House prices to keep rising for years

[Mc Gusto]

Thank you all for your posts and opinions. Amid the bickering i find both these posts (the falling one as well!) more than useful. I am in the market for a home and admit the uncertainty of where the market is going certainly plays on my mind. Having these posts may not quash that uncertainty but it certainly opens the door to many informed opinions and strategies

Thanks

Gusto

 

[kincella]

good on you...if you look past the short term frame and think long term ...there are no worries...some suburbs do better than others....inner city are always better than the outer burbs....I gave an example of my first home cost $12,000 in a regional centre....now worth about 250k...compared to a friend who paid the same cost, same time in a nice suburb inner Melb....just a workers cottage in her case....the land alone now worth 1 million....4 times better..return....
so tell us where you are looking ?

 

[netfleet]

Kotim,
If interest rates are to get back to 7% the economy will have to improve pretty substantially. You would expect house prices will recover in line with the greater economy barring any unexpected altering of the Supply/Demand equation.
So while repayments will increase, homeowners should have increased equity in their homes aswell. It then just becomes a judgement call as to whether these will offset each other.

However, if people have overpaid now, they may not see the same increases in the equity in their homes. But that becomes a case by case issue.

Well thats my view on it anyway.

That's a good point that if interest rates rise, it means the economy is in better shape which means house prices will recover. That makes sense.

However the real issue as I see it will be all those FHBs who scrape into servicing a loan when they have 2 jobs and 5% interest rate. If they lose a job or interest rates are up to 7%, then we might see distressed sales. They may well pull equity out but a number of forced sales will reduce prices.

Plus really tough for the poor owners...

 

[Beej]

That's a good point that if interest rates rise, it means the economy is in better shape which means house prices will recover. That makes sense.

However the real issue as I see it will be all those FHBs who scrape into servicing a loan when they have 2 jobs and 5% interest rate. If they lose a job or interest rates are up to 7%, then we might see distressed sales. They may well pull equity out but a number of forced sales will reduce prices.

Plus really tough for the poor owners...

But you have to ask yourself who are all these "FHB scrapers" and how many are there? The average FHB mortgage is $280k. At 5% interest that's $1150/month (or $14k/year) to cover the interest bill. Not that much really for a couple/family and probably the same or even less than they might have been paying in rent anyway. Even on a single average wage of ~$60k, that's about 28% of take home pay, without accounting for middle class welfare benefits that such a family would be receiving (Family Tax Benefit A/B, dependent rebates etc etc).

If interest rates hit 7.5% (which as pointed out would likely mean the economy was in much better shape), the interest bill goes up to $1750/month ($21k/year), assuming no principle has been paid off at all (which is unlikely). So that's now about 40% of after tax single income. Getting tighter, but probably still doable for most. Many would earn above the average anyway or actually have 2 incomes making it a breeze still.

So only the "complete unemployment scenario" would be likely to produce a distressed sale. And for that to happen both partners would have to become long term unemployed. As discussed previously on the thread and in articles posted etc such as this one (http://www.businessspectator.com.au...ument&src=is&is=Property&blog=Concrete Detail) the likely and historical impact of this factor on the housing market is far less than expected by many. The reason it is misunderstood is most don't really understand how rising unemployment plays out socio-demographically speaking - we haven't really seen it here since the early 90s and most posters on internet forums weren't in the work-force at that time (I was).

Cheers,

Beej

 

[kincella]

netfleet
I am playing the violin for you now......a woeful, mourning, sorrowful tune

listen if one cannot afford to pay an average of 6.5-7% interest in normal times.....then forget about buying a house...
the ones who are buying at 5% are very lucky....
now the bleeding heart brigade were not around when rates went from 12-18% with in about 5 months..when I bought a house....so stop whinging at 5% or 7%
I was advised about a commercial loan last week...the lender uses an 8% rate to determine if you can service the loan....
oh and a huge amount of discretionary income left to play with....so forget about the $100 games, and huge mobile phone bills....nights out on the booze etc, and the credit cards
buying a house requires discipline...a little maturity etc...

 

[netfleet]

But you have to ask yourself who are all these "FHB scrapers" and how many are there? The average FHB mortgage is $280k. At 5% interest that's $1150/month (or $14k/year) to cover the interest bill. Not that much really for a couple/family and probably the same or even less than they might have been paying in rent anyway. Even on a single average wage of ~$60k, that's about 28% of take home pay, without accounting for middle class welfare benefits that such a family would be receiving (Family Tax Benefit A/B, dependent rebates etc etc).

If interest rates hit 7.5% (which as pointed out would likely mean the economy was in much better shape), the interest bill goes up to $1750/month ($21k/year), assuming no principle has been paid off at all (which is unlikely). So that's now about 40% of after tax single income. Getting tighter, but probably still doable for most. Many would earn above the average anyway or actually have 2 incomes making it a breeze still.

So only the "complete unemployment scenario" would be likely to produce a distressed sale. And for that to happen both partners would have to become long term unemployed. As discussed previously on the thread and in articles posted etc such as this one (http://www.businessspectator.com.au...ument&src=is&is=Property&blog=Concrete Detail) the likely and historical impact of this factor on the housing market is far less than expected by many. The reason it is misunderstood is most don't really understand how rising unemployment plays out socio-demographically speaking - we haven't really seen it here since the early 90s and most posters on internet forums weren't in the work-force at that time (I was).

Cheers,

Beej

Nice analysis. And yes when you put it like that it doesn't seem like too much of a big deal.

Few points to make though

• The average FHB would probably be on a lot less than the average wage so as a % of income, it might well be well over 30% to start with (at 5% int rates)
• Mortgage repayments (interest only) are always almost more expensive than renting (even with 5% int rates). Plus there's the other costs of home ownership sapping their income
• I don't think it would take a massive proportion of 'distressed sales' to have a big impact on the market. If just 5% of these FHB end up here, say, wouldn't it have a massive impact on the market.
• Extra houses on the market from these sales is only part of the problem. The fact that these sellers are 'motivated' or forced to sell means they will sell for less - dragging down

prices.

I don't think distressed sales will bring down house prices as much as:

1) a lot of the FHB having been brought forward thanks to the boost
2) the end of the boost reducing the amount remaining FHB can borrow
3) increasing interest rates (or thereat thereof) causing people to be cautious when buying
4) threat of job losses making people more conservative with house buying
5) continued financial disparity between renting & owning your home
6) realisation that property in Aus is v expensive compared to many parts of the world

Saying all that I'm in the market myself even though on the basis of sheer logic & finance I realise I probably shouldn't

 

[explod]

That's a good point that if interest rates rise, it means the economy is in better shape which means house prices will recover. That makes sense.

However the real issue as I see it will be all those FHBs who scrape into servicing a loan when they have 2 jobs and 5% interest rate. If they lose a job or interest rates are up to 7%, then we might see distressed sales. They may well pull equity out but a number of forced sales will reduce prices.

Plus really tough for the poor owners...

Rising interest rates do not mean the economy is in good shape. This is a misnomer created by the lowering of interest rates to stimulate activity. And it is not working so where to from here. Money is losing value each day (the lists of why are endless) and it is becoming almost impossible for business people to borrow now for projects. This tells me that the only way out of this will be a rise in interest rates to entice the banks to lend for worthy activity.

 

[netfleet]

netfleet
I am playing the violin for you now......a woeful, mourning, sorrowful tune

listen if one cannot afford to pay an average of 6.5-7% interest in normal times.....then forget about buying a house...
the ones who are buying at 5% are very lucky....
now the bleeding heart brigade were not around when rates went from 12-18% with in about 5 months..when I bought a house....so stop whinging at 5% or 7%
I was advised about a commercial loan last week...the lender uses an 8% rate to determine if you can service the loan....
oh and a huge amount of discretionary income left to play with....so forget about the $100 games, and huge mobile phone bills....nights out on the booze etc, and the credit cards
buying a house requires discipline...a little maturity etc...

I don't disagree with you but nevertheless I'm sure it's happened. Plenty of people have just rushed in because the combination of low int rates & FHB grants have made it possible

Rising interest rates do not mean the economy is in good shape. This is a misnomer created by the lowering of interest rates to stimulate activity. And it is not working so where to from here. Money is losing value each day (the lists of why are endless) and it is becoming almost impossible for business people to borrow now for projects. This tells me that the only way out of this will be a rise in interest rates to entice the banks to lend for worthy activity.

That makes sense.

 

[robots]

hello,

congratulations to Harry Triguboff, 3rd on the BRW List for 2009

top effort man, well done

thankyou

associate professor robots

 

[Mc Gusto]

good on you...if you look past the short term frame and think long term ...there are no worries...some suburbs do better than others....inner city are always better than the outer burbs....I gave an example of my first home cost $12,000 in a regional centre....now worth about 250k...compared to a friend who paid the same cost, same time in a nice suburb inner Melb....just a workers cottage in her case....the land alone now worth 1 million....4 times better..return....
so tell us where you are looking ?

Hi Kincella

I am looking for a house 2 / 3 bedroom, inner south of melbourne. the search is taking me far and wide and the limited amount of stock means there is not a great deal for me to look at (in my range of 600 - 750k) but i am hoping a bit more stock comes on the market and then we will know the true picture of where this market is.

Thanks

Gutso

 

[kotim]

The average first home buyer loan has gone up 52000.00 in 2 years, no real increase in house prices genreally speaking over the last 2 years, so it means that FHB are borrowing a LOT more money becasue they can with 5-6% interest rate. Tell you what what do you think all those introductory type loans are for. HSBC don't offer 3. something % introductory and then make usre you can pay it back at 7-8%, they simply want your business. They know a certain number will fail adn they are takign a calculated risk.

Do you know that 2 of the big 4 banks are now righting 85% of all new home loans etc. They believe there is not really bad stuff to come, whereas the other 2 big anks reckon the proeprty market is going to hurt the lenders so they are really making sure they only lend to the least riskiest.


Time will tell, but there is an enormous number of fhb's who have clearly maxed their borrowings to the hilt, otherwise we would not have seen a 52 grand increase in loan size.

And the figures show that they are not taking our fixed rates, which means they are very vulnerable to interest rate rises. We know how fast interest rates went back up to 9 plus %

Anyway its all entertaining stuff,

 

[aleckara]

Rule of thumb - most people buy the best they can get away with when it comes to anything. While some people will be factoring higher interest rates in the future I'm sure the buyers that:

1) Feel that they don't get in now they will never afford a home (i.e speculating price rises)
2) People eager to get out of the "rent trap"
3) Young people who expect more than a fibro shack in a crime riddled area
4) People who with the FHB are confident that the govt will save their investment every time
5) Want to be in the best area with the best house they can
6) Want to live in the area which they grew up, have their social networks and their established lives

and many others will be borrowing as much as the bank gives them in the hope of profits or not being stuck in a FHB home forever. Besides in this supposed "housing shortage" if they don't borrow as much as they can they won't get the house at all. The highest bidder gets the home, because there isn't enough homes to fill for the lowest bidders.

Most people can admit here that the lower end of the market is a bit overheated due to the FHBG. If this is so this is direct evidence that indeed people are borrowing irresponsibly as if they want a home when their is a frenzy (FHB boom) they will have to.

 

[kincella]

this is all with 'tongue in cheek', a bit of a stir to liven the place up...

you know that dream home some of you were looking for...the million dollar ones that have dropped 40% and now only $600k...or thats what you were hoping for...based on the silly associate professor's wishing well....

....cannot find it...wonder why ?....well it just does not exist...in fact it will probably be on the market for 1.2 million now or more....

the natives are not restless....they have been renovating the old house, staying put and upgrading it....33 billion dollars last year....now that is keeping a load of people in work and businesses running along....its helping the economy...

see this quote......

Dr Dale said renovations would continue to underpin the housing industry, accounting for 47 cents in every dollar spent in the market. "Renovation activity hit a record worth of nearly $31 billion in 2007/08 and our forecast is for the value to be well on the way to $33 billion in 2010/11," Dr Dale said.

On Wednesday, the Australian Bureau of Statistics (ABS) announced that the value of construction work for the first three months of the calender year posted its biggest fall in almost nine years.

and don't bother with the argument, this information is coming from the insiders...would you rather the 'feral goat industry' who specialise in feral goats...spent the time analyising the housing market ? :sheep:

http://www.news.com.au/heraldsun/story/0,21985,25551465-664,00.html

 

[gfresh]

RBA hints they won't hesitate to raise interest rates if inflation is once again seen as a threat. In some ways the fact that inflation has come back into their precious "target band" revalidates their opinion they can control inflation via interest rates..

http://www.businessspectator.com.au...l-monetary-poli-pd20090528-SG2N8?OpenDocument

While noting that central banks could make incorrect policy judgements, Mr Battellino said the high level of awareness about the risks of higher inflation should prevent this from happening.

"This [incorrect policy judgments] is always a possibility," he said.

"But, the high state of awareness that currently exists about the risk of being too slow to reverse recent exceptional measures should limit the probability of such a mistake being made."

Mr Battellino said the debate about global monetary policy was not surprising given central bank's around the world had made some unconventional moves.

What may happen is that investors could pile right back into commodities (even now this is starting to happen, oil back over $60USbbl), in the *expectation* of inflation hitting.. when in fact this will actually help cause inflation to rise (raw prices being passed onto finished goods) further, building into a large feedback loop. You could argue this is what happened at the tail end of the boom.

Then central banks are going to be rushing madly to raise rates to reign in this rampant inflation and fight these forces. It could be quite messy.

If you think about it, rates rising rapidly is probably now not so much of a problem for those in the US/UK/elsewhere who have had house prices come down significantly. In these countries, even if the CB's hike rates significantly, the prices paid for houses for borrowers who enter now are 30-40% off peak... hence mortgage stress is less of a problem. Here in Australia however, the fact that our market has not crashed and is only a few digits off peak we do not have that luxury, even though higher rates may be pushed upon us due to outside CB forces. Interesting times.

 

[kincella]

UH OH....looks like we have a hiccup here....
all attempts to look at the big picture....goal posts being moved...makes it difficult to see, how the opponents can win their arguments....
and just when you thought you had seen it all....into cruzing gear....
out comes another obstacle......

PLANNED apartments worth more than $2 billion have been shelved or abandoned in inner Melbourne because of the financial crisis.

Projects affected since September include the $700 million Jam Factory redevelopment in Chapel Street, South Yarra, and failed venture WeLive's 320 apartments at Southbank.

At least 3155 apartments or units planned for the CBD, Fitzroy, St Kilda, South Yarra, Docklands, North Melbourne and Collingwood have also been shelved or abandoned, according to figures collated by Colliers International for The Age.
The drop-off could put hundreds of building jobs at risk and worsen the inner-city rental squeeze.

The figures are based on the status of development applications kept by Building and Construction Interchange Australia, a leading provider of building information.

They are likely to spur on supporters of the Commonwealth's proposed $4 billion Australian Business Investment Partnership - or "RuddBank" - that would fund commercial property players struggling for finance. The Senate is yet to vote on the proposal.

Freehills law firm partner David Sinn, who advises developers in gaining finance, said difficulty in securing loans and their high cost was making some projects unviable, despite strong demand. "Basically, the banks are in a position at the moment where they feel they are overexposed to the property market and are very reluctant to provide any further funding," he said.

http://www.theage.com.au/national/2bn-in-innercity-flats-put-off-20090527-bnnv.html

 

[kincella]

wow....QLD knows how to make money and rip off home buyers........
and the grass hoppers reckon its greedy property investors making all the money.....
The state Government made about 40 per cent of its revenue from the construction industry and delays and charges were hitting developers hard through land holding costs, sources said. This was typically $1000 per lot per month, which was more than $1million annually for a 100-lot residential project.

http://www.theaustralian.news.com.au/story/0,25197,25554204-2702,00.html

 

[gfresh]

bah.. blaming the government is just passing the buck as the **** has fallen out of demand. I am sure the government would like nothing more than apartments to be flying off the plan so they can collect the stamp duty.. lack of which is now half the reason the QLD budget is now down the hole.

The tourist spots up here were always boom territory.. relying on baby boomers getting richer and richer and in the hope more and more of them would retire to SEQ. Now the steam has been taken out of that, no surprise demand for approvals has collapsed, as developers (or the financiers) aren't willing to construct more as right now there aren't the buyers, especially as most of these are "premium" apartments. If they were actually sub $400k FHB territory, they might have had a chance to sell.. so they can only blame themselves for targeting the mid to upper market, and nearly totally ignoring the lower end.

Some of the fancier 2br apartments were selling for around $500k+ , when "down on the ground" you could buy older 2br places in the exact same suburb, even across the road for $200k less than that. The difference always seemed a little crazy to me.

On the radio here they are giving away "rent free" for a year an apartment as a competition in a newly finished development.. First they tried sales = fail.. Then they tried pushing rental = fail, now they are even giving it away to get people in there!

 

[Beej]

Gfresh- interesting insights into the SEQ apartment situation! I agree that it seems the developers put all their eggs in the one basket (now with a hole in the bottom!). I've always thought that somehow more incentive is needed to promote the construction of housing at the more affordable end- that would ultimately address the affordability issue over the long term and bring median prices down.

Meanwhile, an interesting article by Alan Hohler today! Seems Alan might have turned more bullish on property after at first buying into all the bearish predictions made up to 2 years ago! See this article (http://www.businessspectator.com.au/bs.nsf/Article/House-rules-pd20090529-SGSL7?OpenDocument&src=sph). April RP Data figures will be out later today as well. Some AK quotes:

Later this morning the RP Data-Rismark house price index for April will come out, along with a revised number for the March quarter. It is expected to show that prices, amazingly, increased more strongly than previously thought in the quarter, and actually accelerated in the month of April. Recession? What recession?

These figures are based on the largest database of home sales (60,000 in the first quarter) and the index is hedonic, which means it is more sophisticated than the median price data used by the ABS because it adjusts for the differences in houses.

In other words, when RP Data-Rismark report, as they will, that home values have increased in every capital city except Perth in the first four months of 2009, we can be fairly sure it’s true.

.....

There seem to be three key reasons for this astonishing difference (bear in mind that Australia’s share prices have fallen more than America’s): the Australian government’s first home buyers' grant, the underlying shortage of houses in Australia, and the healthier state of our banks.

.....

Will it be resolved by an improvement in business investment because of the global green shoots or by a housing downturn caused by rising unemployment, the end of first home-buyers grant and tighter home lending?

That, of course, is the big question. I suspect it will be the latter, but then two years ago, like many, I found the property bears' predictions of a house-price slump convincing. These arguments, for Australia at least, now look to be completely wrong.

The Australian residential housing market is a very resilient beast!

Cheers,

Beej

 

[Beej]

Also - to help understand how median house price figures are being "skewed" downwards without necessarily reflecting corresponding real house price value declines, check the attached chart comparing the range of buynig activity Mar 08 qtr vs Mar 09.
(It's from RP Data).

PS: That's not say there have not been some real value/price declines last year, there certainly have (the area's where I sold one house and bought another one in Nov/Dec last year was definitely down 5-10% from the mini-peak of late 2007/early 2008, although it seems to have stabalised and maybe even gone up a little since the start of this year). But in many cases they are over-stated/skewed by the median stats as discussed here quite a bit, and this chart demonstrates that quite well I think.

Cheers,

Beej

 

[kincella]

Beej, great chart, and the proof for the grasshoppers and others.

now for some other exceptional news
......hints....there are some other strong indicators for confidence.....like the sharemarket lately....

Although first-time buyers helped support the market, "people forget that 70-75 per cent of home buyers aren't first timers''.

No significant falls


Homes in every capital, except Perth, rose in value. Median home prices in the WA capital fell by 0.8 per cent to $466,385 after "spectacular" growth during the commodities boom.

"Our analysis demonstrates that home values are rising in around 80 per cent of all suburbs with only the top 20 per cent of suburbs ranked by price suffering material falls," said Christopher Joye, managing director of Rismark International, which releases the report jointly with RP Data.

Darwin homes experienced the highest median-price growth, rising 5.3 per cent to $443,179 in the first four months of the year, while Melbourne median values grew 4.5 per cent to $436,548. Sydney home values climbed 3.9 per cent to $522,797.

RP Data national research director Tim Lawless said the figures cast doubt on the notion that a `bubble,' driven by low interest rates and the boost to the first time home owners' grant by the government, would develop in the first-home buyers' market.

"Home values in Australia's mortgage belts, which are the prime first-home buyer markets, were flat or falling between 2004-07 while the inner city and affluent markets enjoyed consistent growth,'' Mr Lawless said.

"In 2008-09 we have seen a reversal of these fortunes.''

http://business.theage.com.au/business/house-prices-bounce-back-20090529-bpm7.html