The future of Australian property prices

nukz · 17 November 2010

There are possible signs that rise in Melbourne could drop off with the recent article in the age stating a 37% drop in international student numbers along with market volatility in china and the strong AUD.

As some people here form Melbourne would know allot of the suburbs are almost completly reliant on immigration eg. all the estern suburbs and point cook, northern/western suburbs.

moXJO · 17 November 2010

Quincy said:
As a matter of interest moXJO, do you know whether the purchasers are from around the area (locals) or are they overseas' buyers ?

They are Sydney buyers snapping up everything in sight. I have done a few repairs on houses just sold, so end up chatting with the owner. The majority from personal experience is IP.

CamKawa · 17 November 2010

Some people just don't think of the risks involved in property. When it goes up its all fine and dandy, but when it falls the losses are horrendous.

All at sea as couple loses $2 million on Bondi sale

Bigukraine · 18 November 2010

CamKawa said:
Some people just don't think of the risks involved in property. When it goes up its all fine and dandy, but when it falls the losses are horrendous.

All at sea as couple loses $2 million on Bondi sale

very extreme example though.....and as a way to try and obtain a whole block they went about it a bit stupidly....all you needed was one to hold out and hey presto your stuffed.... should of put a lot of loud ,obnoxious tennants around them and they might of been a chance....::

SusanW · 18 November 2010

More generally, Oz property prices will always be determined most by the cost and availability of credit, because most people cannot pay cash and a steady stream of cash poor first home buyers will always need to enter the market to replace those exiting.

Population dynamics are influential, but much less so than rates. It is possible to see flat and falling property values in the face of population growth. In fact, that has been the case in many regional towns in the last few years, Perth since april 2008, Brisbane since feb 2010, Sydney jan 2004 to 06.

New housing supply/demand is also important, but within the limits of affordability.

I don't think most property investors understand yet the tenuous direction Australia is moving in. Lenders are becoming evermore dependent on foreign capital to sustain property values which carries risks not understood well by most. The risks are born out in Aussie banks' tighter lending criteria to developers despite apparent housing undersupply.

Pre 1990s, housing credit supply was at least 85% sourced from Australian savings. Today some say it is 50% foreign sourced and climbing.

I think the RBA's drive with rates at the moment is to encourage more domestic capital into attractive interest rate deposit accounts, and slow the growth of foreign credit dependent debt. This will help buffer Australia against future global credit tightening, which seems to be a growing possibility.

Based on all of the above, I think the future of passive property investing is unattractive. I expect growth to average less than 3-5%pa over the next 5-10 years in all capitals. I attribute this primarily to the fact that debt growth will be more tightly aligned with wage growth and rates are unlikely to decrease unless there's another serious global credit freeze.

So what does this mean for rent levels? There will be upwards pressure, but that will be capped by wages. I also think the govt will revisit negative gearing, and reduce the incentive for investors to accumulate property, such as negative gearing benefits be limited to new construction.

Finally, I don't see a drop in nominal values >15-20% like some bears. However, in real terms over the next 10 years, that may very well be what happens.

sinner · 18 November 2010

SusanW said:
More generally, Oz property prices will always be determined most by the cost and availability of credit, because most people cannot pay cash and a steady stream of cash poor first home buyers will always need to enter the market to replace those exiting.

Population dynamics are influential, but much less so than rates. It is possible to see flat and falling property values in the face of population growth. In fact, that has been the case in many regional towns in the last few years, Perth since april 2008, Brisbane since feb 2010, Sydney jan 2004 to 06.

New housing supply/demand is also important, but within the limits of affordability.

I don't think most property investors understand yet the tenuous direction Australia is moving in. Lenders are becoming evermore dependent on foreign capital to sustain property values which carries risks not understood well by most. The risks are born out in Aussie banks' tighter lending criteria to developers despite apparent housing undersupply.

Pre 1990s, housing credit supply was at least 85% sourced from Australian savings. Today some say it is 50% foreign sourced and climbing.

I think the RBA's drive with rates at the moment is to encourage more domestic capital into attractive interest rate deposit accounts, and slow the growth of foreign credit dependent debt. This will help buffer Australia against future global credit tightening, which seems to be a growing possibility.

Based on all of the above, I think the future of passive property investing is unattractive. I expect growth to average less than 3-5%pa over the next 5-10 years in all capitals. I attribute this primarily to the fact that debt growth will be more tightly aligned with wage growth and rates are unlikely to decrease unless there's another serious global credit freeze.

So what does this mean for rent levels? There will be upwards pressure, but that will be capped by wages. I also think the govt will revisit negative gearing, and reduce the incentive for investors to accumulate property, such as negative gearing benefits be limited to new construction.

Finally, I don't see a drop in nominal values >15-20% like some bears. However, in real terms over the next 10 years, that may very well be what happens.

Great post SusanW, on the mark on all counts IMHO. Bolded the bits I liked the most. The first paragraph is key to understanding Australian property market.

You mention the 5-10 year timeframe.

What is your view on the standard of living in this country over that timeframe? Do you expect that emerging markets will align their standard of living with ours (due to say, a large uptick in Chinese domestic demand or similar)? Or will we be forced to align our standard with theirs?

trainspotter · 18 November 2010

SusanW said:
More generally, Oz property prices will always be determined most by the cost and availability of credit, because most people cannot pay cash and a steady stream of cash poor first home buyers will always need to enter the market to replace those exiting.

Population dynamics are influential, but much less so than rates. It is possible to see flat and falling property values in the face of population growth. In fact, that has been the case in many regional towns in the last few years, Perth since april 2008, Brisbane since feb 2010, Sydney jan 2004 to 06.

New housing supply/demand is also important, but within the limits of affordability.

I don't think most property investors understand yet the tenuous direction Australia is moving in. Lenders are becoming evermore dependent on foreign capital to sustain property values which carries risks not understood well by most. The risks are born out in Aussie banks' tighter lending criteria to developers despite apparent housing undersupply.

Pre 1990s, housing credit supply was at least 85% sourced from Australian savings. Today some say it is 50% foreign sourced and climbing.

I think the RBA's drive with rates at the moment is to encourage more domestic capital into attractive interest rate deposit accounts, and slow the growth of foreign credit dependent debt. This will help buffer Australia against future global credit tightening, which seems to be a growing possibility.

Based on all of the above, I think the future of passive property investing is unattractive. I expect growth to average less than 3-5%pa over the next 5-10 years in all capitals. I attribute this primarily to the fact that debt growth will be more tightly aligned with wage growth and rates are unlikely to decrease unless there's another serious global credit freeze.

So what does this mean for rent levels? There will be upwards pressure, but that will be capped by wages. I also think the govt will revisit negative gearing, and reduce the incentive for investors to accumulate property, such as negative gearing benefits be limited to new construction.

Finally, I don't see a drop in nominal values >15-20% like some bears. However, in real terms over the next 10 years, that may very well be what happens.

OMFG !!!!!! I think I am in love with the sagacity and clarity of this sublime post. SusanW I am in awe of the way you have enucleated the subject matter at hand for all to understand.

SusanW · 18 November 2010

sinner said:
What is your view on the standard of living in this country over that timeframe? Do you expect that emerging markets will align their standard of living with ours (due to say, a large uptick in Chinese domestic demand or similar)? Or will we be forced to align our standard with theirs?

A tough call Sinner. I think EMs have decoupled more than I expected 5 years ago. But I think they are still considerably dependent on the European and US consumer. China will remain reliant on foreign income (trade surplus) for internal growth for at least another decade in my view. If they are wise, the Chinese will use that surplus to buffer their economy against the ongoing inescapable deleveraging in Europe and USA.

I think Australia's std of living is already falling. Many think we don't have a two speed economy here, but that is bunk in my view. The casualization of our workforce, youth unemployment, longer f/t working week, and the cost of housing in average wage multiples bear that out. Our inability to grow and maintain infrastructure with population growth is a red flag (consider public transport, water supply, law and order) . Things like local governments front loading headworks costs on new sub divisions is indicative we are unable to afford the same level of public service we are accustomed.

sinner · 18 November 2010

SusanW said:
A tough call Sinner. I think EMs have decoupled more than I expected 5 years ago. But I think they are still considerably dependent on the European and US consumer. China will remain reliant on foreign income (trade surplus) for internal growth for at least another decade in my view. If they are wise, the Chinese will use that surplus to buffer their economy against the ongoing inescapable deleveraging in Europe and USA.

I think Australia's std of living is already falling. Many think we don't have a two speed economy here, but that is bunk in my view. The casualization of our workforce, youth unemployment, longer f/t working week, and the cost of housing in average wage multiples bear that out. Our inability to grow and maintain infrastructure with population growth is a red flag (consider public transport, water supply, law and order) . Things like local governments front loading headworks costs on new sub divisions is indicative we are unable to afford the same level of public service we are accustomed.

SusanW, you are spinning gold here, please keep it up.

Your view is actually more bearish than mine in that case, but very well based.

MR. · 18 November 2010

SusanW said:
I also think the govt will revisit negative gearing, and reduce the incentive for investors to accumulate property, such as negative gearing benefits be limited to new construction.

I like this gale!

MR. said:
Just put NG on new houses only and be done with it.

MR. said:
You’d have to wonder if just a change to Negative Gearing on existing houses (similar to July 1985) would help the speculation of ever higher house prices and not enough new dwellings!

If the economy slows here in OZ (more like when) and the RBA reduces interest rates (again) I think that change needs to be made to negative gearing.

sinner said:
SusanW, you are spinning gold here, please keep it up.

Gold as in gold I trust not gold!

robots · 18 November 2010

hello,

oh come on, why this thread got to have all the trash lobbed in it

no wonder Verge32 hasnt returned, its all about banks, EM's, and standard of living, what about plain old vanilla style real estate?

oh well, another great day, upsized to a mega-large latte this morning

thankyou
professor robots

Mr Z · 18 November 2010

In reference to Susan's China comment...

You know, I don't believe that China is as export dependent as is commonly believed. One interesting stat I tripped over the other day --> 95% of China's billionaires made their money on the domestic market. I think that they have just about reached the point that they can grow primarily on the internal momentum they have generated. Much like the US did at one point.... its just an opinion.

Mr Z · 18 November 2010

robots said:
oh come on, why this thread got to have all the trash lobbed in it

It is the universe dude... it's all connected... like wow man, ya dig it? We are just following the threads of life.... BTW... Nice threads dude!

Alex Barton · 19 November 2010

Here is an article about the Australian Housing Bubble that I had published on Ezines. The bulls most probably won't agree with any of it, so fire away with your criticism, I can take it!

Australian Housing Bubble

The question of whether Australian house prices are overvalued has been an extremely polarising issue for some time. Many observers believe property values in Australia are severely overpriced relative to other countries, relative to historic trends, relative to incomes, and relative to rental yields. Such observations have led some people to believe that a speculative housing bubble may be growing in Australia.

Normally in an unregulated economy, housing values should meet an equilibrium based on availability versus demand. When values increase, this suggests that availability has reduced or demand has increased (or both). In fact in Australia, both events have occurred......

..... continues here: http://ezinearticles.com/?Australian-Housing-Bubble

I'm interested to hear what people think about the article. Thanks!

SusanW · 19 November 2010

robots said:
what about plain old vanilla style real estate?

Well here's 30 years of plain old vanilla style real estate growth.

This is a nice chart I just found on a property forum. Highlights well the cyclical nature of property growth, and how Brisbane 10 year rolling av annual growth is beginning a downtrend.

Note that average annual growth through the 90s was less than 4%.
Combine that with 10 years of negative cash flow and your internal rate of return will suck - all in the face of 12% population growth!

Alternatively, the all ords achieved 9.2%pa in the same time frame, without considering dividends or their reinvestment. With 70% margin or equity loans now available for equities, one really needs to model carefully comparison of timing vs buy and hold approaches to asset allocation (property and shares).

CamKawa · 19 November 2010

All good stuff I reckon.

Victorian home owners losing it all

Those seeking assistance can phone their banks, MoneyHelp (1800 149 689) or Lifeline (131 114).

nukz · 19 November 2010

I remember in years between 2004 - 2009 there was a perception between property buyers(residential) that no matter what the location, cost ect it would'nt matter because "it would double in a year or 2".

I think with the increase of the first home owners grant pushing up prices it really confirmed that for some people. There will have to come a time when all that phony growth contracts.

I think proberbly the ticking time bomb will be a slowdown in China or the US slipping back into recession ect. I'm not ushally the one to put a date on something but i would be thinking sometime between Q3 2011 and Q3 2012.

SusanW · 19 November 2010

These charts from a Somersoft member are also excellent.

Perth has gone no where since 2007.
Brisbane is down 2.5% this year.
Sydney is down from a June 2010 peak.
Melbourne, Canberra, and Adelaide are flattening.

The Gold and Sunshine Coasts are train wrecks, as are most regional towns not directly benefiting from mining related growth.

Those who argue population growth is the key driver of property prices would need to explain the decrease in Sydney prices between 04-06 and Perth since mid 2008.

Below, the higher frequency of high amplitude negative monthly changes since GFC indicate the unprecedented pressure on Brisbane house prices. The abnormality of 2001-2004 growth is also apparent.

The third chart gives some indication of how property investing lending has outpaced owner occupiers in the last 20 years. My view is if credit is not used to expand national productivity sufficiently to cover interest repayments (and principal in a timely manner), an economy is impoverished and the trend is unsustainable...economics 101.

Unarguably Australia would be better off if the credit used to bid up Australian house prices was instead used to increase economic productivity, maybe as pharmaceutical research and patents, realistic green tech, robotics, etc. Resi housing doesn't generate sustainable jobs.

Anyway, I might end it there as I presume savvy share traders realize all this stuff anyway.

Agentm · 19 November 2010

this is the one that hurts and the one that will stop the bubble clean in its tracks..

it should come under notice that the rates are not decreasing, but indeed increasing..

as with all things, what goes up must come down, and the future of australian property prices are certainly being talked up by the likes of the cba and rba, and many here... saying its all good.. but i think the sheep are waking up to the fact they paid a bucketful too much for a property that they not be able to afford if the trend continues..

good luck to the dreamers whom keep touting the rosy future and the sipping of lattes..

Mr Z · 19 November 2010

Something to keep in mind is that it is not the absolute rate that counts so much as the direction rates are taking.

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