House prices to keep falling for years

[aleckara]

This is crazy! I'm in the live blog right now and almost everyone is happy with the payout...naturally! ...crazy ppls really!

I am planning to buy my first house in the next yr or two hopefully and I don't see this as a positive announcement at all.

When they introduced negative gearing they should of only allowed it on new homes. Then there would be enough supply for a lot of people.

More money to support the construction/tradies rather than help first home buyers to have a more affordable house.

 

[Temjin]

I am planning to buy my first house in the next yr or two hopefully and I don't see this as a positive announcement at all.

When they introduced negative gearing they should of only allowed it on new homes. Then there would be enough supply for a lot of people.

More money to support the construction/tradies rather than help first home buyers to have a more affordable house.

Yes, more money to support the developers/tradies to lower overall construction cost. (only if they pass it on) But this is only PART of the equation. The biggest is the amount of credit being flown into the residential properties, and these are NON-PRODUCTIVE ASSETS. The government is trying to prevent a bubble from popping when similar bubbles in other countries have already popped. (i.e. US/UK/Spain, etc)

The government is very afraid that if there is a downturn in property in Australia, everyone will suffer. Unfortunately, this will just prolong the inevitable. I'm anger that my tax money is being wasted to save a sinking ship.

 

[steve999]

Construction costs aren't the problem.

From what I've seen, it's the land costs.

I agree that land costs are the major cause of price increases but I'm wondering if people expect house prices to actually fall below replacement costs?
Also, are rents currently covering construction costs?
So a house that costs say $200k to build on a $50k block (assuming land prices went down). $250k @ 9% = $432 a week to cover interest.

I'm not saying any of this will stop prices falling... Just wondering about the relationships between rent, price & construction costs.

I can't say I'd buy an investment property where the rent didn't at least cover the building cost.

 

[Mofra]

I just saw a breaking announcement from Kevin Rudd.

The Government are going to increase the first home owners grant to $14000 and to $21000 if its a new home. I'm still thinking over the effect of the other details.

This plan (whilst on a personal level, only owning investment properties & never a PPOR before so could benefit me in the future if I chose to buy a PPOR) strikes me a ill thought-out and a little desperate.

a. It could kick-start the "no savings" lending segment again, especially considering the grant at $14k covers a small, single bedder in a poorer area to 10% in many cases. Given the high level of banking regulation in Australia (relative to other markets), surely it wouldn't be too hard to set a national minimum standard of savings (or equity) for purchases?

b. For anything approaching a median dwelling purchase, $14k wouldn't cover transaction costs, the majority of which is the State Government stamp duty of the land. Surely reducing state government stamp duties for properties below median value (ie where first home buyers are likely to be entering the market) would be a better use of funds?

 

[stock_man]

The historic trend is three times wages (when the economy is doing well). This means Sydney would have to fall 67.1% just to get back to normal trends. Some argue that if the economy is not doing well, 3x wages might actually be high![/QUOTE]

Assuming prices fall to 3x wages, and credit is obtainable, the weekly p&i repayment on an average Sydney house would be $300 @ 100%! Given that we expect rents to at least stay the same, its clearly in the positive territory.

Weekly Rent: $440
Yearly Rent: $22,800
Purchase Cost: $178,000
Yield: 16% (based on 80% lvr)

Surely those figures are not sustainable? Every man and his dog who can get credit would buy a house. It would make perfect sense from both a ppor and investment?

I put the support line at cashflow neutral.

 

[gav]

Assuming prices fall to 3x wages, and credit is obtainable, the weekly p&i repayment on an average Sydney house would be $300 @ 100%! Given that we expect rents to at least stay the same, its clearly in the positive territory.

Weekly Rent: $440
Yearly Rent: $22,800
Purchase Cost: $178,000
Yield: 16% (based on 80% lvr)

Surely those figures are not sustainable? Every man and his dog who can get credit would buy a house. It would make perfect sense from both a ppor and investment?

I put the support line at cashflow neutral.

I would expect the cost of rent would drop significantly if that situation occurred.

 

[YChromozome]

The most common mistake the investor makes is ignoring the costs in yield calculations.

Council Rates, Strata Fees, Water Rates, Property Management Fees, On going Maintenance - painting, major appliances replacement schedules, termite inspections, advertising costs, insurance, even lost rent due to vacancy. Do you think you will have a tenant paying rent every day of the year for the entire time you own the place? Occupancy rates might be tight now, but not in a normal market.

These costs are not insignificant.

There has also been a trend of late to run the properties into the ground. The tenants will pay anything - who gives a stuff. Regrettably, any capital costs ignored will come back a bite.

 

[gfresh]

Surely reducing state government stamp duties for properties below median value (ie where first home buyers are likely to be entering the market) would be a better use of funds?

This is the case in QLD, discount for PPOR, and nearly $9k benefit for FHB'ers under $500k. So now QLD first home buyers can get close to $30k in discounts if they buy a brand new home. They can't really complain.

I believe NSW has introduced a similar reduction in stamp duty.

There has also been a trend of late to run the properties into the ground. The tenants will pay anything - who gives a stuff. Regrettably, any capital costs ignored will come back a bite.

True, lot of pretty poor properties trying to attract the same price as "the market" when they're a heap of @##$ and haven't had a cent spent on them for years. It's surprising many find any tenants at all, but I guess there are those out there with atrocious rental histories and/or those that can't even rub 5 cents together.

Vacancy rates on the Goldcoast are now at 3.3%, hardly a shortage going on here. Vacancy rates are around 2.5% for Brisbane.. except for inner-city Brisbane (1.5%), where nobody *has* to live anyhow.

http://www.oesr.qld.gov.au/queensla...d/rental-housing-vacancy-rates-qld-200809.pdf

 

[YChromozome]

True, lot of pretty poor properties trying to attract the same price as "the market" when they're a heap of @##$ and haven't had a cent spent on them for years. It's surprising many find any tenants at all, but I guess there are those out there with atrocious rental histories and/or those that can't even rub 5 cents together. Vacancy rates on the Goldcoast are now at 3.3%, hardly a shortage going on here.

Yeah, I suspect it's predatory landlords/property managers that are now targeting Asian students and the like. If they move to a new country, and couple this with "rental shortage", the students will take anything.

I'm unemployed and secured my first choice of rentals at the Northern Beaches (Sydney) about two months ago. At the time there were heaps of places advertised as "available now" which was a dead give-a-way that they empty. This was at the same time the press was running stories about the worst rental shortage.

There is no endless stories in papers about people moving into share accommodation or moving back with the parents to save. I suspect living costs along with rent increases larger than inflation has helped with this.

The big problem now I see is some property investors will be faced with falling prices and having to spend a bit of money to bring their places up to scratch (to compete for tenants). I did look at some apartment buildings about 6 months ago, and while the buildings were only about 6 years old, they had rotting carpet, walls needed attention etc. It was probably someone that brought of the plan 8 years ago, and has never spent a cent on the place since. A lot of it was probably tenants faults, but as they left, the landlord probably pocketed the bonds and never did fix the breakage up.

 

[Ageo]

Hmm its interesting this property market, i believe even with the Home Owners Grant increasing, property prices will eventually fall due to lesser lending (lesser wages etc..). Its funny thow as my cousin bought a house 3 weeks ago and got 6 months of premium rent (which is high for the property) upfront!, they had 100 applications in the 1st week and rented it by the weeks end.

I believe some good country properties would be interesting for cash flow..... like this 1

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2007347763
2 bedroom cottage, which you can pick up for $74,000 and with 20% down that would mean you would have to come up with $14,800.....

The expected rents are $150 p/w so gross rent annual would be $7800, lets say $1500 went to expenses and your left with $6000 before interest and tax. $59,200 (your loan) @ 7% interest would = $4144 in interest.

$6000 - $4144 = $1856p/a

Cash on cash return (cash outlayed to cash earnt) would = roughly 13%p/a

Theres always money to be made in any market

 

[Pommiegranite]

I posted this on another thread, but with hindsight think its just as appropriate here:

This 'plan' to increase the FHOG is nothing but a con.

All the government is doing is shifting one asset(cash) to another asset class (property) albeit indirectly. Any accountants will know that this is a balance sheet reclass, and BS reclasses have no bearing on the P&L.

To take it in microcosm, many people are losing value on their investment properties and would be loathe to spend cash on those properties. So what makes the goverment's plan any different?

This is just expensive campaign by the government to protect banks loans and the building industry (jobs). Those sucked into buying overvalued assets will lose out.

 

[robots]

I posted this on another thread, but with hindsight think its just as appropriate here:

This 'plan' to increase the FHOG is nothing but a con.

All the government is doing is shifting one asset(cash) to another asset class (property) albeit indirectly. Any accountants will know that this is a balance sheet reclass, and BS reclasses have no bearing on the P&L.

To take it in microcosm, many people are losing value on their investment properties and would be loathe to spend cash on those properties. So what makes the goverment's plan any different?

This is just expensive campaign by the government to protect banks loans and the building industry (jobs). Those sucked into buying overvalued assets will lose out.

hello,

man the industry has been going down for years down (ie. construction) yet it is still name your price out there for good tradespeople, name your price

ask Tech, we always looking for good workers

man the government just "given" you another 8k or so and the whine is one,

anybody have negative equity on the share portfolio at the moment?

good luck to the hard workers I hope you do well in this fine country

thankyou
robots

 

[Santoro]

House prices down 10% in Perth since December....gotta be some negative equity in that. Hitting the boom and will radiate out.....

The Govt wouldn't hand out the money via the FHOG if they thought all would be well they would be spending it where its actually needed and we wouldn'y see Kevin Rudd on TV in a Prime Ministers address to the nation telling us he doesn't want to gild the lily if its not going to be bad, he must be wondering how he's gonna win the next election.

 

[numbercruncher]

10pc drops can actually be quite misleading ........

If you bought last year in Perth and on paper lose 10pc, its more like 20 to 30pc when factoring duties, fees, interest , re fee to sell etc ....


Gov is obviously getting desperate to pump the RE market, seems the Gen Ys just arnt buying it with a measly 5pc ownership rate in the 18 to 28 yr old age group ....

 

[Glen48]

Will the Banks lend under the same rules, Will FHO qualify for a loan, I read were insurance premiums are up, Will FHO be game to buy in this market with partners loosing jobs.
Will they buy in this market if prices are going down or wait, Won't be cheaper to buy an established home rather than new. Which way will house prices go and for how long.

 

[MrDamage]

Hi - newbie here.
I am a home owner & currently considering my options - I have friends in UK that have recently lost big on their property etc.

I have read this thread extensively & have concluded at this stage that people are looking at this too simplicitly.

Comparing average earnings to house prices is a factor that could be used to determine if property is over-valued but I don't think it should be the only factor that is considered.

Firstly, absolutely no-one is going to sell a property for 40%, 30%, 20% or even 10% less then what they paid for it unless they have to. I believe a rise of 1 - 1.5% in unemployment coupled with tougher lending criteria could do the trick but this is speculative. The key thing is a significant economic event would need to trigger any large drop in house prices.

...Perhaps the current environment could result in peoples hands being forced

Secondly, since the 1990's alot has changed in wider Australian society. Society obviously started recovering from a recession from the mid 1990s so it is not suprising to find flat growth in the housing market in the early 90s.

Participation rates in the labour market have increased significantly - probably to the point where instead of looking at the multiplier of average wage to house price we should perhaps be looking at average household income compared to house price.

When I grew up (i am gen y) only my father worked and my mother was a full time housewife. This was consistant with most of my school friends. There has been a significant social change in this respect and as a percentage there are more dual income households in this country than ever before. This fact alone must play a large bearing in house price values.

Thirdly, there is a supply problem.

Do I think house prices will fall? I don't know...

What I do know is this - this is now more complex than simply multiplying the average wage by 3.

 

[YChromozome]

Welcome aboard Mr Damage. I agree, there are many factors that need to be considered.

There is a thread on Global House Price Crash.com titled Prediction of the bottom for Australian house prices which may be worth discussing your thoughts there.

Yes, normally bubbles need a trigger to pop. In the case of the US it was a couple of Subprime loans which triggered the crash of the housing markets.

There is still some debate about if we are heading for a recession or not. My opinion is that there is no question. We have been spending more than we earn for a number of years now, and using debt to do so. At a household level, even if we decide to spend the same than last year, we still need credit to do it. It's not sustainable and has to contract.

Credit is also tightening which will not help sustain prices at giddy heights.

However if you want a more significant financial event, I would say credit derivatives such as CDS. If you though credit markets were in a bad way, wait until these start exploding.

The two income households is quite valid, this is talked about in the above thread. There is also a book on the two income trap. In a nutshell, when two wage earners per family started out, it was seen as a way to diversify risk. If one wage earner lost their job, they could depend on the 2nd. However in reality, all it did was push house prices up and make them even more riskier.

Today, in many cases, it is mandatory to have two wage earners to afford the size of the mortgage. However now if any one of the two wage earners lose there job, the likelihood of default is high.

The probability of either one of the two wage earners losing their job is higher than just one wage earner losing their job. Or it has done is exposed households to more risk.

The supply problem is a common myth used to put a floor under house prices. The USA had a shortage of houses and the UK also had a shortage of houses prior to their spectacular crashes. For example :

UK house prices to rise 40% by 2012 - 7th August 2007.

LONDON: UK house prices will increase 40% over the next five years because of a shortage of properties, a report by the National Housing Federation said.

14 months on and house prices there are down 12.4% for the year, the steepest fall in 25 years.

Data released today show Perth house prices are down 10% from December last year. It's possible come December this year, yoy falls for Perth exceed that of 12.4%. I'm sure Perth complained there was a shortage of houses too.

I have plenty of examples of a shortage of houses within a couple of streets here at Narrabeen in Sydney. There is a penthouse built 5 years ago, which the developers are still trying to sell. No one has ever lived in it. Around the corner is 18 townhouses which was finished at the start of this year. All 18 are empty. Down the road is a development of 63 units completed three years ago. As the developers have struggled to sell them all, they have applied to council to turn 40 of the units into short term hotel accommodation.

 

[Temjin]

First of all, excellent response there YChromozome.

And hi MrDamage, welcome to the forum. I'm glad you took an interest to investigate this further. Take your time to read what we have post so far, do some research on the internet and avoid media information as much as possible, especially from sources where they have a vested interest in seeing property prices rise. (i.e. mortgage industry, real estate bodies, etc, they all have been praising the increase in FHG)

Hi - newbie here.
I am a home owner & currently considering my options - I have friends in UK that have recently lost big on their property etc.

I have read this thread extensively & have concluded at this stage that people are looking at this too simplicitly.

Unfortunately, it is the same goes for those who are in denial of the bubble we are in. They used simplistic assumptions as well.

Comparing average earnings to house prices is a factor that could be used to determine if property is over-valued but I don't think it should be the only factor that is considered.

Definitely, it's not the only factor that are being considered. It merely shows you how "far" in value it has increased but does not tell you exactly if it can go higher.

Firstly, absolutely no-one is going to sell a property for 40%, 30%, 20% or even 10% less then what they paid for it unless they have to. I believe a rise of 1 - 1.5% in unemployment coupled with tougher lending criteria could do the trick but this is speculative. The key thing is a significant economic event would need to trigger any large drop in house prices.

...Perhaps the current environment could result in peoples hands being forced

This is what YChromozone or we think as the biggest risk right now. Do you think Australia will go into a recession? Do you trust the mainstream economists view and the government who have a vested interest in being a cheerleader? The risk of a serious recession in Australia has increased significantly, and even these permabull politicians are predicting times will be tough.

Like you said, people will not sell their house until they are forced to. They will spend every last cent of saving and use up every credit available to stay in their house. When unemployment rise, and personally, it will be way more than 1-1.5% (talking about 10%+ here), all our personal debt would have to be unwinded quite aggressively.

Secondly, since the 1990's alot has changed in wider Australian society. Society obviously started recovering from a recession from the mid 1990s so it is not suprising to find flat growth in the housing market in the early 90s.

You need to realise that the growth in the housing market from the 1980s to present was fueled by massive credit growth with few obstacle in between. This credit boom is about to end unfortunately.

Participation rates in the labour market have increased significantly - probably to the point where instead of looking at the multiplier of average wage to house price we should perhaps be looking at average household income compared to house price.

What's the difference between average SINGLE wage and average HOUSHOLD income (which is really two person working...) verse house price?? One has a higher ratio than the other, but if you compare these same value to other countries, you will see how overvalued we are from this perspective.

This is no difference than distorting the data and interpret it your way.

When I grew up (i am gen y) only my father worked and my mother was a full time housewife. This was consistant with most of my school friends. There has been a significant social change in this respect and as a percentage there are more dual income households in this country than ever before. This fact alone must play a large bearing in house price values.

So why it was easier to afford a house on a single income before and now you can't? What makes housing more expensive than before? So the cost of building and maintaining a house has risen despite an increase in technology to make things more efficient? Or has the cost of materials risen more than inflation rate? No, the rise in house price is an illusion based on the massive increase supply of money, or rather credit. More money chasing the same product would lead to inflation. This is same as if you have $10 and there is only 10 apples in this world. If you have $100, you would be willing to pay $10 each instead of $1, thus, making the apples seemingly more "expensive".

Thirdly, there is a supply problem.

This is a myth, please read the following links.

http://cij.inspiriting.com/?p=314
http://cij.inspiriting.com/?p=458

http://cij.inspiriting.com/?page_id=295 has more links to other articles.

You need to ask yourself where did you learn about all this "supply problem" issue. Have you investigated yourself? Or you only hear about it from your friends and from the media?

 

[robots]

hello,

welcome Mr Damage,

be very careful of people with vested interests who want RE prices to fall (typically the handout crew, whinners, bloggers, ghpc members, bludgers, free loaders, the guy out the front of Coles who wants a $1 of your hard earned)

sit tight man, in 20-30yrs when you have a roof over your head and you sitting back on easy street you will be high-fiving yourself while enjoying nirvana,

debt is on the way down so it will get easy and easy to keep that roof over your head,

thankyou
robots

 

[numbercruncher]

is that your Guys life plan ?


Have a roof over your head within 20 to 30 years ?


What a sad waste ......


but if it makes you happy , whom am I to judge !