House prices to keep rising for years

[professor_frink]

morning Tom, just wanted to comment on one part of your post-

For many Australians, particularly the younger ones or those with short memory, this will be a novel and rather painful experience. It will once again demonstrate that contrary to popular wisdom, it is possible to go broke owning property because it does not always go up.

maybe my data on this is a bit dodgy, but I can't seem to find much in the way of house price declines since WWII. It would appear that the only people that can recall housing falling by 30% are those of us born before the great depression! Now I kinow that median house prices are a rather poor reflection on what is actually happening in the housing market, but it seems to be the main method used by both the bulls and bears to try and make a case, so I'll stick with that until something better is found.

One of the charts posted by the bears on this forum plots the median price of housing on an inflation adjusted basis, and it clearly shows the booms and busts. What is also apparent when lookng at the inflation adjusted chart with the standard chart next to it is that pretty well every property bust we've experienced since WWII is a period of stagnating prices, instead of a crash- prices don't really go anywhere whislt inflation and wages play catch up for a few years.

Considering we are currently in a period of increasing inflation after the past property boom, why should this time be the exception to the rule?? What is to stop house prices stagnating for a few years whilst inflation and wages catch up, making housing affordable once again? Or are you expecting that the recession that seems to be on it's way is going to turn into a deflationary depression style situation?

Cheers

 

[gfresh]

Perhaps if we did that it would give our young people an opportunity to buy into " the great Australian dream " at affordable prices.
Something has to give with the current prices, and surely we have an obligation to give our young children the opportunity to be able to buy decent homes to raise their children instead of renting those " dogbox " inner city apartments.

Within 100km south-west of the goldcoast there is as much green ground as you can poke a stick at - plenty of rainfall and the like. Most of that seems to be taken up by a few cows spread out over a heck of a lot of area doing not much (ok, this is a generalisation, but I can't see much productive use of 100% of that land). The land values in these areas however are still quite expensive, and to be honest, I'm not even sure what a lot of the people who own this land are doing with it..

In the few small spread out estates that have been established in these areas, they are all a bit 'wanky' to use the phrase "country living", "lifestyle properties", etc, however they are still your usual $350-450k properties which try to be fancy. You may as well purchase back in the "city" (goldcoast) for close to the same cost. To me, it's just developers trying to make a buck, not provide any form of housing that is affordable or accessible to most families. It's in a less accessible area, which you would think would be cheaper, but in most cases it's quite similar.

Surely, there is a market, and the means to create something different? Maybe there needs to be a Government sponsored building authority, that builds for cost and affordable housing, rather than strictly for profit?? "Affordable housing" subsidies are planned in some parts of Aus, but really, I think that's just shifting money into the pocket of developers, so there is always commercial interests going on.

Not everybody wants to, or can afford to spend $350-450k on property.. Surely there are ways to construct lower cost housing that is down under the $300k mark in these sorts of areas using different materials and methods. I'm the sort of person who really doesn't give a s* what sort of house I live in.. as long as it's not too tiny, fairly ameniable, and not falling apart, walls and a roof - I don't need big kitchens, large living spaces, all that guff. I'm sure there are plenty of individuals and families out there that would feel the same. Yet most new housing estates seem to be trying to offer a package for those that "want everything", and looks pretty in a brochure - and pay accordingly for it.

These outer areas would be prime for some lower density, lower cost property.. Even taking into account 1 hour drive, and petrol costs, I'd much rather do that and have a bit more space, than pay $350k (minimum) for a newly built small inner city place, or a bit less for an older place that is starting to get a bit ratty.

 

[Tom Ronalds]

morning Tom, just wanted to comment on one part of your post-

maybe my data on this is a bit dodgy, but I can't seem to find much in the way of house price declines since WWII. It would appear that the only people that can recall housing falling by 30% are those of us born before the great depression!

I don't believe that I was claiming that housing has in the past *uniformly* dropped by 30% or more.

However plenty of people experienced substantial drops in the values of their houses in the early 90s, during Paul Keating's infamous recession "we had to have". Many were forced to sell at a loss because they could not afford the mortgage payments.

Incidentally the "accepted" (by most economists at least) indicators of mortgage servicing costs show that these days the *average* household needs almost 3 times as much of its income to service the mortgage as it did leading up to the last recession. Interest rates were much higher then but the level of debt was much, much lower.

And herein lies the current problem. A severe recession combined with the current levels of debts will see many people destitute.

Now I know that median house prices are a rather poor reflection on what is actually happening in the housing market, but it seems to be the main method used by both the bulls and bears to try and make a case, so I'll stick with that until something better is found.

Unless one is in a position to comment specifically on particular suburbs/areas/income groups, then the "median" is the most useful and meaningful proxy.

One of the charts posted by the bears on this forum plots the median price of housing on an inflation adjusted basis, and it clearly shows the booms and busts. What is also apparent when lookng at the inflation adjusted chart with the standard chart next to it is that pretty well every property bust we've experienced since WWII is a period of stagnating prices, instead of a crash- prices don't really go anywhere whislt inflation and wages play catch up for a few years.

True, but this is where the "median" tends to mask wide disparities in various areas/amongst different income groups.

What makes the current situation different is the fact that the average Australian is loaded up to the eyeballs in debt (really no different to the average American) and that the median house price has shot way, way out of its 100-year trendline (which tracks the relationship between incomes and house prices).

This has been made possible, just like in the USA and some European countries, by such easy access to cheap credit that in relative historical terms it's almost unprecedented.

When that credit is withdrawn, as is happening now, the bubble must deflate. When the ability of borrowers to service this debt is impaired by high rates of unemployment, then it's well and truly all over.

Considering we are currently in a period of increasing inflation after the past property boom, why should this time be the exception to the rule?? What is to stop house prices stagnating for a few years whilst inflation and wages catch up, making housing affordable once again? Or are you expecting that the recession that seems to be on it's way is going to turn into a deflationary depression style situation?

You answered your own question. One only needs to look at the US - contrary to many local posters' opinions, the USA is a pretty good "leading indicator" for Australia in many aspects.

As I have said in my earlier post, the news coming out of the States is not just atrocious, it is well and truly frightening. One trillion dollars in losses arising from the credit markets meltdown is now an accepted figure, with some commentators (and I don't mean sensationalist media by this) putting the figure at up to $1.7 trillion.

On top of this, the "next stage" of the blow-out is shaping up to be the credit derivatives. There is over $140 trillion worth of these instruments out there. If/when the corporate credit default swaps (CDS) system suffers a systemic collapse, then the Fed will be powerless to do much about it - it also only has limited resources, even if those are very large. It is also debatable how much of the intervention can only serve to postpone the inevitable, rather than "solve" the problem.

Those figures are mind-boggling. The word "deflation" is already doing the rounds over there, as anything approximating losses of such magnitudes cannot lead to any other outcome.

With a US recession as deep and protracted as the one that would follow the above scenario, the rest of the world, Australia included, will not be immune. As I already mentioned, we have many of the same imbalances here that have brought the Americans unstuck. Furthermore, Australia is in comparison to the States a small and rather undiversified economy. To somehow believe we will not be affected, because of China or because the Federal government is not running a budget deficit (not yet, anyway - but just give them a little time!) is beyond naive.

We are well and truly in an uncharted territory now. This is why my opinion is that going forward, it is going to be a pretty bad time to have a big debt tied to a large, illiquid asset like direct property. I would not want to bet on inflation saving these investors' skins.

Cheers,

Tom R

 

[professor_frink]

I don't believe that I was claiming that housing has in the past *uniformly* dropped by 30% or more.

However plenty of people experienced substantial drops in the values of their houses in the early 90s, during Paul Keating's infamous recession "we had to have". Many were forced to sell at a loss because they could not afford the mortgage payments.

Incidentally the "accepted" (by most economists at least) indicators of mortgage servicing costs show that these days the *average* household needs almost 3 times as much of its income to service the mortgage as it did leading up to the last recession. Interest rates were much higher then but the level of debt was much, much lower.

And herein lies the current problem. A severe recession combined with the current levels of debts will see many people destitute.



Unless one is in a position to comment specifically on particular suburbs/areas/income groups, then the "median" is the most useful and meaningful proxy.



True, but this is where the "median" tends to mask wide disparities in various areas/amongst different income groups.

What makes the current situation different is the fact that the average Australian is loaded up to the eyeballs in debt (really no different to the average American) and that the median house price has shot way, way out of its 100-year trendline (which tracks the relationship between incomes and house prices).

This has been made possible, just like in the USA and some European countries, by such easy access to cheap credit that in relative historical terms it's almost unprecedented.

When that credit is withdrawn, as is happening now, the bubble must deflate. When the ability of borrowers to service this debt is impaired by high rates of unemployment, then it's well and truly all over.



You answered your own question. One only needs to look at the US - contrary to many local posters' opinions, the USA is a pretty good "leading indicator" for Australia in many aspects.

As I have said in my earlier post, the news coming out of the States is not just atrocious, it is well and truly frightening. One trillion dollars in losses arising from the credit markets meltdown is now an accepted figure, with some commentators (and I don't mean sensationalist media by this) putting the figure at up to $1.7 trillion.

On top of this, the "next stage" of the blow-out is shaping up to be the credit derivatives. There is over $140 trillion worth of these instruments out there. If/when the corporate credit default swaps (CDS) system suffers a systemic collapse, then the Fed will be powerless to do much about it - it also only has limited resources, even if those are very large. It is also debatable how much of the intervention can only serve to postpone the inevitable, rather than "solve" the problem.

Those figures are mind-boggling. The word "deflation" is already doing the rounds over there, as anything approximating losses of such magnitudes cannot lead to any other outcome.

With a US recession as deep and protracted as the one that would follow the above scenario, the rest of the world, Australia included, will not be immune. As I already mentioned, we have many of the same imbalances here that have brought the Americans unstuck. Furthermore, Australia is in comparison to the States a small and rather undiversified economy. To somehow believe we will not be affected, because of China or because the Federal government is not running a budget deficit (not yet, anyway - but just give them a little time!) is beyond naive.

We are well and truly in an uncharted territory now. This is why my opinion is that going forward, it is going to be a pretty bad time to have a big debt tied to a large, illiquid asset like direct property. I would not want to bet on inflation saving these investors' skins.

Cheers,

Tom R

sorry Tom, I wasn't trying to say that you were claiming a 30% decline in the past - I was merely making the point that based on median house price data there has barely been a decline at all since WWII.

So deflation it is then. Thanks for clarifying that for me

On a personal level I wouldn't be betting against a 50 year trend in housing ending coming to a sudden halt and reversing, but hey, every trend has to bend at some stage doesn't it! But then again, I've gone to great lengths to try and "recession proof" the Frink household, so maybe I do agree with you on a subconscious level- and having the security of owning our own home compared with renting was a no brainer for us - even if it means that we've paid more to get our house than we would have if we had waited for another year or 2.

As with everything else in this area, it'll be interesting to see how it all pans out.

cheers

 

[nioka]

The situation with housing prices is displayed by agents differently than in actual fact. When sales are slow agents need to get them on the move and what better way than to get home owners to have discount sales, remember for agents it is no sale no income at all. They still get most of, if not all of their commission even at discounted sale prices. The "falling home prices" is a beat up by real estate agents to get people to sell and they pressure clients in that direction.

Sure there are some home owners who are not able to meet their mortgage payments but they will mainly be those who have only recently purchased and do not have much equity, if any equity in their property. The majority will have enough equity to have their loan extended to prevent having to pay extra per week. Investment property owners can obtain higher rents with the shortage of rental properties.

I had experience yesterday with an agent desperate for a sale trying to get me to sell a property at $200,000 less than value because her "customer" only had $1m. She admitted my price is right but said "the market is back". If I sell at her price the market will be back but if I don't the market will not be back.

So you see it is up to the individual to make the market for themselves. The law of supply and demand will keep the market rising for years. Until Australia's population stops rising and while the population wants to live in the best areas, it will always be "Location, Location, Location."

 

[Adam A]

Nokia if your price is right why isnt sold? (i know i know not going to give it away)

 

[nioka]

Nokia if your price is right why isnt sold? (i know i know not going to give it away)

I admit that I have not found a willing buyer.... YET... but I will in the next 12 months if I choose to sell. In the meantime it is a good proposition to hold. I don't have to sell. The agent approached me yesterday because she hasn't been able to find something her client would buy. I did not ask her to sell it. She is so desperate she even offered to halve her commission.( will accept $18000 for a days work.)

 

[Adam A]

Fair enough, there bloody cheeky those agents, wondering about there next dollar,tough times ahead for them me thinks (those bmws arnt cheap)

 

[gfresh]

What is the percentage of fixed vs variable loans in Australia? Does anybody know?

The problem I see is that the longer rates stay at present levels.. the worse the pressure on many out there. If rates for instance have to stay at, or close to current rates for 2 years, the more painful things could get for many. From various economists, not many are tipping a significant lowering anytime soon...

As a result, into 2008/09 you're going to be hitting people that were on "fixed for 5 years" or "fixed for 3 years". Even "fixed for 10 years" were on much lower rates..

Let's see (I've added 2% ontop of the RBA cash rate target for bank mortgages)..

2004/05 (3/4 year reset): 7.5%
2003 (5 year): 7%
2002 (6 year): 6.5%
2001: 6.5%
2000: 7.25%
1998/1999 (10 year): 6.75%

So assuming a 9.5% rate currently (highest since 1992), if forced to go back onto a variable (or fix another loan), you're looking at 2-3% jump.

Depending on the size of the loan, that can be an instant $100/wk increase in the household budget. For those poor at budgeting, or high in other debt, that's surely enough to cause a few to be in stress. Not many were able to look forward to 2008, and see interest rates would be 2-3% up (who really would!). A woman here at work is fretting because she is in exactly the same situation -- a very large jump in weekly payments, as her 3 year fixed rate expires later this year.

I can see some similarities to the US "ARM" style reset loans, where after an initital honeymoon rate, the loans reset and caused a lot of the worst of subprime. Yes, it's quite a different product, but possibly similar effects.

Here it may be a couple of years longer than that process, but surely there could be a similar effect.. whether you're either an investor or owner/occupier it effects equally.

 

[gfresh]

ok, assuming avg 2.5% increase (7->9.5%), on some average mortgages (30 year terms)

$100k remaining: $153wk -> $193.94/wk
$200k remaining: $306.87/wk -> $387.88/wk
$300k remaining: $460.29/wk-> $581.82/wk
$400k remaining: $613.72/wk -> $775.76/wk

Maybe many can cope, but towards the upper level of that scale, anybody with even modest debts such as credit card, car, or personal loan is getting hit with large % increases as well.. Then considering inflation which has been running high the last few years on weekly expenses such as electricity, food, and of course petrol..

Many who were comfortable 2 years ago, and even conservative with what they thought they could borrow, may not be in the same situation right now.

 

[nioka]

Maybe many can cope, but towards the upper level of that scale, anybody with even modest debts such as credit card, car, or personal loan is getting hit with large % increases as well..

Anyone with a mortgage can not afford the "things" they bought with personal loans and credit cards.They should not have bought them in the first place.
Nor should they be paying off through hire purchase, an expensive 4wd vehicle, like some I know. Maybe they will have to accept that a 4yr old Ford or Holden will get them where they need to be. Maybe they will have to forgo designer labels and shop at the local op shop.
They won't be the first generation that went without some of the oversold and unnecessary products available to manage a mortgage.
I have just collected mail and in it was the latest BigW catalogue. What a lot of consumer rubbish available for those who spend on unnecessary items.

 

[Happy]

Anyone with a mortgage can not afford the "things" they bought with personal loans and credit cards.They should not have bought them in the first place.
Nor should they be paying off through hire purchase, an expensive 4wd vehicle, like some I know. Maybe they will have to accept that a 4yr old Ford or Holden will get them where they need to be. Maybe they will have to forgo designer labels and shop at the local op shop.
They won't be the first generation that went without some of the oversold and unnecessary products available to manage a mortgage.
I have just collected mail and in it was the latest BigW catalogue. What a lot of consumer rubbish available for those who spend on unnecessary items.

I know few young people who cook home, take home prepared lunch to work, have basic plan mobile phones, have modest car and dress, have second hand computer but don’t have big LCD or plasma TV.

They are proud homeowners and pay off mortgage in leaps and bounds.

Imagine, if you pay towards home loan all spare money, you save interest you would have to pay if you didn’t and it is tax free !!!

Try to do that legally, receiving interest from saved money in a bank account.

Of course you don’t have to worry about tax bit if you save nothing.

 

[Uncle Festivus]

Starting to get nasty....blame it on Howard?

THE Howard Government's First Home Buyers grant was a huge of waste of taxpayers' money that actually made housing less affordable and is depressing the market, an industry expert says.
The comments came as interest rate rises culled house buyer interest with auctioneers struggling to sell properties over the weekend.
"We are seeing auction clearance rates much lower than at the same time last year," said Michael McNamara, head of Australian Property Monitors.
"With mortgage rates rising so rapidly in the last few months, buyer sentiment in the property market has taken a battering.

.............
In Sydney, the auction clearance rate over last weekend was 50.2 per cent, only a slight improvement on the previous week's dismal 45.7 per cent.

Melbourne's clearance rate was 62 per cent, well below last year's 84 per cent. The median house price was $552,000, with the dearest house, at Canadian Bay, fetching $2.5million.

In Adelaide the clearance rate was 47.2 per cent, a dramatic drop from last year's 73.5 per cent.

Brisbane's property market continued to nosedive. The clearance rate for the weekend auctions was 35.7 per cent, down from last week's 37.9 per cent.

http://www.news.com.au/business/money/story/0,25479,23533823-5013951,00.html

 

[KIWIKARLOS]

I was driving around my local area on the weekend and was surprised at how many places have come on the market recently. There is usually a handfull but I reakon the numbers have increased at least 3 fold since about 2 months ago. They also seem to be staying on market for longer too?

Could this be a sign that interest rates are starting to effect more area's ?
The area i live in isn't a "rich" area but it is by no means a "poor" area either.

 

[numbercruncher]

Distinct lack of permabull comments in this thread lately

 

[professor_frink]

Starting to get nasty....blame it on Howard?

http://www.news.com.au/business/money/story/0,25479,23533823-5013951,00.html

yeah I think it was a big waste of money. No way in hell I was going to give back a $7K freebie from the govt though.

 

[Kimosabi]

Has anyone else noticed that Robots has gone MIA....

 

[Mofra]

Distinct lack of permabull comments in this thread lately

NC, you may finally be right.... after 2 and a half years

 

[numbercruncher]

NC, you may finally be right.... after 2 and a half years

Cut me some slack, I havnt even been a member here that long and I used to be a property bull until the unsustainability of it all became glaringly obvious.

 

[Temjin]

Cut me some slack, I havnt even been a member here that long and I used to be a property bull until the unsustainability of it all became glaringly obvious.

Not unusual given this is a stock forum, not a property forum.

Try our bearish view on any of the investment properties forum and I'm sure we will be flamed to death.

We are still in the "in denial" stage though, but with a bit of anger in it.