The future of Australian property prices

[Dowdy]

Yep sure is.
(1) You cant walk out of your house throw the keys to the bank and leave them with the debt.
(2) We Dont and never will have the over supply that the US had/has.
(3) We Dont have a government printing billions of dollars to cover its debt.
(4) We Dont have Banks closing down due to poor lending practice.

Australia is VERY different and your damned lucky to be a citizen of hers.

1. The same outcome will happen, whoever sells the home - weather it be the bank or home owner, if they can't afford it then they'll sell at a depressed price

2. When an optimist said NEVER WILL to promote his product (the stock market will never crash, The housing market will never crash) etc, he's either a liar, dumb or both. And just for kicks, i'll rephrase your statement - There never was an under supply of houses to begin with, just an oversupply of speculators

3. Nope you just have an economy based on exporting to China. Replacing one form of government with another

4. Bank didn't close down in USA in 07 either

Add a few more to the list:-

1) A very low default rate of 0.5% of all housing loans.
2) A low unemployment rate of 5.3% and improving private sector wages growth.
3) A different tax regime. No capital gains on selling PPOR unlike USA as well as interest component not tax deductible.

Gooooooooooooooooooo Professor robots !!!!!!

1. The default was pretty low in 07 too in USA
2. The unemployment rate was also 5% in 07 too in US
So those statements mean absolutely jack

 

[FxTrader]

no they will do what we all did when interest rates went to 18%. Cut down to tinned food and take any extra work we can to get through.

Perhaps some will get by this way. However the household debt profile is a major concern now...

From http://www.debtdeflation.com/blogs/

Figure 7: Increase in debt per house and house price

Thus even though house prices have risen substantially, household equity in houses has fallen over the last 2 decades””from above 90 percent in the late 1980s to under 70 percent (see Figure 8; the significant rise in the last two years has been caused by the increase in house prices sparked by the First Home Owners Boost). This equity is now extremely dependent on house prices remaining high, since though debt has driven house prices up, debt will not fall if house prices fall.

Figure 8: Value of household assets minus mortgage debt

As equity has fallen, the cost of entering the market has risen. Those who have recently entered the market have had to devote a prohibitive portion of their incomes to servicing their mortgage, while those considering entering must contemplate a daunting level of debt compared to their incomes.

Over supply is the main component. Too much supply you cant sell it. Happens here in areas of over supply. But not even remotely near the US extent.

Since I have relatives in the U.S., I have continued to watch the U.S. housing market for many years (my sister-in-law is a real estate agent in Florida). The main contributor to the housing crash there was reckless lending and outright fraud (e.g. NINJA loans, teaser rates with resets etc.), the resulting loans were then securitized and sold off as AAA rated securities. Easy credit at low rates created an artificial shortage of supply driving up prices prior to the bust. The rest is history. Over supply is definitely a problem now and getting worse.

As for Australia, the situation for house prices in 2011 looks fragile and 2 or 3 more rate rises by the RBA (quite likely IMO) will put considerable pressure on debt laden households to offload mortgage debt.

 

[nukz]

2. When an optimist said NEVER WILL to promote his product (the stock market will never crash, The housing market will never crash) etc, he's either a liar, dumb or both. And just for kicks, i'll rephrase your statement - There never was an under supply of houses to begin with, just an oversupply of speculators

One of the best points so far for a while!

3. Nope you just have an economy based on exporting to China. Replacing one form of government with another

This is very true, if a slowdown in China happened at a time when our dependence on mining was still very high then.. well you have seen it all before

4. Bank didn't close down in USA in 07 either

This country's very naive, every country claims there **** don't stink untill they get flushed.

1. The default was pretty low in 07 too in USA
2. The unemployment rate was also 5% in 07 too in US
So those statements mean absolutely jack

Yes thats true.

Where is Robots today? or is he waiting for the REIV daily press release?

 

[nukz]

Hey FXtrader, nice graph of household equity. It would be great if that chart could be drilled down on and seperated into generations.

The silent generation i assume would pulling that figure of equity upward because they all basiclly own their homes.

This would be true somewhat for the baby boomers.

I fear thought Gen-x & Gen-y would own nowhere near that kind of equity suggested in the graph though.

Great post by the way

 

[tech/a]

1. The same outcome will happen, whoever sells the home - weather it be the bank or home owner, if they can't afford it then they'll sell at a depressed price

Your completely missing the point.
You can walk away from a $500K debt in the US and leave it to the bank.
In Aust you are still liable---so who do you think will do everything possible to save their home???

2. When an optimist said NEVER WILL to promote his product (the stock market will never crash, The housing market will never crash) etc, he's either a liar, dumb or both. And just for kicks, i'll rephrase your statement - There never was an under supply of houses to begin with, just an oversupply of speculators

Its pretty obvious you haven't lived long enough to make these sort of stupid statements. Time has proven from the Great depression to the recession we and to have to now and will in the years to come housing will continue to increase in price the stock market will make new highs.
I've been in Property since 83 have a Civil Construction Company and Invest and develop Property for a living.With 8 current holdings and under construction and an LVR of 34% you would be (And 90% of those who visit this thread) to get a solid grasp of HOW to invest SAFELY in property for capital growth and Passive income.
Instead of looking at why the sky will fall learn how to profit and survive even if the sky does fall. people like me look at this thread and just shake our heads!

Been trading for 15 yrs and you should learn the exact same things.
Again we shake our heads this is a screen shot of my resource portfolio you'll note TODAY'S P&L of $4300 (Yes today!) on a pretty moderate portfolio of $100K
$3k yeaterday---hows your holidays going! Mine are bearable!!!



In 87 I had around $5k to my name and facing bankruptcy if I had an attitude like you and all the other defeatists out there Id still have $5k to my name.LEARN HOW TO HANDLE RISK!!!!

3. Nope you just have an economy based on exporting to China. Replacing one form of government with another

China/India/Indonesia/Africa/US we are a country of 22 million with wealth beyond comprehension---go live in Africa and try and get ahead!!!

4. Bank didn't close down in USA in 07 either

bail out--Trillions--Billions
Not even a drop in the world economic ocean.

We are in a very strong position V the rest of the world.
Dont stand by and watch---95% will of course!!








1. The default was pretty low in 07 too in USA
2. The unemployment rate was also 5% in 07 too in US
So those statements mean absolutely jack[/QUOTE]

 

[nukz]

Been trading for 15 yrs and you should learn the exact same things.Again we shake our heads this is a screen shot of my resource portfolio you'll note TODAY'S P&L of $4300 (Yes today!) on a pretty moderate portfolio of $100K $3k yeaterday---hows your holidays going! Mine are bearable!!!

Your on a stock forum dude, you don't need to prove anything, everybody has different strategy's.

Don't get me wrong, its great your making some money but dont assume your the only one ;-)

In 87 I had around $5k to my name and facing bankruptcy if I had an attitude like you and all the other defeatists out there Id still have $5k to my name.LEARN HOW TO HANDLE RISK!!!!

I dont think anybody is suggesting people will just let themselves go under, i think the suggestion is the debt levels/ratios are much higher than they where in '87 so it may be inevitable no matter how hard people work.

China/India/Indonesia/Africa/US we are a country of 22 million with wealth beyond comprehension---go live in Africa and try and get ahead!!!

So was Iceland as well if you want to use this arguement lol

bail out--Trillions--Billions
Not even a drop in the world economic ocean.

Quote of the year

 

[tech/a]

Your on a stock forum dude, you don't need to prove anything, everybody has different strategy's.

Don't get me wrong, its great your making some money but dont assume your the only one ;-)

Making a point.
I Dont see too many doers on this thread.
Most Dont know how to DO.
The rest are as scared as hell.
Not assuming anything but I'm as sure as hell the minority are taking advantage of what this great country has to offer.

I dont think anybody is suggesting people will just let themselves go under, i think the suggestion is the debt levels/ratios are much higher than they where in '87 so it may be inevitable no matter how hard people work.

At 18% and 24% when default interest hit there were very few that didn't feel the strain. Has happened before and will happen again.

So was Iceland as well if you want to use this arguement lol

Its a valid argument your trivialization doesn't make it any less valid.

Quote of the year

US Trillions Australian ---- Australian billions not a drop in the economic ocean.
We can throw in Iceland Greece Hungary Spain Portugal---the list goes on Australia is nothing more than an economic speck.

What is your financial strategy? Nukz/Dowdy?

 

[nukz]

What is your financial strategy? Nukz/Dowdy?

I cashed out of my propertys in late '08 and early '09. Its not nessasarily because i had turned extreemly bearish on the property market it's just after that 30% gain we had in a single year(my personal gains that year alone where significantly higher though)... i just don't see any other years like that again for sometime.

Its more the prospect of better returns in other area's. In '04 and 05 i was heavily invested in mining stocks but lost interest in those and moved to property.

Now i'm out of property i traded the Swiss franc and Cotton for a while and had some fun, moved a small chunk into Silver and some into gold.

The rest is just sitting around at this point in time, just waiting for my next move somewhat.

I'm not really prepared to divulge any number or anything like that but i'm doing ok

 

[tech/a]

I cashed out of my propertys in late '08 and early '09. Its not nessasarily because i had turned extreemly bearish on the property market it's just after that 30% gain we had in a single year(my personal gains that year alone where significantly higher though)... i just don't see any other years like that again for sometime.

Its more the prospect of better returns in other area's. In '04 and 05 i was heavily invested in mining stocks but lost interest in those and moved to property.

Now i'm out of property i traded the Swiss franc and Cotton for a while and had some fun, moved a small chunk into Silver and some into gold.

The rest is just sitting around at this point in time, just waiting for my next move somewhat.

I'm not really prepared to divulge any number or anything like that but i'm doing ok

I maybe wrong but I Dont see passive income as being a biggy for you.

With such equity in property I cant see why people sell!
There is more to property than capital gain particularly if geared correctly not to mention the tax implications and if you have it in Super SMSF then its even better again.

I have housing that returns $400 a week and cost me $96K in 1995.
One Industrial property returns $7K a month and is now freehold from capital gains in other property sold in the late 08s
Doesn't take long and its pretty apparent to most that selling without purpose---Freehold or lowering LVR while maintaining one of the best hedges against inflation (housing) perhaps isn't the wisest thing to do.

But hey each to their own.

 

[nukz]

Super SMSF then its even better again.

I somehow dont think you really care about super haha if i could i would have got everything out my super already but it's not so easy(im not that old yet) lol

 

[Dowdy]

Your completely missing the point.
You can walk away from a $500K debt in the US and leave it to the bank.
In Aust you are still liable---so who do you think will do everything possible to save their home???

Regardless of who owns it, if it needs to be sold because they couldn't afford it (consumer) or they don't want it (banks) then it's going to be sold at a lower price.

I've been in Property since 83 have a Civil Construction Company and Invest and develop Property for a living.With 8 current holdings and under construction and an LVR of 34% you would be (And 90% of those who visit this thread) to get a solid grasp of HOW to invest SAFELY in property for capital growth and Passive income.

That's a nice story. We all know your background and your experience but stop putting it in post to try and make your argument look stronger

Instead of looking at why the sky will fall learn how to profit and survive even if the sky does fall. people like me look at this thread and just shake our heads!

I do, I listened to reputable people in 08 and bought myself heaps of silver. I'm shaking my head alright, in joy!

-hows your holidays going! Mine are bearable!!!

They're very good, thank you

In 87 I had around $5k to my name and facing bankruptcy if I had an attitude like you and all the other defeatists out there Id still have $5k to my name. LEARN HOW TO HANDLE RISK!!!!

Actually I'm just defeating one form of investment - housing.

What is your financial strategy? Nukz/Dowdy?

I got a stack of silver and I collect rare coins and banknotes for a hobby

I run my own ebay business. Been doing extremely well considering I only invested $4000 to start off with. I've got a few more shipments coming in early next year and looking to expand my product range aswell.

As with housing, I'm looking to buy a industrial factory since the garage and theatre room in my parents house had been converted into my warehouse


We all know what the bull invest in - housing but I bet if you ask the bears you'll probably find they're more financially savvy (I'm not referring to you, tech, just a few housing bulls who spend their time sipping lattes )

 

[KurwaJegoMac]

I'm going to preface this post by saying I'm in my early 20s, and fairly new to investing so I acknowledge I've still got a lot to learn and experience. I am an Engineer by education and financial literacy comes from what I've learned through the last few years reading. So I apologise to all the economists out there in advance

Anyway, that being said, here is my view as to why I think we will not experience the same 40% shock that the US housing market did.

In my opinion, it all comes down to this point:

Your completely missing the point.
You can walk away from a $500K debt in the US and leave it to the bank.
In Aust you are still liable---so who do you think will do everything possible to save their home???

In the lead up to the GFC, banks in the US had irresponsibly lent money to those it shouldn't have. (Sub-prime mortgages and the like). While the economy was booming everything was fine, as it always is.

Then came a slight bump in the US economy and suddenly banks see some of their customers lose income and the capacity to repay. "No biggie!" says they banks and off they go and sell some of the houses.

Queue more job cuts and more people defaulting on their loans and it reaches a stage where there is a slight oversupply of houses due to banks selling the homes of defaulting customers. As with all supply and demand, with increasing supply prices start to level off and then drop slowly.

Well prices have now dropped 10%. No big deal right? Normal property correction of course, in line with normal cycles.

Well it is a big deal to those mums and dads who just bought a home in the last few months - 'whaddya mean my house is worth 10% less? I just bought it a few weeks ago!'

So they think to themselves, 'hmm, my house is now worth 350k, down from 380k. I took out a loan for 360k... wait a minute, my house is now worth 10k less than what I borrowed! So why am I continuing to pay this loan for when I could get rid of this house and buy a similar one with a cheaper loan!' Boom, walks out of the house and leaves the key on the table. There are no selling fees or costs to pay because the law is that the bank can't chase you for the loan amount!

So now the bank is stuck with a home worth less than the loan amount. Being a bank you want to recover as much as possible so you sell the house for as much as you can get.

So now you have more houses coming onto the market and a slightly bigger oversupply than before. Prices drop again. More people suddenly have negative equity. Queue more people walking out on their loans. Banks put the homes on the market, prices drop again. etc etc.

Suddenly you have a huge oversupply and prices plummeting like mad. it's no wonder they dropped 40%. Here in Australia, you can't walk out on your loan in the same way so we won't experience that self-feeding doom spiral that America has been in.

That being said, prices in all likelihood could come down or stagnate, but it's nothing out of the ordinary considering normal property cycles. If you engage in appropriate risk management, within your means and tolerance it shouldn't matter what the prices do over the next couple of years. (unless you're flipping homes of course but that's a whole different ball game )

Maybe my view is overly simplistic, but sometimes simple is best. Cut out all the noise and focus on the key factors. The only thing I think that could cause some grief is a high interest rate (15%+). Will see a few people burnt but as has been said on these forums before, it has happened before and will inevitably happen again. If you invest sensibly there should be no reason why you can't ride out such high interest rates.

Australia is VERY different and your damned lucky to be a citizen of hers.

Damn right.

EDIT: P.S. please be gentle. I'm still a newbie!

*Puts on flame-retardant suit*

 

[KurwaJegoMac]

Just in relation to my post above - i'm not saying prices will go up, down, sideways or whatever. It's just my view on why we won't experience the same plunge that the US did even though house prices have ballooned in the last decade.

 

[tech/a]

Kurwa

Good to see someone gets it.

My final word on this thread for now.

"People shouldn't try and guess the investment vehical they are involved in.
They should learn how to turn the odds in their favour address risk and DO IT.
Not look at the myriad of reason why they cant/shouldn't do it---those reasons will ALWAYS be there. If you keep waiting to identify opportunity (in your terms) you'll never be in the position to take advantage of it"

Enjoy your break everyone and if your caught in the floods my sympathy and wishes that 2011 brings much better conditions to you all.

 

[FxTrader]

That being said, prices in all likelihood could come down or stagnate, but it's nothing out of the ordinary considering normal property cycles. If you engage in appropriate risk management, within your means and tolerance it shouldn't matter what the prices do over the next couple of years. (unless you're flipping homes of course but that's a whole different ball game )

Maybe my view is overly simplistic, but sometimes simple is best. Cut out all the noise and focus on the key factors. The only thing I think that could cause some grief is a high interest rate (15%+). Will see a few people burnt but as has been said on these forums before, it has happened before and will inevitably happen again. If you invest sensibly there should be no reason why you can't ride out such high interest rates.

The subject of risk management in the context of property has been mentioned here several times without being defined. Risk management in investing has several components including limiting loss, capital allocation, gearing ratios, gov't actions and profit maximization (when to sell).

Investment property is usually a geared investment (4 or 5:1 gearing ratio) to maximize capital gains over time using bank lending and tax offsets while normally enduring negative cash flow for years. The negative cash flow element is how many property investors I know evaluate their risk exposure to property by factoring in potential rate rises and rent increases etc. They tend to ignore the possibility of a significant price correction, job loss, economic downturn etc. and the impact this can have on their personal balance sheets.

For many I know, property is the only asset class they invest in (as it's the only one they think they understand). One of the dangers here is the normalcy bias, the assumption that since a large correction in the Australian property market has never occurred then it never will occur (no disaster plan necessary). Such thinking usually discounts risk management and encourages more risk taking behaviour. How many people do you know have a written investment strategy and risk management plan for property or any other investment? Few to none perhaps?

 

[satanoperca]

Hi,

Boom, walks out of the house and leaves the key on the table. There are no selling fees or costs to pay because the law is that the bank can't chase you for the loan amount!

Need to verify but I believe that non recourse loans did not apply in every state in the US, I believe less than 25% of states had full non recourse loans. This fact needs to be verified as it is widely assumed that every loan in the US had jingle mail attached.

If you engage in appropriate risk management, within your means and tolerance it shouldn't matter what the prices do over the next couple of years.

The key word being "appropriate", the question being how many people are severly overleveraged and how close to the edge are budgets before a sale needs to proceed, which leads to the next point.

The only thing I think that could cause some grief is a high interest rate (15%+). Will see a few people burnt but as has been said on these forums before, it has happened before and will inevitably happen again. If you invest sensibly there should be no reason why you can't ride out such high interest rates.

I believe this figure would crucify many home owners and investors, anything over 10% will see a swift drop in property price demand. Again, yes people who were "sensibly" should be able to ride it out but go ask the 100K's FHB of the last two years if they would be able to cope with such an increase after purchasing at max LVR on historically low IR's. First tier of the ladder is removed.

I should also add there must be 100K's of investors that have LVRs of less than 25% as property is a great place to park some cash if you have no immediate or future need for it. They do say "safe as houses".

Cheers

Great day in Melbourne.

 

[Beej]

Oh god. This is a sh!te bit of scaremongering. So what? They tapped some short term loans at a miesly interest rate because the finacial system had gone into melt down and there was no cash for short term commitments. This anit news people. What the hell do you think all the problems where about back in 08 then?

Its nothing more than a "Today Tonight" journalism.

+1 - a short term loan from a central bank, whose role after all is in part to act as "lender of last resort" is hardly a bail out or anything to get too excited about. The fact we had the GFC and a global credit crunch should more than explain the need for such loans. I for one am pleased that they occurred as this was one of many factors that enabled our financial system in Oz to emerge relatively unscathed from the crisis.

Cheers,

Beej

 

[c-unit]

Kurwa, good analysis but I would argue your "story" is not unique to the US, but applies elsewhere. Non-recourse loans aren't necessary for your dialogue to play out in Australia.

I am the first to admit that I am a bear on property (and somewhat *hopeful* as a 22 year old ) but I cannot see how prices can continue rising once you look at the fundamentals.

We are at the top of the credit cycle, the consumer deleveraging process has begun (2 years later than the rest of our Western friends). Our domestic rates are no longer controlled by the RBA and are expected to rise thanks to increasing foreign lender risk aversion and the rationing of credit as Western deleveraging continues. Even though we are near on in recession right now (non-farm economy is in recession, productivity going downhill fast), the RBA has limited control over rates. Combine higher mortgage rates with serious cost of living pressures, utility bills skyrocketing etc, and a perfect storm appears to be brewing.

In my opinion we managed to avoid a property collapse because of a few factors. We continued borrowing, facilitated by foreign lenders being happy with the perceived safety of Australian property. I put this perception down to the strength of the mining sector and the previously low level of public debt. Unfortunately that perfection has changed in recent months, as the level of indebtedness of consumers and the undiversified nature of the Australian economy becomes better understood.

The first to fall will be the FHB's who took advantage of the generous grant. I've got mates who earn $35k a year and took out a $500k mortgage and are in strife. Second will be the speculators and negative gearers. Fun fact - 30% of Australian properties are investment properties of which 70% are negatively geared. We are therefore looking at roughly 15-20% of Australian housing stock being negatively geared and relying on capital growth for profits. Those capital gains have now dried out, and interest rates are rising. The question is, how many of those properties will be put on the market?

United States, Spain, Ireland. We are next IMO, 2 years later and coinciding with the turn of the credit cycle.

Do your own research.

 

[tech/a]

I've got mates who earn $35k a year and took out a $500k mortgage

How did they pass serviceability?????? ---Dont believe you!.

Second will be the speculators and negative gearers. Fun fact - 30% of Australian properties are investment properties of which 70% are negatively geared. We are therefore looking at roughly 15-20% of Australian housing stock being negatively geared and relying on capital growth for profits.

How many do you imagine have massive tax bills in other areas which they off set against property they Dont want liquidated gain!.

22Yr olds speaking like seasoned veterans
Wet behind the ears and no hope of drying off!

Time to bugger off.

 

[KurwaJegoMac]

How many people do you know have a written investment strategy and risk management plan for property or any other investment? Few to none perhaps?

Agree with your post. Also in relation to your question above, the answer is none! People in general don't take the time to have a defined strategy and risk management plan. Mostly the reasons I hear is because property is a 'safe' investment.

It most certainly can be a relatively 'safe' investment provided appropriate risk management strategies are in place. But no investment is ever 100% risk free and to not account for, and plan for risks is just asking for trouble!

Need to verify but I believe that non recourse loans did not apply in every state in the US, I believe less than 25% of states had full non recourse loans. This fact needs to be verified as it is widely assumed that every loan in the US had jingle mail attached.

Can't say I know the figures exactly, and you may very well be correct. The non recourse loans did not account for all of the downturn for sure - I just feel that it was a big factor to make the sell off gather pace quickly in the beginning. Then the herd mentality and excess supply factors kick in.