House prices to keep falling for years

[kitehigh]

I am!! Its uncanny that you posted this, as I have just come online to post the same!!

I've just had cousins over from Toronto and we have been discussing the relative AUS and CAD property markets.

Canada seem to be in a very similar position to us here i.e a resoruce rich country with high immigration, 1 province being very resource rich and the rest hanging onto it's coattails etc etc.

Yet (besides Vancouver) Canadian cities have some of the most affordable real estate in the western world. Ontario is the most populous province, yet has some of the most affordable real estate (even within 25ks of Toronto CBD) in any developed Canadian city.

Its almost as though they had only a small RE boom and are therefore sheltered from a major bust. I expect that the relatively open border with the US (which on the whole always has had cheaper housing than Canada) has had a major influence on their RE market.

Canada has tradionallly had low interest rates, but even this didn't lead to an outright buying frenzy which we have had in Australia.

I was just talking to a Canadian guy the other week and we got talking about realestate. He happened to own over a 100 acreas with a 4 bedroom house, sheds, 2 fresh water creeks and only an hours drive to Ontario. I was shocked when he told me he paid 135k for this place 2 years ago. I thought he must be living along way from amenties etc than, but he said the local school was only a 10 min drive away along with the local shops. So afterwards I had a look at property in the Ontario region and it does seem that they enjoy very reasonable priced property.

 

[Temjin]

SOME are paying 40% of their income, at this point right now! How many home owners are in this position? It is NOT the majority. How many will still be in that position in a few years with much lower interest rates? 50% of homeowners in NSW pay 0% of their income towards mortgage payments anyway as they dont have a mortgage! In the long distant past I did commit over 40% of my income to a mortgage - but then over time my income went up and interest rates came down - just like will happen from this point in the cycle. That first mortgage was paid off in 6 years. Gonski.

The glass is far from empty.... but whatever - those who want to rent, rent. no one is going to force anyone to buy a house, either to live in or for investment.

Beej

wooo, you have made a lot of assumptions here. I would love statistical data to back this up.

And how certain are you that the interest rate will continue to go down? If you are so 100% sure of the trend, you should be playing futures.

All of us are basically ignoring the possibility of a blackswan event and the implication of it. What happens if the US really tanks hard? What if China has finally take a huge breath and stop growing for a few years? (Note: Even Jim Rogers, a lover of China, suggest such a possibility, nothing go straight up without coming back down a bit)

However, the fact remains that over the last decade or more, there has been an increase in the portion of people who are paying more and more of their income to cover their mortgage repayment. Houses were ALOT more affordable back in the high interest rate environment in the 1980s and I doubt you would find anyone who is sane enough to disagree with that.

It's funny eh? An average house supposed to worth 3 times the average wage more than 2 decades ago, now it is close to 10 times. I thought with technological advances and increased construction facilities, you would see prices to GO DOWN. Just like computers and/or food prices (before the recent rise) when we got more efficient at it. And we still have plenty of land left!

 

[JackC]

Its the average!!!!

IE the bears on this thread are paying 0%, and the property hype victims are living on rice bought in 20kg bags ... and cant afford the bandwidth to out argue us on this thread .

 

[Beej]

It's funny eh? An average house supposed to worth 3 times the average wage more than 2 decades ago, now it is close to 10 times.

Lol! House prices 3 x average wages!! Tell him he's dreaming! That has certainly not been the case in Sydney at least during my lifetime! Even in 1987, JUST before the 88 boom (a convenient time statically to pick if you want to make houses look like they were as cheap as possible) , Sydney average price (~$100k) was STILL 5+ times the average wage (~$20k). By 1990 the multiple was 8 times, as house prices nearly doubled while average earnings went up to around mid $20ks.

Of course compared to the 80s there is a lot more money around in Sydney in real terms, and the existing housing stock has been considerably improved, and so surprise, asset values have increased?? Maybe that's what's happened in the rest of the country in the last 10 years as well???

Here is a link showing historical Sydney median house price back to 1975:
http://www.propellvaluers.com/media/docs/pdf_docs/sydney_december.pdf

Anyway this exact point has already been covered in this thread multiple times before. I really have no idea where people get the idea that houses are "supposed" to cost only 3 x the average wage! That would make life sooooo easy! Of course you can buy a house that cheap if you want to live out in the country somewhere.....but not in the big city!

I thought with technological advances and increased construction facilities, you would see prices to GO DOWN. Just like computers and/or food prices (before the recent rise) when we got more efficient at it. And we still have plenty of land left!

This last statement just really shows that you do not understand the R/E market or what drives prices in it.

Cheers,

Beej

 

[pepperoni]

That would make life sooooo easy!

We wouldnt want that now would we. And plus the banks wouldnt be able to turn us all into walking 30 year annuities with 100% land back security? Perish the thought!

 

[Beej]

We wouldnt want that now would we. And plus the banks wouldnt be able to turn us all into walking 30 year annuities with 100% land back security? Perish the thought!

Yes well, they can be the first against the wall when the revolution comes eh??

Beej

 

[gfresh]

Well to be honest, given improved efficiencies and building techniques, you'd maybe expect construction costs to come down, reducing house prices a little (yes land, blah, blah). Do most of our construction materials come from China yet? Can I import some Chinese to build my house at 1/5 the cost? hmmm

Canada is mentioned as a more stable housing market, I wonder what Government assistance and schemes they have over there? Have they had recent booms that have given the population the idea that as property has made good gains over the last 15 years, it will continue to do so in-infinitum, hence making every man and his dog think his path to riches is through his property? I have a feeling the discounts could be the difference.

Bank credit still shakier than it looks which should be a concern to any potential housing investor. If there is any further crisis write-downs for any of our majors, a few may be going into 'lockdown' mode, leading to the same problems which killed the UK market - credit rationing.

http://business.theage.com.au/business/nab-peers-over-the-cliff-20080904-494k.html

 

[Beej]

Canada is mentioned as a more stable housing market, I wonder what Government assistance and schemes they have over there? Have they had recent booms that have given the population the idea that as property has made good gains over the last 15 years, it will continue to do so in-infinitum, hence making every man and his dog think his path to riches is through his property? I have a feeling the discounts could be the difference.

Canada is not that cheap - see figures here: http://www.livingin-canada.com/house-prices-canada.html

Vancouver and BC, which are like the Sydney and NSW of Canada, have median prices just about on par with Sydney and NSW. Then, like AU, there are some cities which are more and some that are less expensive, in a similar fashion to Melbourne/Brisbane say compared with Adelaide.

The overall average is $CA302k - whats the Australian national average? high 300s? Canada many be lower due to more regional cities than Australia has plus proximity to the US - but it's not *that* much lower. Their $ has tended to be worth than ours too.

Cheers,

Beej

 

[IFocus]

I thought with technological advances and increased construction facilities, you would see prices to GO DOWN. Just like computers and/or food prices (before the recent rise) when we got more efficient at it. And we still have plenty of land left!

Temjin the house bit is to some degree actually true its just that houses are now much bigger (Mac Mansions) compared to the pass.

It's funny eh? An average house supposed to worth 3 times the average wage more than 2 decades ago, now it is close to 10 times.

I have seen the 3 times average wage thing here in the West a couple of times but never seen the last five years growth rates ever even in this boom bust state.

 

[IFocus]

Lol! House prices 3 x average wages!! Tell him he's dreaming! That has certainly not been the case in Sydney at least during my lifetime! Even in 1987, JUST before the 88 boom (a convenient time statically to pick if you want to make houses look like they were as cheap as possible) , Sydney average price (~$100k) was STILL 5+ times the average wage (~$20k). By 1990 the multiple was 8 times, as house prices nearly doubled while average earnings went up to around mid $20ks.

Yes Sydney has always just been so far out there even in world terms I think.

I knew some guys who were in the building game in the 80's and decided to risk every thing and build a apartment tower.

They pulled it off and both them and their families retired on the profits.

 

[pepperoni]

"Household recession" as per the numbers posted by dhukka

http://business.theage.com.au/business/recession-hits-on-the-home-front-20080903-48wf.html

 

[Temjin]

Lol! House prices 3 x average wages!! Tell him he's dreaming! That has certainly not been the case in Sydney at least during my lifetime! Even in 1987, JUST before the 88 boom (a convenient time statically to pick if you want to make houses look like they were as cheap as possible) , Sydney average price (~$100k) was STILL 5+ times the average wage (~$20k). By 1990 the multiple was 8 times, as house prices nearly doubled while average earnings went up to around mid $20ks.

Dude, where are you getting your data from? Your "observation"? Unfortunately, you seem to refuse to see the real official statistic data that tell you otherwise. So I suggest you stop making numbers out of the hat.

Let's use the "ridiculous" report that Johnston Dixon has posted recently, so to let you know I AM NOT BIASED.

http://blogs.abc.net.au/queensland/files/JOHNSTON_DIXON_Report.pdf

For example, the MEDIAN HOUSE PRICE in Brisbane in 1983 was $57,000

From here, http://www.ausstats.abs.gov.au/auss...BA277BD34A1CA2574A4001FA80D/$File/6302003.xls

The Ordinary Time earnings for a full time adult (for Australia) in Nov 1983 was merely $346.00 per week. That's $17,992 p.a. excluding overtime, sick leave, etc.

What is the ratio then??? 3.168

What about 1990? The median house price, for Brisbane, is now $118,000.
OTE for a full time adult in Nov 1990 is $555.60, that's $28,891.20 p.a.

Ratio has now increased to 4.08. Where is this ratio of 8 you are dreaming about??

(For those interested, the ratio has increased to 7.8 ending 2007)

Anyway this exact point has already been covered in this thread multiple times before. I really have no idea where people get the idea that houses are "supposed" to cost only 3 x the average wage! That would make life sooooo easy! Of course you can buy a house that cheap if you want to live out in the country somewhere.....but not in the big city!

Historical data has proven that it is true. You just choose to ignore it because you have your own perception of reality, which is not really a representation of the REAL one.

This last statement just really shows that you do not understand the R/E market or what drives prices in it.

This statement shows you that you are obviously biased in your own thinking and have limited "big picture" thinking.

IFocus is right in the sense that houses are now bigger (mansion) than it was 30 years. The amount of man hours/effort needed to construct a house considered average today is definitely lot more than decades ago. But is it truly worth that much??

R/E market is driven by supply and demand, supported by the availability of free credit and supportive legistration that encourage speculations. Years of "house loving" by the Aussies have made speculating/owning a property the thing of a norm.




Oh yes Beej, I'm sure you will LOVE the Johnston Dixon's report. Three cheers to $30 million houses and 100%+ average income to average mortgage repayment by the year 2050!

 

[Beej]

So Temjin all your posts and views pertain exclusively to the Brisbane market do they? I think you are missing my point that I am talking about the Sydney market and using it to demonstrate what has happened in more recent times in other markets around Australia and thus the national housing figures. Sydney has never been near the affordability you claim as "normal" for half a century. I believe Sydney provides the lead, and the explanation for why other cities have got more expensive in recent times. If you don't get that, well whatever....

My stats are not made up or based just on observation - I posted the links which back them up. Eg, in Sydney in 1990 let's use your average OTE of $28k (I saw a figure of $25k elsewhere) vs median SYDNEY house price of $180k (from http://www.propellvaluers.com/media/docs/pdf_docs/sydney_december.pdf) that STILL gives you a ratio of 6.4. Nationally the median in 1990 was $140k, given a multiple of 5 using your wage figure. Still nowhere near 3! Remember those were the ratios during the middle of the last REAL recession and interest rates were 17%!!!! - so I still don't know why you expect or think houses will ever get cheaper than that.....

Or are you just upset you put off buying in Brisbane as the prices rose because you didn't understand why it was happening and convinced yourself they would fall??? If that's the case the next few years will provide a great opportunity to get in at lower real cost as the prices come off a little and stagnate for a while.

PS: Just to be clear, as I have stated numerous times, I do not believe average house prices will continue to grow in the next decade as fast as they have in the last. I believe prices will stabalise during the current period and probably track inflation plus a smidgen on average (thus avoiding your 100% of income needed to service the average mortgage scenario). In addition I bet their will be an increased focus on the supply side of lower cost affordable housing in cheaper area's which will be the primary factor in keeping the "average" price growth low.

However, I also believe property in sought after well located area's that the wealthier and higher paid people desire to live in will continue to grow at a faster rate than the average. They are bought by people way above the average wages, so the average wage based stats are meaningless in understanding what will drive the prices of those houses - the primary factor being an increasing number wealthier people in absolute terms coupled with a static supply.

Cheers,

Beej

 

[robots]

hello,

oh temjin, since you love stats can you post the one from ABS showing how things are going with prices please (oopsies, we dont want to put that one up)

and also the one about specuvestor renters being 6x poorer than specuvestor property owners,

keep it coming homies, looking forward to the next 30yrs at least

thankyou

robots

 

[Glen48]

Have a look at PATRICK.NET to look into the future and the Money managers while you are at it.
To work out when is a good time to buy take the monthly rent and x it by 150 and when a house get's to that price decide.
The USA market started to crash in 2006 and they think it will last until 2010 we are at the starting line.

 

[xoa]

Nationally the median in 1990 was $140k, given a multiple of 5 using your wage figure. Still nowhere near 3!

Really? Is that 140k in 1990 or 2008 dollars?

Official statistics show that ratio of median house prices to median fulltime wages have risen from 4.3 in 1996 to 7.0 in 2006, even though house construction outstripped population and household growth over that period. It's almost certainly worsened since then. My guess is it's sitting at about 8.0.

At the peak of the last bubble, in 1989, the ratio was 5.0.

"Investors" accounted for 21% of new residential loans in 1990. In 2007, they accounted for 47%. Almost half of new home loans! That's what's caused the bubble.

You're fighting a losing battle, if you're trying to convince us that affordability hasn't worsened.

 

[Beej]

Really? Is that 140k in 1990 or 2008 dollars?

At the peak of the last bubble, in 1989, the ratio was 5.0.

That's what the median price in 1990 in 1990 dollars. Let's see - 1989/1990 - pretty similar years, both post late 80s bubble - oh look, we both agree the multiple was 5x average wages! And yet you are still questioning my posted figures????

"Investors" accounted for 21% of new residential loans in 1990. In 2007, they accounted for 47%. Almost half of new home loans! That's what's caused the bubble.

Which bubble? The Sydney bubble burst back in 2004?? Affordability here would have improved if it wasn't for interest rate rises.....

You're fighting a losing battle, if you're trying to convince us that affordability hasn't worsened.

Well I've never argued that have I - please read my previous post again - read the last paragragh. I state very clearly what I am arguing - prices are unlikely to fall dramatically as contended by this very thread. I explain my rationale. You either believe it or you don't. The thing is that the market to date has backed my view not yours. Time well tell who is right from here.....

Any by the way, when using wage to house price multiples, you really need to consider the prevailing interest rates at the same time - ie the last 10 years they have been far lower than over the preceding 10 years.

Cheers,

Beej

 

[xoa]

The overall average is $CA302k - whats the Australian national average? high 300s? (LOL!) Canada many be lower due to more regional cities than Australia has plus proximity to the US - but it's not *that* much lower. Their $ has tended to be worth than ours too.

The Canadian market is much different to ours. Their bubble is concentrated in Toronto and Vancouver, as well as a few towns near the oil sands.

Outside of these areas, Canada is an affordable place to buy a home. According to a study conducted this year, Canada has 22 cities where median prices are "affordable": less than 4 times median income. Australia has nowhere in this category. Every single Australian city was rated as unaffordable.

 

[pepperoni]

and also the one about specuvestor renters being 6x poorer than specuvestor property owners,

Spaming this nonsense is bad enough but this ridiculous flame spamming has no place on an otherwise intelligent forum.

You have every right to entertain yourself on this thread if you wish to thumb your nose at the forum rules every day you should be banned.

 

[KIWIKARLOS]

Actually from the latest GDP report, trade was a real fizzer.

terms of trade and balance of trade are two different factors. Yes in the last month inports increased whilst exports decreased. It was due to coal in particular qld has bad weather and two major coal exporting ports effected. Terms of trade refer to the price of ore. We are shipping more ore and are increaing and recently our prices rose 70-100% for coal and iron. We will reap the benefits for years the last figures were an exception.

I bought two years ago and I haven't lost a month ago a place 3 doors down went for $5K higher than what i paid. Yeah sure my house price stays even and inflation devalues it but I would rather have inflation kill my asset price then Have the asset drop capital cost. At least with inflation the lenders looses as well and not the owner, as inflation makes my repayments even cheaper and interest rates continue to fall im a happy camper considering the current climate. House prices or any asset price will always average increase in periods of stong economic growth, productivity growth and prosperity.

US REAL unemployment when you include people given up looking for work in 14% there deficiets are huge. The US is still the most productive country in the world and its economy is larger than the 3 next biggest combined. they are going through tough times but tey are far from terminal. I mean the strategic oil reserve alone at 700 Mill barrels is like sitting on $1 bill of oil.

Time will prove me right or wrong but i think we may see the start of a good recovery middle to late next year. Dont give up on oz just yet for a country of 25 mill we have one of the strongest (comparable) economies in the world. BHP and RIO are massive and only growing go the aussies!