House prices to keep falling for years

[dhukka]

If you factor in inflation, the real fall has been 15%. There's probably another 2 or so years of falls to come.

I wonder whatever happened to the UK's "housing shortage" and formerly low rental vacancy rates.

Good points xoa. The HIA released it's New Home Sales report today showing a 7.2% drop in new homes sales.

HIA Chief Economist, Harley Dale said new home sales dropped by 7.2 per cent in July 2008 , reinforcing industry evidence that home building conditions hit the wall in early July.


“Budgeted sales levels are well down on expectations and that runs the clear risk of the next step being a shedding of labour in the industry,” said Mr Dale.


HIA’s New Home Sales Report showed a 7.5 per cent dip in detached house sales in July. Multi-unit sales fell by 5.2 per cent. The weak result reflects a final bout of mortgage rate increases clashing with sharply higher fuel and food bills....

....In the month of July new home sales fell by 24.5 per cent in Western Australia and sales were down by 11.7 per cent in New South Wales, 11.2 per cent in South Australia, and 7.2 per cent in Victoria. Sales increased by 13.4 per cent in Queensland, the first rise in six months.

 

[KIWIKARLOS]

i dont think we will see massive drops like US, UK, Spain etc.
We are still very attractive to foriegn investment and relatively our interest rates are fairly high and we never had rates down to 1%. Our loans even the dodgy ones are as dodgy as the US sub prime loans.

Sure we may see - 10% in some areas hell some areas have already dropped more than that but many other areas have remained level. I think we will see more of the same, maybe for a year or two. That said when ever there are large drops there are normally large recoveries following and you only loose if you sell. Many familys now that can't afford their repayments overstreched in the beginning and they sell the house and look for a house to rent. We have a cronic housing shortage that will in some respects provide some base support for inner metro housing prices. People who are feeling the pinch won't just sell their house they will downgrade their car, try to move closer to work and spend less.

I think NSW is in a very dicey position at the moment a lot of our revenue is from stamp duties which if decreases could spell tough times for us and other revenue making ventures or cut backs.

Realistically we pay for any infrastructure be it private or government, If its private we fund cmpany profits as well but state owned companies can be inefficent. Water prices will increase as will electricty and transport, as a community we can't afford to fund large suburban expansion.

We need to reduce stamp duty and build some new medium to high density housing.

If we have two years of 0 or slightly negative house prices plus 4% inflation and moderate wage increases we could return to more affodable housing in the next few years.

One point for discussion, since houses are now treated as a commodity shuldn't supply and demand dictate prices? Demand may be slowing but we just need 2-3% rates cuts before rents = repayments. There are very few rental properties and there is a shortage of housing, demand surely must increase with pop growth.

I dont think there will ever be enough over supply to facilitate a 30% drop?

 

[numbercruncher]

One point for discussion, since houses are now treated as a commodity shuldn't supply and demand dictate prices?

No Credit price and availability combined with peoples ability to pay does - why dont you people understand that ?

 

[Beej]

No Credit price and availability combined with peoples ability to pay does - why dont you people understand that ?

Of course we understand that! But why don't you people understand that if what you propose was correct then the housing market should have collapsed years ago and would never have got to where it currently is?? Ie supply demand is an equally important factor.

Case in point - in the "olden" days, most families consisted of a married couple, single income earner, couple of kids. Nowadays most families have 2 incomes, and those incomes are considerably higher in real terms than they ever have been. In addition, the cost of many other goods have decreased compared to the "olden days", in real terms, eg, cars, whitegoods, and luxuries such as TVs, stereos and other consumer electronic goods.

Ergo, people can AFFORD to service higher debt in order to get the things they desire - like the best house they can afford for their family. That is why the market is where it is, and why currently it is basically staying there. Credit is a little tighter and more expensive than in *recent* times, but go back 10 years or so and the conditions now are not that different.

Cheers,

Beej

 

[theasxgorilla]

Of course we understand that! But why don't you people understand that if what you propose was correct then the housing market should have collapsed years ago and would never have got to where it currently is?? Ie supply demand is an equally important factor.

Case in point - in the "olden" days, most families consisted of a married couple, single income earner, couple of kids. Nowadays most families have 2 incomes, and those incomes are considerably higher in real terms than they ever have been. In addition, the cost of many other goods have decreased compared to the "olden days", in real terms, eg, cars, whitegoods, and luxuries such as TVs, stereos and other consumer electronic goods.

Ergo, people can AFFORD to service higher debt in order to get the things they desire - like the best house they can afford for their family. That is why the market is where it is, and why currently it is basically staying there. Credit is a little tighter and more expensive than in *recent* times, but go back 10 years or so and the conditions now are not that different.

Cheers,

Beej

I love reading your posts Beej. You say everything I've tried to only better.

With words like "surge" and "soar" and "plummet" and "drop" and "fall" and "stress" and "hike" the media create so many realities. The modern day news addicts think that if they read more news, or source it from the fringe that they're getting better informed...and yet, as you point out, reality defies them, year after year after year after...

 

[numbercruncher]

Global House Price crash and you guys think well be Immune, prices are falling and you stick your heads in the sand chanting this is Oztraaaaalia mate, its different here .....

Well it isnt going to save you Im afraid ....

Large inflation cycle might ...

Just look at that the building figures for the last Quarter, nose dived .... minus 25pc for WA - that is not a healthy RE market , people can cram 10 to a house if need be ! Prices at 7x Incomes are completely unsustainable bubble levels ...

Anyway Im not here to debate this subject anymore, its happening as Ive been warning for 18 months , I see proof in the pudding nearly everyday.

Cheers.

 

[pepperoni]

Of course we understand that! But why don't you people understand that if what you propose was correct then the housing market should have collapsed years ago and would never have got to where it currently is?? Ie supply demand is an equally important factor.

Case in point - in the "olden" days, most families consisted of a married couple, single income earner, couple of kids. Nowadays most families have 2 incomes, and those incomes are considerably higher in real terms than they ever have been. In addition, the cost of many other goods have decreased compared to the "olden days", in real terms, eg, cars, whitegoods, and luxuries such as TVs, stereos and other consumer electronic goods.

Ergo, people can AFFORD to service higher debt in order to get the things they desire - like the best house they can afford for their family. That is why the market is where it is, and why currently it is basically staying there. Credit is a little tighter and more expensive than in *recent* times, but go back 10 years or so and the conditions now are not that different.

Cheers,

Beej

This decade brought with it a combination of low rates and property fan boys/fanatics the likes of which has never been seen in modern history hence the spike in price and debt.

You are spot on about dual income households. 100% right, but this has over the last 20 years alsonbeen overcomitted to property. It shows in the household income to debt numbers.

You are right that some costs have fallen, but there are many increased and new costs of living today which outweigh the falls.

Today prices are falling. A waterfront reserve house in cremorne just had its 3rd failed auction in 6 months and is listed for under 1.7m.

PPORs are not an investment unless you plan to downgrade one day. They certainly dont provide an income.

The indoctinated "property investors" are TODAY too mortgage stressed to buy more or are folding (2 of my wealthier friends this year). Gen Yers realise the wont get ahead doing the same thing as everyone else with their $$.

Borrowing for property is at 20 years lows THIS MONTH. Its over people. In the best parts of sydney prices are back to almost 4 years ago and anyone that bought in that period would have done better in term deposits.

PPOR buying was never a way to get rich and today, once again, is a lifestyle decision.

Those looking to get rich are looking elsewhere. The sheeple chasing the dream wont bring about another spike for many years.

And i dont care if some paper shows gains ... on these volumes one or 2 $10m buys by old money bargain hunters will give wacky nos but like for like prices are shocking.

 

[pepperoni]

Good points xoa. The HIA released it's New Home Sales report today showing a 7.2% drop in new homes sales.

There are plenty of new homes/units for sale (see the rhodes/meriton post above) just no demand.

IE we are increasingly in oversupply ... people looking to offload their IPs at rhodes or in some other unit city to buy in mosman will find they cant pay as much as they expect a few years back.

No part of the market will be immune just like aus has proven not to be immune to US and UK falls.

 

[Temjin]

Of course we understand that! But why don't you people understand that if what you propose was correct then the housing market should have collapsed years ago and would never have got to where it currently is?? Ie supply demand is an equally important factor.

Case in point - in the "olden" days, most families consisted of a married couple, single income earner, couple of kids. Nowadays most families have 2 incomes, and those incomes are considerably higher in real terms than they ever have been. In addition, the cost of many other goods have decreased compared to the "olden days", in real terms, eg, cars, whitegoods, and luxuries such as TVs, stereos and other consumer electronic goods.

Ergo, people can AFFORD to service higher debt in order to get the things they desire - like the best house they can afford for their family. That is why the market is where it is, and why currently it is basically staying there. Credit is a little tighter and more expensive than in *recent* times, but go back 10 years or so and the conditions now are not that different.

Cheers,

Beej

The recency bias AGAIN and again! It's really simply amazing how one can be so affected by the media. I really doubt you have look at evidences beside those posted by the mainstream media.

It's a simple fact that housings were a LOT more affordable in just about ANY WAYS back 20 years ago, even when the interest rate was at 17%+. Right now, the credit to GDP ratio has SHOOT straight up to the roof, and it is totally unsustainable.

The 7.2% p.a. growth rule is only applicable for a relatively short time in our property history. And why is this figure so popular amount the general and mostly "ignorant" public? Because they hear about it from the MEDIA and from real estate agents!

THE FACTS

The facts


The following chart shows nominal average dwelling prices from 1880 to 2007. Highlighted in red are two periods when house prices most certainly did not double over any period. In fact, following the booms of the 1880s, prices fell sharply from 1890 and did not regain their previous highs until 1914, twenty-four years later. A similar situation occurred between 1929 and 1942. So we have two long periods where prices failed to appreciate at all, let alone double.

Now turning to years when the doubling theory hold true, the following charts highlight such periods:

The top chart has years where the average price has doubled over ten years highlighted. 40 out of 128 years or 31%. The lower chart highlights years where the average price has doubled over the previous seven. 22 out of 128 years or 17%. Incredibly, the myth was entirely false for the period from 1996 to sometime during 2002. Yet by 2003 it had become common knowledge, repeated at property investment seminars; in books, magazines and newspapers; on television current affairs, infomercials and property pr0n?; as well as property websites and dinner tables around the country!

Clearly, the 'rule' didn't hold prior to the middle of the twentieth century. Even then, apart from the rapid appreciation of prices of 1950 that was associated with the return of many men from the war, all the doubling action has taken place since 1970.

The future


If you are an investor wanting to buy a property, should you bank on the price rising 7.2% per annum? Let's have a look at the fact.

The average income in Australia at present is approximately $52,000 per annum. The average house price is approximately $345,000 — 6.6 times the average annual income.

Now, let's assume that house prices rise at 7.2% per annum, while wages grow at 5% (quite a generous growth).

In 20 years, the average house price will be about $1,385,000. At the same time, the average income will be about $138,000. So, despite there being only a 2.2% difference between wage growth and house price growth, the average house price will be 10 times that of the average wage.

If we continue another 20 years into the future (40 years from now), the average house price jumps to $5,567,000, while the average wage is $366,000. So, the average house price is about 15 times the average wage. This assumes a 5% increase in salaries per annum, which could be higher, or more likely, lower.

Many recent, double-income home buyers are paying well over 30% of their combined net income to pay their mortgage, and are at risk of losing their home. For the 7.2%-rule to hold, double-income families in 20 years will have to pay almost 50% of their take home income to pay their mortgage, and this number will continue to grow. This would mean that the general cost of living: food, entertainment, raising kids, will have to drop by about 30%. If you are considering investing in property, you can choose to believe that this is going to happen, and go ahead and buy; or you can accept that the 7.2% is a generalisation from a very short period of time that cannot hold in the future. Despite the forecast population increase, demand for housing is strongly related to affordability, and property in Australia is currently the most unaffordable in the world, despite being one of the least densely populated countries.

Regardless anyway, time will eventually reveal everything. It's long due that we all need to face the consequences of living beyond our means and end this credit boom. Country can only increase its wealth through production and saving, not spending and borrowing, which is what we have been doing mostly for the past 20 years.

 

[Shane Baker]

Temjin

Nigel's study has some serious methodological flaws so I'd be careful trying to extrapolate too much from history over the long term. Simple questions raised are;

1.What was the average life expectancy in early 20th century? Has this changed and made long term assets such as property more desirable?
2. How many "average" people were able to purchase their home pre WW2? How many now have that option via easier access to credit?
3. What deposit criteria were required over time to fund the loan? Has this changed and made access to the property market easier?
4. Has household "income" changed ie working mothers? Where does the extra income go?
5. Has there been an increase in disposable income over time and where have people chosen to put that income?
6. Inflationary periods related to house price growth by?? Perhaps rising commodity costs affect cost of new stock making older stock more attarctive and maintaining prices in real terms?

So many more questions related to Nigel's study. Only time will tell us what lays ahead regardless of what the perma bulls or D&G crowd have to say.

Cheers

Shane

 

[robots]

This decade brought with it a combination of low rates and property fan boys/fanatics the likes of which has never been seen in modern history hence the spike in price and debt.

You are spot on about dual income households. 100% right, but this has over the last 20 years alsonbeen overcomitted to property. It shows in the household income to debt numbers.

You are right that some costs have fallen, but there are many increased and new costs of living today which outweigh the falls.

Today prices are falling. A waterfront reserve house in cremorne just had its 3rd failed auction in 6 months and is listed for under 1.7m.

PPORs are not an investment unless you plan to downgrade one day. They certainly dont provide an income.

The indoctinated "property investors" are TODAY too mortgage stressed to buy more or are folding (2 of my wealthier friends this year). Gen Yers realise the wont get ahead doing the same thing as everyone else with their $$.

Borrowing for property is at 20 years lows THIS MONTH. Its over people. In the best parts of sydney prices are back to almost 4 years ago and anyone that bought in that period would have done better in term deposits.

PPOR buying was never a way to get rich and today, once again, is a lifestyle decision.

Those looking to get rich are looking elsewhere. The sheeple chasing the dream wont bring about another spike for many years.

And i dont care if some paper shows gains ... on these volumes one or 2 $10m buys by old money bargain hunters will give wacky nos but like for like prices are shocking.

hello,

now this is an interesting one from pepperoni, something which happens day in day out

in will be great in 20 or 30yrs time with the research being conducted here on ASF to get some results regarding buying vs. renting,

even more important will be the ABS stats on owners vs. renters in 20-30yrs to see if anything has really changed

no worries number, will touch base again at Q3

thankyou

robots

 

[Beej]

This decade brought with it a combination of low rates and property fan boys/fanatics the likes of which has never been seen in modern history hence the spike in price and debt.

You are spot on about dual income households. 100% right, but this has over the last 20 years alsonbeen overcomitted to property. It shows in the household income to debt numbers.

You are right that some costs have fallen, but there are many increased and new costs of living today which outweigh the falls.

Today prices are falling. A waterfront reserve house in cremorne just had its 3rd failed auction in 6 months and is listed for under 1.7m.

PPORs are not an investment unless you plan to downgrade one day. They certainly dont provide an income.

The indoctinated "property investors" are TODAY too mortgage stressed to buy more or are folding (2 of my wealthier friends this year). Gen Yers realise the wont get ahead doing the same thing as everyone else with their $$.

Borrowing for property is at 20 years lows THIS MONTH. Its over people. In the best parts of sydney prices are back to almost 4 years ago and anyone that bought in that period would have done better in term deposits.

PPOR buying was never a way to get rich and today, once again, is a lifestyle decision.

Those looking to get rich are looking elsewhere. The sheeple chasing the dream wont bring about another spike for many years.

And i dont care if some paper shows gains ... on these volumes one or 2 $10m buys by old money bargain hunters will give wacky nos but like for like prices are shocking.

I don't disagree with much of what you say. My main contention is I don't believe there will be a massive, long term "crash" in property prices - instead there will be a period of flat prices followed by a slower uptick. I also agree that the recent 7-10%pa capital value returns were unique, but I think going forward prices will still increase at least in line with inflation (after this adjustment period). That's still a nice tax free return for PPOR owners, and if you add 5% rental returns (which will only go up during this period) still provides something approaching a 10%pa return for property investors.

PS - thanks for the tip re that Cremorne place - I'm going to go and have a look at that today is it seems like a real "opportunity"!! Although I do wonder if there is something wrong with the house as it seems to be way below the rest of the current market for the area....

Also to Shane Baker - great comments, you saved me having to point all those flaws out in the studt posted by Temjin One other point I would add is that use of linear rather than log price graphs always makes the situation look far more "bubble-esque" than it actually is.

Cheers,

Beej

 

[wayneL]

My main contention is I don't believe there will be a massive, long term "crash" in property prices - instead there will be a period of flat prices followed by a slower uptick.

If that proves true (and I doubt it), I would save every freaking penny to pump into the UK market in 3-5 years time, 'cause there will be bargains WITH YIELD!

You heard it hear first folks, mark my words.

 

[Mofra]

I don't disagree with much of what you say. My main contention is I don't believe there will be a massive, long term "crash" in property prices - instead there will be a period of flat prices followed by a slower uptick. I also agree that the recent 7-10%pa capital value returns were unique, but I think going forward prices will still increase at least in line with inflation (after this adjustment period). That's still a nice tax free return for PPOR owners, and if you add 5% rental returns (which will only go up during this period) still provides something approaching a 10%pa return for property investors.

Beej,

I hold similar sentiments for middle-priced property that is well-serviced by solid infrastructure & required amenities for families (public transport, schools, shopping centres, roads that can handle the required traffic during peak hours etc). I don't think most of the macro figures published will show this growth (without filtering out anomolies) as the cost of living impacts hardest on suburbs with the least amount of infrastructure (the outer suburb mortgage belt communities). I know people who have bought out in these areas and most say they intend to upgrade within 5 years. I can't understand how prices in these areas are even going to track inflation if they are only ever seen as (in a long term sence) a temporary buy, especially as domestic policy combines with global demand to push up energy prices in the areas most suceptable to price sensitivity, and the NBLs share of the credit market has been savaged.

 

[Temjin]

Temjin

Nigel's study has some serious methodological flaws so I'd be careful trying to extrapolate too much from history over the long term. Simple questions raised are;

1.What was the average life expectancy in early 20th century? Has this changed and made long term assets such as property more desirable?
2. How many "average" people were able to purchase their home pre WW2? How many now have that option via easier access to credit?
3. What deposit criteria were required over time to fund the loan? Has this changed and made access to the property market easier?
4. Has household "income" changed ie working mothers? Where does the extra income go?
5. Has there been an increase in disposable income over time and where have people chosen to put that income?
6. Inflationary periods related to house price growth by?? Perhaps rising commodity costs affect cost of new stock making older stock more attarctive and maintaining prices in real terms?

So many more questions related to Nigel's study. Only time will tell us what lays ahead regardless of what the perma bulls or D&G crowd have to say.

Cheers

Shane

While I admit that I have not personally "peer-checked" his PHD study, I am not in any position to verify his methodologies anyway. So to check whether his methodology is wrong will require a fair amount of probing and not to mention a sufficient academic qualified person to do so.

However, I don't see some of your questions is related to the main message that house prices have historically tracked inflation/wage growth rate (i.e. 3-4%) over the last 100+ years. (except for the last 20-30 years) No one has ever disputed that fact, because they are based on real historic data.

The problem lies on how do people interpret the data.

I personally value common sense than ANY information reported by the mainstream media, regardless if the message of the article is bullish or bearish.

Though if you wish, you should consider asking Nigel these questions personally. I would love to know some of them as well.

I don't disagree with much of what you say. My main contention is I don't believe there will be a massive, long term "crash" in property prices - instead there will be a period of flat prices followed by a slower uptick.

I don't think any of us can predict the future. However, I don't think we should be optimistic to the point that Australia will be THE ONLY COUNTRY in the world to avoid a property crash, which has already happened in the US and starting in the UK. Not to mention in certain cities of China.

I don't think we are THAT unique. The fact remains that an average Australian own a lot more debt than American and can we continue to live like this forever and forever?

 

[pepperoni]

Temjin speaks the truth as does the phd study ... some correction in trend is a matter of when not if.

PS - thanks for the tip re that Cremorne place - I'm going to go and have a look at that today is it seems like a real "opportunity"!! Although I do wonder if there is something wrong with the house as it seems to be way below the rest of the current market for the area....

Did you go .. I was going to but ended up in Bellevue hill as a house on beresford st with great harbour view potential from 2nd story went for $2m on tues!!!!!! 550 sq m. Should have grabbed that one ... how can you lose there??????????? Places with no view were going for mid 2s 6 months ago!!!???

There are amazing bargains out there here and there... dont see any need to rush to buy now.

Cremorne place has 2 car lock up garage and no lights to sydney cbd .. hows that for amenity. Not much land but near primrose park etc.

There is also a block of 4 units with strata approval going for auction soon talking 1.6m.

Last few weeks have not been pretty round here ... if there are many more listings should be good buying in spring summer.

 

[pepperoni]

hello,

in will be great in 20 or 30yrs time with the research being conducted here on ASF to get some results regarding buying vs. renting,

even more important will be the ABS stats on owners vs. renters in 20-30yrs to see if anything has really changed

Ive been in an out of property from 20 years ... out more than in. I have also more money having predominantly rented.

I sold a property 10 years ago that would sell for the exact same price today ... much better to have the equity compounding somewhere.

Quote statistics all day but the proof is in the puddin.

hello,

no worries number, will touch base again at Q3

Average price of sales is more about the types of properties being sold ... about as useless as auction clearance rates. Esp av sales in only 3 months

You yourself said the only way to find out was to get out there ... speaking of which, what happened to the weekly clearance rate as gospel report. Are they that bad down there ... or did you realise they were pretty pointless.

Speaking of silly numbers ... we had 36% house clearance rate on syd north shore a week back. :

 

[gfresh]

Clearance rates pretty iffy, but will chuck a fairly recent one up anyhow (RP Data)

I reckon she (I have a suspicion robots is a she by the amount of reality tv it watches ) keeps quoting them as Melbourne is the only one doing ok.

Brisbane, Adelaide, Perth are especially bad in terms of clearance. Withdrawn on Sydney is an interesting one.. 15% : Maybe they realise they're wasting their time with an auction sale

 

[Macquack]

Quote:
Originally Posted by robots
hello,

no worries number, will touch base again at Q3


Average price of sales is more about the types of properties being sold ... about as useless as auction clearance rates. Esp av sales in only 3 months

You yourself said the only way to find out was to get out there ... speaking of which, what happened to the weekly clearance rate as gospel report. Are they that bad down there ... or did you realise they were pretty pointless.

Speaking of silly numbers ... we had 36% house clearance rate on syd north shore a week back. :

Could have fooled me.

I thought Robots was referring to "numbercruncher".

 

[pepperoni]

Brisbane, Adelaide, Perth are especially bad in terms of clearance. Withdrawn on Sydney is an interesting one.. 15% : Maybe they realise they're wasting their time with an auction sale

Nice chart.

Def many more private treaty of prestige houses. And every second auction is pushed back two weeks or withdrawn and restarted.

If you go out a bit like seaforth and clontarf the buyers party has started ... i could quote examples but it wont matter ... you either know its happening or you dont. And if you dont then clearly "reality" means a show involving kyle sandilands ;-) ).