House prices to keep rising for years

[MrBurns]

From Crikey -

In one of the more remarkable occurrences, residential property, despite macroeconomic indicators to the contrary, has been an incredibly resilient asset class this year. In fact, the "affordable" sector of the property market is trading at record high levels, while auction clearance rates in major cities remain above 70 percent (in Melbourne, the clearance rate is above 80 percent). The use of inverted commas around the word "affordable" is intentional -- for many, the "affordable" sector of the housing is perhaps ironically, relatively unaffordable.

To purchase a property within 15 kilometres of a major city, first home owners are required to spend often upwards of six times average incomes, double the amount previous generations would spend on a home. That means one of two things is happening; people really like buying homes these days, or punters are vastly overpaying for residential property, or perhaps a little of both.

Property bulls will no doubt argue that the housing sector in Australia is not really over-priced, but due to the shortage of satisfactory property, the price is at an equilibrium level.

While supply issues no doubt have a short-term effect (Australia still has significant net population growth), in the longer term, the free market requires capacity to increase to match the higher demand. (Australia isn’t Monaco, urban centres take up a mere fraction of total land).

No, the major impetus for the prevailing boom is the continued, boosted first home owner’s grant and the ongoing lax lending standards exhibited by major banks. The FHOG is a dreadful piece of policy which has the unfortunate effect of inflating the cost of homes for young people. Various potential buyers, all with the grant in their back pocket, simply bid up the price of a property to what they could afford, plus the value of the grant, plus the leverage they are able to obtain. (Figures released last week indicated the "first home buyer" sector continues to dominate property prices with data indicating that 29.5 percent of owner-occupied mortgages were to first home buyers. Before the grant was boosted, the figure was around 12 percent).

But even the boosted FHOG (and various stamp duty concessions in certain states) isn’t enough to cause the dead-cat boom in residential property. For that, we can thank the highly concentrated banking sector, especially the major banks, for continuing to lend on loan-to-valuation ratios of upwards of 90 percent.

The apparent generosity of the banks could be stem from their desire to increase market share and earnings. That of course, does not inspire a great deal of confidence given that these are the very same banks which funded Opes Prime, ABC Learning, Centro, MFS, Babcock & Brown and Allco (among others), presumably, also to increase market share and earnings. When it comes to assessing risk, notwithstanding their penalty fee-funded profits, the performance of Australian banks leaves a lot to be desired.

It is also interesting to compare the buoyant Australian banking sector to the flailing US financial institutions. For it seems that Australian banks are following a similar path to that of US lenders earlier this decade. In that regard, we note Bill Bonner, in the Daily Reckoning, who claimed:

In 2007, the banks were so loose their arms practically fell off. If they had been young girls, you would have found short poems about them in the boys' toilets. They weren't prudent lenders; they were promiscuous ones. But now house prices are falling and lenders say "no" to everyone. But unfortunately, that won't undo the mistakes of the past -- the mistakes that are deciding the future of the US economy.

There is one other possible explanation for Australian banks’ continued generosity. That is, they are desperately trying to put their collective fingers in many collective holes in a very large dyke.

If all the Australian banks tightened their lending standards, for example, by requiring LVRs of 50 percent (which is the level which they could fund from deposits, without the need to seek overseas finance or issue bonds) there would be an almighty crash in the property market. Instead of using a $40,000 deposit to purchase a $350,000, the young couple would only be able to spend $100,000. Forget a supply-driven boom, the recent spike has been caused by banks unwilling to reign in borrowers to any large degree (banks have only marginally cut back on LVRs and slightly tightened deposit requirements).

Banks are in a Catch-22 of sorts -- if they tighten lending not only will their income drop (from writing less loans), but more importantly, the value of collateral underpinning their existing loans will slump; dramatically. This will lead to a surge in bad-debts, much like what happened in the United States, when borrowers had the equity in their homes dwarfed by their mortgage. When homes start getting foreclosed, the value of property falls even more as buyers adjust their expectations (Why buy now when the guy next door will have their house sold in a month’s time for $50,000 less?).

Of course, if the banks continue their generous lending policies, that would add to the boom and cause an even greater problem when eventually unemployment spikes, borrowers start missing payments and banks are forced to foreclose on even higher-priced properties.

The banks are currently choosing the second option -- delaying the pain for a few more years (and possibly allowing executives to continue to receive handsome performance bonuses along the way). The victims of this policy will be bank shareholders and home buyers paying far too much for their Australian dream.

 

[kincella]

the next project I am looking at is insulating the windows....to stop the heat and cold coming in from the outside, or to stop it escaping from the inside....its rather cheap, about $20 per window,, of 1 metre x 1.6 metres....makes sense ...it was on that house and garden show recently
then we will have all the houses well protected and keep running costs down...
http://www.clearcomfort.com.au/howitworks.htm

 

[robots]

hello,

good day, hows it going?

another sour grapes article on Crikey, man Glen48 has informed us houses go up 0.1% pa, so just rent if its such a terrible deal

sunshine and lollipops across the country, BIG UPS to those holding direct property

this is just amazing, forget options, cfd's, is the stock going to move this way or that, what if the premium on the option is this, my futures broker is on the phone

hang on i have to set the alarm for 2am,

just wake up, get out and about and the $ are on the way

thankyou
professor robots

 

[robots]

hello,

when i pick-up my slab of Satanoperca we might hit the seats out the front of the town hall and drop a few,

we might even see Keen walking the streets, he can come and mix it with some true great minds of the planet

thankyou
professor robots

 

[tech/a]

Yeah, I suppose these house prices will just keep doubling every 7 years, what happened to that?? lol

Yeh what a joke.

I bought 4 bedders in 1997 for $90K
Now 12 yrs later and they are $350K

$700K in another 7 yrs--yeh right!!
TOSSERS.

 

[robots]

hello,

check check:

http://www.morrellandkoren.com.au/topend/

more great reading, investors have been out and about for a while now

some i saw months ago are back on for lease and in most cases some updating has gone on, those with the $ can

special word out to a few from back in the day:

pepperoni
chops a must
numbercruncher
xao
ronald the financial advisor
numbercruncher
xao
stop the clock
numbercruncher
pommigranite

thankyou
professor robots

 

[satanoperca]

Hi,

Robots, just looking for the bike pump to get prepared for my bike ride down to St Kilda with a slab under one arm. August the 4th ABS stats - judgment day.

While it seems that property has not falling in value over the last six months while in the background the GFC was boiling away, why hasn't it increased more given :

1) Lowest interest rates in 46 years
2) Still low levels of unemployment <6%
3) A sound financial system - so I am told
4) Government handouts - FHBG and stamp duty reductions
5) Freely available credit - only minor tightening of credit
6) An endemic belief that property only goes up
7) Incredible capital gains for the last 18 years approx.
8) One of the few western countries not in a recession - technically
9) A government hell bent on stopping property prices from falling.
10) Share market as an investment tool smashed during the last year
11) Population growth 1.8% approx p.a.
12) Low Interest rates on cash deposits

Why wouldn't you invest in residential property?

But, I do wonder how many of the above points need to change for property prices to fall or remain stagnate.

Cheers

 

[kincella]

I bet the kids dont like this story.....just goes to show what the smart money does....Land banking....I like that term....prices triple every 10 years....well look at this example.....7 times in 18 years....thats more than triple, and in less time......
Warning this is an extract................

THEY are Toorak's ghost mansions: grand houses that have sat unoccupied behind chained gates and boarded-up windows for years, even decades.

As Melbourne struggles with a housing shortage, some of the city's finest abodes are home to nothing more than dust and cobwebs.

Take, for example, a French Renaissance-style mansion in St George's Road that Asian-based property tycoon David Yu bought in 1991 for $5 million and has left unoccupied since.

The land alone, believed to be one of Toorak's largest allotments, could now be worth as much as $35 million.

Plans by Mr Yu to build a five-storey apartment block on the site were rejected a decade ago.

"He's just sitting on it," Kay and Burton director Ross Savas said

http://business.theage.com.au/business/palatial-spreads-kept-empty-thats-rich-20090713-disw.html

 

[kincella]

people heading into property, out of the stockmarket....yes and thats been my mantra for a couple of years now.....
extract follows........................

An undersupply of housing and weak returns from other assets has put the spotlight on investment property. John Collett talks to the experts.

Following the dismal performance of shares and super funds, many older investors are likely to have a renewed appreciation for the value of a reliable income stream generated by investment properties.

Super funds have posted their worst returns since super was introduced in 1992, with default funds falling, on average, 13 per cent for the year to June 30. More aggressive "growth" funds have lost about 20 per cent.

Baby boomers in particular, hit hard by these losses and the freezing of redemptions on mortgage, property and fixed-income trusts, are likely to be considering the merits of a rental property over which they can exercise their control.

There are signs this group has become disillusioned with the performance of their super funds and managed investments in general, as well as governments' constant tinkering with the super rules

http://www.theage.com.au/news/busin...rental-property/2009/07/07/1246732332878.html

 

[MACCA350]

Super funds have posted their worst returns since super was introduced in 1992, with default funds falling, on average, 13 per cent for the year to June 30. More aggressive "growth" funds have lost about 20 per cent.

Watching the Business channel yesterday they showed about 5 hedge funds that performed in the region of +35% over the last 6 months, many also performed well during the crash.

cheers

 

[Beej]

Watching the Business channel yesterday they showed about 5 hedge funds that performed in the region of +35% over the last 6 months, many also performed well during the crash.

cheers

All well and good - but few of these funds are available as an option to the mum & dad type retail investor..... although I think it is likely that more of these alternative investment funds will become available for such investors in the future. I would think there is definite demand there.

Re the Crikey article posted by Mr Burns, looks like the author there is starting to sound a little desperate that their published views have proven to be soooo wrong!

To purchase a property within 15 kilometres of a major city, first home owners are required to spend often upwards of six times average incomes, double the amount previous generations would spend on a home. That means one of two things is happening; people really like buying homes these days, or punters are vastly overpaying for residential property, or perhaps a little of both.

Note that they focus on affordability of "properties within 15kms of the CBD of a major city"!! LOL this is where all the PRIME real estate is! Unless buying apartments, I don't think suburbs in Sydney for example within 15kms of the CBD have been FHB territory since before WWII...... certainly weren't for my parents who were FHBs in the 60s, and certainly not for me when I was a FHB in the early 90s - honestly where do these guys get these fantasies from?? I mean it's pretty simple really - more people creating demand for a finite resource (houses within 15km's of CBD) = higher prices over time - FOREVER, due to increasing exclusivity of such properties. The only way around this is to build/expand new cities as the population grows and as existing cities reach practical capacity (Sydney may well be at or close to that point now?).

Cheers,

Beej

 

[kincella]

Beej,
another of my mantra's....go out to the suburbs and buy the affordable house....we had to do that, if we wanted a house....if we only wanted to buy 15-20k's from the biggest cities....I would still be renting today....
plenty of affordable places...around 200k's, half hour travel time....
even that kid at 18 paying over 400k's is silly.....pay 200-250 k's.....
oh and 'get real'....none of us owe you anything....
we started at the bottom and worked our way to the top....
if you can figure out another way...go for it....but do not expect us to sell you our properties....or for anyone to drop the prices...and feel sorry for you...
whinging about the high prices...will not bring them down....in fact just sit back and watch them go even higher....

 

[gfresh]

Inner city wealth will always protect themselves from further development. Why would you erode your own wealth by reducing the scarcity of property by allowing people to build more in your area? It's all a croc

Meanwhile..

http://business.theage.com.au/business/jobless-fears-hit-home-20090714-djco.html

Nearly forty per cent of working Australians do not have enough savings to last them more than one month if they lose their job, as rising joblessness erodes household finances.

As suspected, the line here in Australia is very thin, and if (still if) unemployment is to rise into the 7's or 8's there is going to be very real pressure on a society very much swimming in a sea of private debt. Pray on that recovery being real eh

 

[kincella]

arhh...but at 10% we still have 90% employment

 

[AQR]

the next project I am looking at is insulating the windows....to stop the heat and cold coming in from the outside, or to stop it escaping from the inside....its rather cheap, about $20 per window,, of 1 metre x 1.6 metres....makes sense ...it was on that house and garden show recently
then we will have all the houses well protected and keep running costs down...
http://www.clearcomfort.com.au/howitworks.htm

Off topic I know but you will be disappointed if you use that product.

Geoff.

 

[kincella]

please explain...is there a better product...or do they just not do what they promise?

 

[gfresh]

So, I just bought a house expect the market to crash tomorrow .. sell sell

You'll have to slap me if suddenly I spout dodgy reasons why housing is the greatest investment ever, and I can never lose on property, and I will double my money every 5 minutes or some such.

620sqm 10km from Brisbane CBD anyhow, think that may provide some protection. The stupid thing I noticed in my looking is people seem happy paying more 15km further out in more working class suburbs which I can almost guarantee will come off next year.

 

[Beej]

So, I just bought a house expect the market to crash tomorrow .. sell sell

You'll have to slap me if suddenly I spout dodgy reasons why housing is the greatest investment ever, and I can never lose on property, and I will double my money every 5 minutes or some such.

620sqm 10km from Brisbane CBD anyhow, think that may provide some protection. The stupid thing I noticed in my looking is people seem happy paying more 15km further out in more working class suburbs which I can almost guarantee will come off next year.

Hey congrats gfresh!! If you are buying for PPOR purposes and for the long term, then I'm certain you will never look back and this will prove to be a great decision for you and your family! I'm sure you got good value too as there must be some good buys around - especially in Brisbane. 620sqm of prime Aussie soil 10km's from the CDB should put you in a pretty good area too for sure - are you north, west, or south of the city?

PS: Macquaries Equity Research group reckon all the housing bearishness is a bit over done now: (From http://www.macquarie.com.au/emg/prime/prime_prtradingpickofday_1.htm)

15 July 2009
Australian housing: Testing the foundation

According to Macquarie Research Equities (MRE 15/7), the contentious issue of house prices has sceptics falling into one of two camps. On the one hand, many people have voiced concerns that the first home buyer led recovery in home lending is not sustainable and will see activity stagnate once the grants are removed. On the other side of the spectrum are those that believe the recovery has been too strong and is inflating a house price bubble, which will soon require the RBA to tighten policy and bring the recovery to an abrupt halt. MRE find both of these fears to be exaggerated. A common criticism of the boosted first home owner grants is that they merely bring forward demand from first home buyers. This demand is seen to be unsustainable due to the limited pool of potential first home buyers and the limited timeframe within which the grants are available. While the grant has spurred many people into action, it is likely that there was a growing pool of potential home buyers waiting for conditions to turn more favourable. The population in the 20-40 year old age cohort (potential first home buyers) has been growing at the faster than average rate of more than 1.5% per annum since 2005-06. This suggests there is currently a large stock of potential first home buyers in Australia, which could see the proportion of first home buyers remain higher for longer in the current cycle. On the other side of the spectrum are concerns that the housing market recovery is too strong, creating a housing bubble, with prices set to increase too rapidly. While Perth house prices surged in the last 5 years – and are now coming off – Sydney prices have gone sideways. While the early signs of demand have picked-up sharply, actual housing market transactions remain at historically low levels according to MRE. Similarly, any improvement in building approvals over 2H09 will be coming from a weak base. MRE do expect these transactions to increase sharply in 2H09. As such, MRE believe the Reserve Bank will not be in any hurry to tighten monetary policy during 2H09, with policymakers looking for a durable recovery in housing activity to offset inevitable weakness in non-residential construction in the year ahead.

Cheers,

Beej

 

[gfresh]

Thanks It's in Mount Gravatt East, which is south. Nice quiet suburb near Holland Park/HP West, similar except the price tags are a bit more affordable.

As article states, there is positive and negative signals, but keeping a feet in each camp with a PPOR is a nice two way bet in some ways. If the market really looks like it's going well in 2 years time, should still have enough left in the kitty to consider an IP. But if not, just stay put, and keep toying with the share market or keep it in the bank.

There seemed to be quite a few investors around the places I looked too south of Bris. They may take up some slack come early next year, if they are not starting to already.

 

[Beej]

Thanks It's in Mount Gravatt East, which is south. Nice quiet suburb near Holland Park/HP West, similar except the price tags are a bit more affordable.

Nice area - I have friends who own/live in Holland park West actually, and I was just up there a few weekends ago again visiting. Lot's of nice traditional character Queenslander type homes on well kept garden blocks, well maintained, lot's of renovated/extended places etc. Quick trip up the freeway into the city as well!

As article states, there is positive and negative signals, but keeping a feet in each camp with a PPOR is a nice two way bet in some ways. If the market really looks like it's going well in 2 years time, should still have enough left in the kitty to consider an IP. But if not, just stay put, and keep toying with the share market or keep it in the bank.

There seemed to be quite a few investors around the places I looked too south of Bris. They may take up some slack come early next year, if they are not starting to already.

Good strategy I think, and in fact quite similar to where I am at right now - focussing more on building up the share portfolio while the buying is still cheap. Re increasing investor activity, the same thing is starting to happen in Sydney anecdotally, and the finance stats etc are also starting to bear this out. I suspect that the trend of the self managed super fund types etc moving into the stability of "bricks and mortar" for steady rental income etc may be starting to come more into play, and that while I still don't see any great boom coming for a while, this will continue to keep a solid demand base in place through the next 1-2 years, and with it the possibility of some slow and steady growth.

Cheers,

Beej