House prices to keep falling for years

[theasxgorilla]

The best post for a long time on any RE thread.

Sobering and a little sad...if this is really the end of this rather long cycle it sounds a bit like, "sorry to all the folk who didn't make anything from this boom, there will be another one along in 1 to 2 decades".

 

[WaySolid]

When it comes to giving out loans at fixed rates for long period of times they have to form an opinion and make a best guess and add the risk of their interest payments changing to the rate.

For instance if the bank is going to write you a 5 year fixed interest loan and they just add a standard margin of 2 % then over the 5 years the interest rate that the bank borrows moves up by 3% then the bank is losing money.

Tyson where on earth are you getting this idea from? I agree with what ASXGorilla said.

 

[WaySolid]

Sobering and a little sad...if this is really the end of this rather long cycle it sounds a bit like, "sorry to all the folk who didn't make anything from this boom, there will be another one along in 1 to 2 decades".

Definitely sobering if your only trick from property is buy n hope.

Peter Spann is a well known example of a guy who created a small fortune, 0 to a few million or so from buy, renovate and flick in Brisbane during the recession we had to have in the 90's.

If you have some value adding skill then I guess that property will remain an excellent vehicle to create wealth. The only scenario that has me a bit perplexed is a Japanese style multi decade ground out deflation, that's a scenario killer for property that would have you looking to avoid the asset class completely perhaps?

The playbook from the early 00's where you could just lever to your maximum and repeat as quickly as possible might need some tweaking though

 

[theasxgorilla]

Peter Spann is a well known example of a guy who created a small fortune, 0 to a few million or so from buy, renovate and flick in Brisbane during the recession we had to have in the 90's.

I hope it still works...it's all I know how to do!

 

[wayneL]

I hope it still works...it's all I know how to do!

It will always work so long as the spread between unimproved and improved value is sufficient.

In recent years, in most cases, there was not really a great spread, but rather an enforced period of holding while renovations took place. Rampant capital gain was actually the profit driver and any extra was simply paying for your time... sometimes not even that.

In a recession, it probably will mean a greater spread (as was the case in the Peter Scam example). This is already starting to happen here. Fixer uppers are starting to get a lot cheaper than up-to-date properties.

Renovators/value adders should really be hoping for housing Armageddon. Those fixer uppers will be cheap as chips.

 

[gfresh]

It's funny how soon everybody is reading the last rites already

tech's view is speaking from good experience, however I am sure there are many different views out there.

Will 12-18 years see the next boom or a major bust? To be honest, at that stage we're probably more likely to get the mega-collapse as all the baby-boomers reach their twilight years, and the mass of the younger population isn't enough to support it. We're also likely to see the west becoming minnows against the big fish of the east, and whatever else that brings.

Housing structures will change - mega retirement villages? easy to maintain retirement units rather than sprawling houses? Who knows, but it may well be quite different what people require in 2020+

The way the whole financial system, especially growth in domestically driven economies, has gravitated towards feeding off property over the last few decades, and it's subsequent collapse only perpetuates it's the only way to expansion. Humans don't really learn from history, they go forth and do the same things over and over again, and they shall again. It's seems now that the timing between boom and bust is oscillating quicker, as the world also moves at a much faster pace in everything we do.

While it seems gloomy now, I am sure those at the top of financial circles will dream up some new and wild new scheme to re-inflate another credit bubble in the next few years, fueling the next boom within the next decade. Often from the largest collapses become the largest gains afterwards. When you get hooked on something, it's hard to give it up so easily, they'll simply look for the next fix.

 

[Tysonboss1]

Tyson where on earth are you getting this idea from? I agree with what ASXGorilla said.

If you believe that every fixed loan they write is backed by a bond of the same size and term you would be wrong,... equally if you believe that every bond they write is backed by a loan fixed for that same period then you would also be wrong.

There will always be a difference the size and terms between the bonds written and loans at fixed rates.

What you are saying is that the banks never make any forecasts as to the future of interest rates and adjust the products they are offering this is just plan wrong,

 

[Tysonboss1]

Sobering and a little sad...if this is really the end of this rather long cycle it sounds a bit like, "sorry to all the folk who didn't make anything from this boom, there will be another one along in 1 to 2 decades".

Remember thought that techs portofolio was commerial property which has a much higher risk profile than other areas,

The same thing would have been happening to any body who had margin loans to the limit of there stock portfolio at the beginning of the year, It is more the debt stratergy that you use than the asset class.

I mean no one good argue that buying a property outright with cash and just using it as an inflation hedged income stream carries a high degree of risk, It one of the safest investments there is,

 

[pepperoni]

A few sales in syds north of late ... not doing great but nowhere near disaster yet.

 

[CamKawa]

Found this chart over at bubblepedia, it makes for interesting viewing, looks like demand for housing is dying in the ****.

 

[pepperoni]

There is very little volume .... unless people get forced to sell home owners are the perfect little cartel ... no sales/no listings/no supply/no price falls.

 

[CamKawa]

There is very little volume .... unless people get forced to sell home owners are the perfect little cartel ... no sales/no listings/no supply/no price falls.

I hear what you are saying and it's a good point. You don't happen to have a chart of sales volume handy for a comparison against housing finance commitments?

 

[pepperoni]

ha ha .. no .. wouldnt know one if I saw one ha ha.

32% clearance rate on northern beaches a week or so back ... no giveaways though ... about as telling as robots 60% week in week out clearances.

One thing Ive learnt through this ... property prices are VERY resilient to sharp falls! Human nature really.

 

[Beej]

ha ha .. no .. wouldnt know one if I saw one ha ha.

32% clearance rate on northern beaches a week or so back ... no giveaways though ... about as telling as robots 60% week in week out clearances.

One thing Ive learnt through this ... property prices are VERY resilient to sharp falls! Human nature really.

Yea but that's what happens during an (Aussie) housing market downturn - especially in Sydney. Seen this many times before - in fact the graph posted shows perfectly the slowdowns that occurred in 2000 just after the intro of the GST, and in 2004 when Sydney first came off the boil - this time is no different IMO, and if you look the volume levels are not even that low yet.

Yes prices are high, but they don't tend to crash for the reason you state - instead sale volume falls dramatically as owners only sell if they have to for some reason, prices fall a little, but 5-10% is the norm, then flatten and stagnate for a while (possibly several years even). In the meantime, housing stock renewal/ gentrification/ renovation of older areas will continue, and those not in the market and those looking to move up the ladder will continue to save lot's of cash, the interest rate cycle will turn from upwards to downwards, until the time seems right and the market will start to move again. And therein lies to start of the next cycle.

Of course if we didn't have a supply problem then this wouldn't happen so easily (like in the US where supply is not a problem - in fact they have an over supply), but we do, so this is what happens - (in Sydney at least). Personally I think Brisbane and Perth have more scope for larger value falls in a market like this, as currently their prices are closer to Sydney than they have ever been, but the quality of the housing stock, and the cities in general, have not been improving in line with the price increases in the way those things tend to improve in Sydney.

Cheers,

Beej

 

[CamKawa]

Yes prices are high, but they don't tend to crash for the reason you state - instead sale volume falls dramatically as owners only sell if they have to for some reason, prices fall a little, but 5-10% is the norm, then flatten and stagnate for a while (possibly several years even).

Could that some reason be unemployment? The RBA said today that it is expecting an increase. If that jumps house prices may fall dramatically. Stay tuned...

 

[white_goodman]

unskilled developers will be found out in this period of downturn... the major issue with financial success is land price, all other feasibilities mean little if you pay too much for the land

 

[Beej]

Could that some reason be unemployment? The RBA said today that it is expecting an increase. If that jumps house prices may fall dramatically. Stay tuned...

Well, we have had unemployment rates as high as 10% before and believe it or not property prices didn't crash! The thing you have to remember is that when employment is in fact contracting, the people who are *primarily* effected (unfortunately) tend to be the younger, plus the less skilled members of the workforce. These are not, as whole, the section of the population that tends to own property (and therefore may be forced to sell), or that tend to own property in the more desirable areas.

Sure there are exceptions to this (on both sides), but generally speaking skilled workers/professionals are more able to find new jobs, or can more readily re-skill into a new area as required, and are less likely to be over-committed to their mortgage. Also, unemployment tends to cluster around particular geographies, and so might impact a particular suburb, region, or town more severely, but not the city-wide or national property market as a whole in general anywhere as much. In other words, you might see your "bargain" out there at Mt Druitt, but I bet that most of the hopefuls waiting eagerly for a property market crash still won't buy that bargain no matter how cheap. Conversely the areas in which they would want to buy (Sydney Inner West, Lower North Shore, Eastern Suburbs and so on) tend to be the areas least effected by rising unemployment, and are also the area's with lower mortgage commitments on average etc, and therefore the huge price drops just won't be seen in these area's.

Also remember it's LONG term unemployment that might cause you to loose your house. As a result, a slight up-tick in unemployment from low 4.x% to high 4.x or 5.x % is IMO hardly going to be the great trigger for a huge property price crash like some seem to expect.

Cheers,

Beej

 

[theasxgorilla]

There is very little volume .... unless people get forced to sell home owners are the perfect little cartel ... no sales/no listings/no supply/no price falls.

Finally someone who gets it.

So in effect you have a chart where prices "stagnate"...on the x-axis is time, it passes, on the y-axis prices, they don't move much, on a seperate histogram you have volume, it shows a significant decrease, net short term result, house prices don't fall (much in most areas) if people aren't forced to sell, and after enough time has passed and people have figured out how to save more, earn more, spend less (which is the natural order of things) house prices go up again.

Oversimplified, but if you bet on this you'll do better than the majority of Chicken Littles.

 

[CamKawa]

Well, we have had unemployment rates as high as 10% before and believe it or not property prices didn't crash! The thing you have to remember is that when employment is in fact contracting, the people who are *primarily* effected (unfortunately) tend to be the younger, plus the less skilled members of the workforce. These are not, as whole, the section of the population that tends to own property (and therefore may be forced to sell), or that tend to own property in the more desirable areas.

Sure there are exceptions to this (on both sides), but generally speaking skilled workers/professionals are more able to find new jobs, or can more readily re-skill into a new area as required, and are less likely to be over-committed to their mortgage. Also, unemployment tends to cluster around particular geographies, and so might impact a particular suburb, region, or town more severely, but not the city-wide or national property market as a whole in general anywhere as much. In other words, you might see your "bargain" out there at Mt Druitt, but I bet that most of the hopefuls waiting eagerly for a property market crash still won't buy that bargain no matter how cheap. Conversely the areas in which they would want to buy (Sydney Inner West, Lower North Shore, Eastern Suburbs and so on) tend to be the areas least effected by rising unemployment, and are also the area's with lower mortgage commitments on average etc, and therefore the huge price drops just won't be seen in these area's.

Interesting Beej, but not everyone agrees with you.

""Blue Chip" (ie rich) areas tend to do very well in terms of capital gains especially during economic boom times, but also can have rather large falls when the economy turns down."

source: http://travismorien.com/invest_FAQ/content/view/90/56/

 

[Tysonboss1]

One thing Ive learnt through this ... property prices are VERY resilient to sharp falls! Human nature really.

it tends to stagnate rather than fall,... some areas will fall offcoarse but not by the 30% qouted by some people.

a prospect of stagnation or a small fall in prices would normally cause shorterm investors in the stockmarket to rush and sell,... so share markets are subject to small downturns becoming avalanches and the falls get bigger and bigger,....

But it is completely different with property with over 70% of property being held by owner occupiers who are not going to sell because of a small down turn, and most of the rest held by longterm investors who are not phased by periods of stagnation,... for instance a retired couple who own a few houses debt free are only concerned with collecting rent to fund their life style,... they aren't going to rush and sell because the price may stagnate for 3 years.