things, I don't think rent will be coming down in the inner city or desirable areas anytime soon, and if so at worst maybe $10-$20/wk to keep them rented.

Personally I think prices if they are to come down, will stabilise at CFN positions.. which for entry level may only be 15-20% fall from here. If we assume market has come down 5-10% already, that's 20-30% total.

Not sure how the numbers stack up for $500k+, I'm sure considerably higher risk of loses before cashflow neutral position.

 

[CamKawa]

Tonight on Four Corners Paul Barry looks at the financial crisis facing Australia. I think Australian property may get a fair mention.

Permabulls can watch re-runs of Hot Property instead.

 

[kincella]

house prices to drop 50-80% hahahahahahahaha

we need a humour thread...and thats where some of these posts should be
forget about serious discussion ........

you guys really crack me up....what are you smoking.or drinking...or what planet are you on.....who are you trying to kid......you are kidding yourselves...never heard anything more ridiculous

you will be waiting an awful long time......
by the time this thing is over...prices will be more expensive than they are...due to the inflation...hyperinflation bogey.....
govt printing money.....
but hey it makes for a really good laugh

 

[hotbmw]

Kincella, i think we might get another 10-15% lower which isnt the end of the world right?

but thats my best case scenario. there is no reason why we couldnt go another 30% lower.

dont discount this possibility mate.

50-80% is obviously not going to happen

 

[kincella]

hotbmw....not a chance...and I am talking about inner city homes and units...
prop I was looking at for someone....battler in regional town....probably worth 80 now listed at 95.....should been 120,000 before this mess....but there's a big drought out there and water is a worry....so its already down 30%....
if I had excess cash I would help out the battler....I think its a steal

other suburbs I watch...all the cheap places are gone...and they sold at a premium to what they were worth in an ordinary market.....

there is plenty of affordable stuff out there now.....its just not the prime real estate in the popular suburbs, or inner city

I wonder if you watch a particular suburb you are interested in ,,,on a regular say weekly basis ??? to check whats on the market, and the selling prices...
or are you just one of the many that believe all houses in every suburb will fall 30% ???
and do you have a deposit saved....are you intending to buy this year....or just hoping prices will crash anyway?
I am not being sarcastic...just asking a sensible question..

 

[Glen48]

Mr. Burns
Time bomb going of in USA is a foregone conclusion what we don't know is how many Bombs there are.

 

[Nosferatu]

I think some people who believe Australian house prices will crash are living in a false reality. Some bears like to ignore the fundamentals of the Australian property market in favour of glib remarks such as 'we are just like the USA/Japan/UK' or 'this is just like 1929' or 'houses are just too expensive' etc. Let's have a quick reminder about the fundamentals here...

Fundamentals of the Australian property market...
- Record population growth driven by strong overseas immigration and natural population increase (mini baby boom in progress!).
- Trend towards fewer persons per household is also increasing demand for new housing.
- Massive pent-up/underlying/latent demand for housing. This is becoming entrenched in many cities.
- Huge shortage of housing - we are simply not building enough houses for the growing population.
- Australian median prices still very low compared to many other countries (no not the countries in the Demographia survey that only compares Australia with five other countries).
- Rapidly rising rents are driving investors back to property, and making buying more attractive than renting for FHBs. It is cheaper to buy than rent now in many places.
- Record low vacancy rates. Vacancy rates in Australia are at critical levels of around 1-2% in most cities (compare this with the 10% rental vacancy rate in the USA).
- Interest rates are falling and have a lot of scope to fall further (compared to other countries). Most IPs are now cashflow neutral or positive.
- The falling Australian dollar has made Australian property almost 40% more affordable for many foreign investors (hey, Steve Keen's 40% crash already happened!).
- The First Home Owners Grant has been doubled and tripled, further encouraging FHBs to buy.
- The disastrous stock market is driving investors back into the security of bricks and mortar.
- Prediction: Banks will start to promote Shared Equity Mortgages, 40-year Mortgages and Generational Mortgages
- Prediction: Super Funds will start investing more heavily into property, in preference to the more volatile and risky share market.

Fundamental reasons why Sydney will the next city to boom...
- Current Sydney prices are 20% lower (in real terms) than their previous peak.
- Prices in Sydney have moved backwards for half a decade, while the rest of Australia boomed.
- Increasing rents and rental yields
- Very strong international immigration. Most overseas migrants settle in Sydney.
- Extreme lack of supply of suitable and available properties in the locations where people actually want to live.
- The past domestic exodus from NSW to other states is reversing.
- The price gap between Sydney and other cities is now quite small by historical standards.

We will see moderate growth in Sydney for the next couple of years, followed by a strong price surge around 2011, leading to a massive boom around 2013.

Cheers,

Shadow.

 

[Glen48]

massive boom around 2013.
Spot on fingers in your ears..

 

[hotbmw]

hotbmw....not a chance...and I am talking about inner city homes and units...
prop I was looking at for someone....battler in regional town....probably worth 80 now listed at 95.....should been 120,000 before this mess....but there's a big drought out there and water is a worry....so its already down 30%....
if I had excess cash I would help out the battler....I think its a steal

other suburbs I watch...all the cheap places are gone...and they sold at a premium to what they were worth in an ordinary market.....

there is plenty of affordable stuff out there now.....its just not the prime real estate in the popular suburbs, or inner city

I wonder if you watch a particular suburb you are interested in ,,,on a regular say weekly basis ??? to check whats on the market, and the selling prices...
or are you just one of the many that believe all houses in every suburb will fall 30% ???
and do you have a deposit saved....are you intending to buy this year....or just hoping prices will crash anyway?
I am not being sarcastic...just asking a sensible question..

fair questions.
i have a 15-20% deposit
of course the lowest end will not be affected like the mid range
im not looking at the cheapest end as in yrs to come when property starts rising again the lowest end will lag and rise the least
the very lowest end may not go down in 2009, but my feeling is it may go down very slightly, maybe 5%

mid range is what im looking at. this i think will be hit another 10-12% in 2009.
the mid range will lead us out in the coming yrs as property rises. im not looking at the very cheapest end.

the top end has been smashed already and will probably keep getting smashed in 2009

i didnt say we will fall by 30% i just said anything is possible
we need lower interest rates and job security to ensure we dont see mass losses in property.

you mentioned what u r seeing now.
remember we wont see the worst until after people lose their jobs.

i am interested to see your reply. u dont think the above is logically possible?

 

[numbercruncher]

/puke


Dont worry Shadow your house along with a handful of your permabull mates will continue to rise faster than any other asset class ......

But prices continue to fall virtually everywhere else ...


Congrats on your money tree ....

 

[Nosferatu]

/puke

Dont worry Shadow your house along with a handful of your permabull mates will continue to rise faster than any other asset class ......

Yes, certainly that has been that case over the past few years, and it's great to see house values holding up so well while everything else crashes in this climate. Can't say I've got any 'permabull' mates though. I myself was quite bearish on Sydney property in late 2002/2003, which is why I waited until 2005 before buying. Median prices in my area are up about 20% since then. The top-end is taking a bit of a hammering, although top-end only represents 5-10% of the overall market, so it's not having any significant impact on medians (although it does provide the media with a good excuse to print sensationalist D&G!).

But prices continue to fall virtually everywhere else ...

The Australian median price fell by 3% over 2008, which is an excellent result considering the economic climate, high interest rates, and of course the excellent capital growth achieved over the previous years. The falls during 2008 were worst in Q2 and Q3, but seem to have stabilised somewhat in Q4 with the lower interest rates and government stimulus just starting to kick in.

Congrats on your money tree ....

Cheers!

 

[kincella]

hotbmw...sounds more like it..but you did say 10-15 and 30 not impossible....
I dont care about the top end....that was all the bankers and financial, brokers etc....that will lose their jobs and the fancy houses....
and WA and QLD can also fall...due to the high wages of the miners..that are now dissapearing...but their prices were way over the top anyway...above syd and melb....
they are expecting 300,000 to lose jobs....but some are already keeping jobs..but with less hours and less money....
there will be competition for those mid range houses....from the cashed up people,,now with low interest rates....they upgrade their houses in times like this...and the fhb buy the lower end
people like me see it as an opportunity ...prices have already come down...and rates too....
all the self funded retirees not happy with term deposit rates or the stock market....the oldies like the bricks and mortar and have the cash....not dependent on having a job or a deposit....
just need some to think from another side....not just their own position, regarding income and jobs to fund a home....
and if you think that we follow the us and uk...you may be wrong...some of us believe they follow us in housing...or we lead not follow...
think of other possibilities and affects to get the big picture....
if you seek you shall find....there will always be an opportunity to find what you want at the right price.....

 

[kincella]

shadow...that was an excellent post imo...clear concise etc....
what is this perma bull thingy from the others....???
I am a conservative investor,,,and I happen to prefer property over any other class...
If construed as bullish...well I am not..but not bearish either....just believe that as with 100 years history of property...it will recover in the long run...

I have cash and shares...but am overweight property....also the props can be used to house family if nothing else....
property gives me far more control over my assets, than that offered by the alternatives....
I have some dependent people to look after....so my needs might be a bit more than the average....

 

[hotbmw]

hotbmw...sounds more like it..but you did say 10-15 and 30 not impossible....
I dont care about the top end....that was all the bankers and financial, brokers etc....that will lose their jobs and the fancy houses....
and WA and QLD can also fall...due to the high wages of the miners..that are now dissapearing...but their prices were way over the top anyway...above syd and melb....
they are expecting 300,000 to lose jobs....but some are already keeping jobs..but with less hours and less money....
there will be competition for those mid range houses....from the cashed up people,,now with low interest rates....they upgrade their houses in times like this...and the fhb buy the lower end
people like me see it as an opportunity ...prices have already come down...and rates too....
all the self funded retirees not happy with term deposit rates or the stock market....the oldies like the bricks and mortar and have the cash....not dependent on having a job or a deposit....
just need some to think from another side....not just their own position, regarding income and jobs to fund a home....
and if you think that we follow the us and uk...you may be wrong...some of us believe they follow us in housing...or we lead not follow...
think of other possibilities and affects to get the big picture....
if you seek you shall find....there will always be an opportunity to find what you want at the right price.....

i cant disagree with your thoughts kincella.
thats why im going to wait till early next year when people are holidaying and ill try to pick up a property 10% or so lower from now together with a low fixed interest rate.

 

[singlefished]

Fundamentals of the Australian property market...
- Record population growth driven by strong overseas immigration and natural population increase (mini baby boom in progress!).

don't expect this to be the case in a few months time ~ shouldn't be too long before Krudd slashes immigration once unemployment starts rising

- Trend towards fewer persons per household is also increasing demand for new housing.

didn't you say there a baby boom going on? I'm pretty sure the bubs won't be buying houses by themselves and am also pretty sure most bubs are planned for prior to the conception. With the last few years of price rises (purchase and rental) expect this trend to reverse... look how many bunk beds robots has been buying!!!

- Massive pent-up/underlying/latent demand for housing. This is becoming entrenched in many cities.

where? as far as I know, the vast majority of people in Australia have a roof over their head whether renting or owner occupier. Just have a look at the rental vacancies and for sales on RE dot com

- Huge shortage of housing - we are simply not building enough houses for the growing population.

see above

- Australian median prices still very low compared to many other countries (no not the countries in the Demographia survey that only compares Australia with five other countries).

why are you comparing apples with oranges????

- Rapidly rising rents are driving investors back to property, and making buying more attractive than renting for FHBs. It is cheaper to buy than rent now in many places.

a demographic shift from renting to owning cannot be good inverstors... less renters = lower prices, and Krudd wants to build more!

- Record low vacancy rates. Vacancy rates in Australia are at critical levels of around 1-2% in most cities (compare this with the 10% rental vacancy rate in the USA).

Whoops... what will happen if there are no vacancies anywhere in Australia? The doors will close and the economy will stall so I can only see vacancy rates improving in the future. That certainly won't be a factor in driving house prices up.

- Interest rates are falling and have a lot of scope to fall further (compared to other countries). Most IPs are now cashflow neutral or positive.

yup.... so? That is a statement, not a reason...

- The falling Australian dollar has made Australian property almost 40% more affordable for many foreign investors (hey, Steve Keen's 40% crash already happened!).

as far as I know, $1 still only buys $1... apples and oranges again. Foreign investors are not a fulcrum that the market swings on...

- The First Home Owners Grant has been doubled and tripled, further encouraging FHBs to buy..

yup - less renters on the market driving rents down

- The disastrous stock market is driving investors back into the security of bricks and mortar.

could be plausible but with the doom and gloom in the economy I doubt it. Stocks have been going down for over a year now so how can you explain the increasing number of properties on the market and the lack of interest from buyers???

- Prediction: Banks will start to promote Shared Equity Mortgages, 40-year Mortgages and Generational Mortgages

and 20% deposit also on the way too I believe

- Prediction: Super Funds will start investing more heavily into property, in preference to the more volatile and risky share market.

you appear to assume that the stock market is never going to recover... under your outlined scenario, what happens when global economies start recovering and money starts coming out the property market???

Fundamental reasons why Sydney will the next city to boom...

don't know the Sydney market as well as Brissy so can't really comment...