The future of Australian property prices

[c-unit]

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

Time to bugger off.

Bit unnecessary, old timer.

 

[KurwaJegoMac]

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?

Prices will eventually stagnate and/or decline slightly at some point in time. This is inevitable and part of the normal cycle. That being said, while having a high interest rate will hurt a lot of people who haven't planned for it adequately, it won't cause a property meltdown. Why?

Well after all, what are interest rate changes really trying do? The ultimate aim of the changing interest rates is to ensure that the economy gallops along at a 'healthy' rate of inflation (2-3%). How does it control inflation though? By limiting the amount of $ you have in your pocket for discretionary spending by increasing your loan repayments on your mortgage or business loan and vice versa when it wants to ramp up inflation.

So why is that significant? In the US and many other countries that are suffering, their interests are at or near 0%. They have no room to move! We of course, still do. In the event that property starts falling in price, what do you think will happen? People will start to panic and get scared and stuff their money under the mattress. So the economy starts to slow down (deflation). So what will the RBA and banks do? Drop interest rates.

Dropping interest rates will then make houses cheaper to pay off and hence attract new investors and home owners causing prices to stabilise. You can see problems in countries like the US because they can't lower their interest rates any more - they have no way to stimulate home investment any further (save for tax cuts which they cant afford to do because of their debt).

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?

Negative gearing is not necessarily about relying on capital growth for profits. If you're financially smart and plan accordingly, you can be negatively geared but realise a positive cash flow. In the event that interest rates do go up, it will eat into your positive cash flow. Only when interest rates are at high levels will you then be in negative cash flow territory - but if planned well, then only at levels which are well within your affordability.

That way you can ride out any economic cycle and enjoy the good times and not be 'sold out' during the bad.

 

[tech/a]

Bit unnecessary, old timer.

Meaning Time for me to bugger off.

 

[bellenuit]

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.

Listen to the talk as well as view the list from this link. The talk provides greater detail on the consequences of each loan type.

http://www.mortgagereliefformula.com/recourse/

These are all the mortgage walkaway trustee sale states, meaning they are non-judicial foreclosure states.

In those states, generally, when they foreclose on you, they cannot pursue you for their financial losses.

Many, such as California, do in theory allow a lender to choose judicial foreclosure but in those cases the lenders only do so if a borrower has significant other assets. This is the "one action" rule that lets the lender either pursue non-judicial foreclosure, at lower cost and less time, or judicial foreclosure that costs more money and takes more time but lets them go after you for their financial losses.

Alaska
Arizona
Arkansas
California
Colorado
District of Columbia (Washington DC)
Georgia
Hawaii
Idaho
Mississippi
Missouri
Montana (as long as non-judicial foreclosure is used)
Nevada - note that the lender CAN get a deficiency judgment (See below)
New Hampshire
Oregon
Tennessee
Texas (but even in a non-judicial foreclosure, the lender can pursue a deficiency judgment)
Virginia
Washington
West Virginia

These are states that also allow non-judicial foreclosure, and/or where non-judicial foreclosure is more common and deficiency judgments can be obtained more easily:
Michigan
Minnesota
North Carolina
Rhode Island
South Dakota
Utah
Wyoming

 

[TabJockey]

Well after all, what are interest rate changes really trying do? The ultimate aim of the changing interest rates is to ensure that the economy gallops along at a 'healthy' rate of inflation (2-3%). How does it control inflation though? By limiting the amount of $ you have in your pocket for discretionary spending by increasing your loan repayments on your mortgage or business loan and vice versa when it wants to ramp up inflation.

So why is that significant? In the US and many other countries that are suffering, their interests are at or near 0%. They have no room to move! We of course, still do. In the event that property starts falling in price, what do you think will happen? People will start to panic and get scared and stuff their money under the mattress. So the economy starts to slow down (deflation). So what will the RBA and banks do? Drop interest rates.

I think you are looking at rba policy with RE goggles on. Do not make the assumption that just because the real estate market drops, that will trigger a rate decrease. Its quite possible to have high core inflation pressure and falling real estate prices.

Reading the "risk management" post: There is no WAY 95% of property owners have any risk management in place. Why would you if property has been going up for 20 years?

If you are an older person with an established RE portfolio then your pretty confident you can ride out any dips, because you bought in at 1/10 of the current price and NOTHING will send RE prices that low short of a nuculear war.

But younger people on thier first and second home, you have one single asset with 80 or 90% leverage that you can just afford if you pay 2/3 of your wage into it. Any situation that forces you to sell out of the market, weather it is interest rates your did not plan for or a large drop in value is going to wipe you out. You are going to take serious capital losses. There is not much you can do really.

 

[Vicki]

I think you are looking at rba policy with RE goggles on. Do not make the assumption that just because the real estate market drops, that will trigger a rate decrease. Its quite possible to have high core inflation pressure and falling real estate prices.

Reading the "risk management" post: There is no WAY 95% of property owners have any risk management in place. Why would you if property has been going up for 20 years?

If you are an older person with an established RE portfolio then your pretty confident you can ride out any dips, because you bought in at 1/10 of the current price and NOTHING will send RE prices that low short of a nuculear war.

But younger people on thier first and second home, you have one single asset with 80 or 90% leverage that you can just afford if you pay 2/3 of your wage into it. Any situation that forces you to sell out of the market, weather it is interest rates your did not plan for or a large drop in value is going to wipe you out. You are going to take serious capital losses. There is not much you can do really.

I couldn't have summed it up any better.

I think some politicians need a smacked bottom, for the way in which they extended or encouraged the FHB'ers grant coupled with temporarily low interest rates.

Might have looked good for the economy [or made someone look good] with the resiliance of the r/e market, but surely they must have realised if a property price increases much faster than a persons average wage, then the music will to stop eventually?

It's now possibly, going to bring about an interesting turn of events.

If there is a 'shock' of some sort, whether it be rates or erosion of current values, [LVR] that causes people to sell...Well, there's going to be some great oppertunaties to be had at their expense...For those that are ready.

Lots of houses for sale, chasing fewer 'spooked' buyers in the short term, equals lower prices.

As far as I know, people looking for rentals, stand in a queue 10 deep!
[this queue might be added to, by people who had to sell?]

So there's a strong demand for them.[rentals]
Investors who are cashed up, will be able to buy properties at a discount to current levels, and add to their portfolio's...While rents will stay high.

Another transfering of wealth, to people who are prepared.

This may help stabalise the market to a degree...Unless they're spooked for some good reason, in which case, we may see stagnating prices for some time [in average suburbia]..

Vicki

 

[tech/a]

So your a young couple and you cannot afford 10%-14% interest You have a $ 450K loan over 30 yrs and you have an average wage.---what do you do?

Other than going bankrupt/not putting yourself in a position you cant maintain in the first place----what do you do?

What is your practical advice.

 

[Vicki]

Short of living off baked beans, or renting out your house while they move back in with mum & dad?

Negotiate some sort of interest deferance?

Try & sell whilst prices are still high enough to pay your expenses, and maybe a bit left over I guess...If they can't service the loan, then their options are limited.

Vicki

 

[Junior]

So your a young couple and you cannot afford 10%-14% interest You have a $ 450K loan over 30 yrs and you have an average wage.---what do you do?

Other than going bankrupt/not putting yourself in a position you cant maintain in the first place----what do you do?

What is your practical advice.

One or more of the following:

1. Sell
2. Borrow from mum and dad
3. Refinance with an interest only line of credit
4. Work more, spend less, don't have kids
5. Rent out the property, and live somewhere cheap

 

[c-unit]

Meaning Time for me to bugger off.

My apologies, thought it was aimed at me which I was suprised at because I normally enjoy reading and learning from your posts.

 

[indeck]

I couldn't have summed it up any better.

I think some politicians need a smacked bottom, for the way in which they extended or encouraged the FHB'ers grant coupled with temporarily low interest rates.

well no, first home buyers need help getting into the market. They're probably going about it the wrong way with the grant but its better than nothing. What they do need is to be belted about is perpetuating the price problem by allowing negative gearing. We're one of a few countries that still have it and it should be scapped. But politicians are spineless and it will never go.

 

[Vicki]

well no, first home buyers need help getting into the market. They're probably going about it the wrong way with the grant but its better than nothing. What they do need is to be belted about is perpetuating the price problem by allowing negative gearing. We're one of a few countries that still have it and it should be scapped. But politicians are spineless and it will never go.

You raise a good discussion point, but the US have had offsets even for onwner occupied dwellings?

Maybe this could be offered to FHB's as well?

Personally, in my humble opinion, if FHB's are helped to artificially hold the value of entry level [first homes] By buying them at current levels, this also by proxy increases the price of 2nd & 3rd home buyers prices, [i.e. sell first home for more, spend even more on the 2nd etc.] & thus onwards & upwards it goes?

By letting the bottom wrung faulter, [can't afford 500k as fhb's], It could help keep property values at a more sustainable rate?

What thoughts do others have?

Vicki

 

[SM Junkie]

well no, first home buyers need help getting into the market. They're probably going about it the wrong way with the grant but its better than nothing. What they do need is to be belted about is perpetuating the price problem by allowing negative gearing. We're one of a few countries that still have it and it should be scapped. But politicians are spineless and it will never go.

Seriously, get rid of negative gearing?? What might be the consequence of this??

Investors pull out of the market once it is no longer a beneficial investment vehicle to offset the tax. Then where would renters find accommodation, oh yes it becomes the responsibility of Government.

Or rents will go through the roof because now to make money in property I have to seek a rent that covers my costs. I could do this because now there is probably less rental properties available. So this would ensure people have even less money to save, which would mean they are less likely to ever afford their own home. So probably my investment property is in good demand, hell I'm really going to make money now and put the rent right up.

This is a little tongue in cheek, but I live in a location where a crap house will cost the renter a minimum of $1,500 per week, so don't think it couldn't happen.

I don't agree that we need to help FHB by giving them handouts. We should help them by giving them the skills to manage money responsibility. Then maybe the example of the young person who was stupid enough to think they could even take on a $500k loan would not happen.

 

[satanoperca]

Happy new year to all bulls, bears and fence sitters.

http://www.theaustralian.com.au/news/nation/house-prices-tipped-to-slip/story-e6frg6nf-1225979670600

THE Reserve Bank's November rate hike sparked a national fall in house prices with further declines likely over the year ahead.
Prices had been flat for the five months since the previous rate hike in May but slipped 0.2 per cent in November.

New lending figures released by the central bank yesterday show that growth in home lending to owner-occupiers has fallen to 7.3 per cent, its lowest level in the 20 years figures have been kept and little more than half the average growth of 13 per cent.

What is going on, a few interest rate rises and people stop borrowing, thats hardly seems right, we surely cannot have reached peak debt yet, my crystal ball told me it was to come in the year 2020.

Rismark managing director Christopher Joye said the likelihood of further rate rises in 2011 meant it was unlikely that home owners would see any capital appreciation, with small nominal price falls a chance. Financial markets expect three more 0.25 percentage point rate hikes this year.

Geez, a flat year or slight falls after the last two years of fantastic growth, really nothing to worry about unless you are overleveraged or bought at the top.

Happy new year again and what will property prices in Oz do this year?

Cheers

 

[electronicmaster]

Personally, in my humble opinion, if FHB's are helped to artificially hold the value of entry level [first homes] By buying them at current levels, this also by proxy increases the price of 2nd & 3rd home buyers prices, [i.e. sell first home for more, spend even more on the 2nd etc.] & thus onwards & upwards it goes?

By letting the bottom wrung faulter, [can't afford 500k as fhb's], It could help keep property values at a more sustainable rate?

What thoughts do others have?

Vicki

Your on the Money Vicki

More incentives from the government always becomes factored into the "cost" of owning a Home or investment property. This also includes house prices. This in turn makes the "value" of money worthless. Only CEO's and maybe some Investors have adjusted incomes that can keep up with such inflation. Not to mention rising interest rates.

Not many people seem to be aware of what inflation is, and how it is introduced into the economy. This year the inflation increase is going beyond exponential.

Only Silver and Gold and the Gold/Silver Mines (hopefully) will be the only investments that will keep up or go beyond inflation.

Property will crash, anyone who thinks otherwise is going to be shocked to death by the results.

 

[FxTrader]

Seriously, get rid of negative gearing?? What might be the consequence of this??

Investors pull out of the market once it is no longer a beneficial investment vehicle to offset the tax. Then where would renters find accommodation, oh yes it becomes the responsibility of Government.

One likely consequence would be a glut of investment property hitting the market due to government subsidy being removed, making negatively geared property prohibitively expensive. Since such a glut of property would depress prices, more renters could afford to be owners. Less demand would then make it more difficult for landlords to hike rents.

This is usually the case with a government subsidy; it distorts markets and creates unintended consequences. Negative gearing cost the gov't (and taxpayers) $3.9 billion in 2004-05. It also has the effect of inflating house prices as investors compete with owner-occupiers for properties since the investor can afford to pay more thanks to the subsidy. The FHB grants are yet another example of the market distorting and price inflating effects of gov't subsidy.

Changing gov't policy is always a risk with investing. Ignoring such risks can be costly. For now the subsidy to property investors looks safe but generational change and a shrinking tax base may see proposals like limiting or removing tax concessions for negative gearing getting more attention.

Or rents will go through the roof because now to make money in property I have to seek a rent that covers my costs. I could do this because now there is probably less rental properties available.

From a wiki...

The popular view that the temporary removal of negative gearing caused rents to rise has been challenged by two separate studies. The first study, which examined Real Estate Institute data, found that rents rose in Sydney and Perth, but did not find any discernable increase in rents in other State capital cities[1]. The second study, which examined Australian Bureau of Statistics rental data, found that rents rose in Sydney and Perth, remained flat in Melbourne and Adelaide, but fell in Brisbane[2]. Both studies suggest that the property industry's claims about the impact of negative gearing on rents are false. Since if it was true that the abolition of negative gearing caused rents to rise, rents should have risen Australia-wide since negative gearing affects all rental markets equally.

Changes to the tax system (1987 reintroduction of negative gearing) did lead to an increasing number of investors simply chasing tax deductions via property investment. Armed with the belief that property always goes up, investors were attracted by the reduction in taxes paid (negative gearing). This trend was reinforced by the introduction of the 50% discount on any capital gain for property held for more than one year. However, the lack of any sensible relationship to long term sustainable rental yields has been ignored. This myopic strategy has “led to a surge in property investment in Australia” yet “. . total net rental income from investment properties has decreased from +$219m in 1999/00 to -$8,628m in 2007/08”, meaning that ordinary Australian taxpayers are increasingly subsidising property speculation.

I don't agree that we need to help FHB by giving them handouts. We should help them by giving them the skills to manage money responsibility.

Agreed, but other than making investment education mandatory in schools I am uncertain what else could be done about the financial literacy problem.

 

[SM Junkie]

One likely consequence would be a glut of investment property hitting the market due to government subsidy being removed, making negatively geared property prohibitively expensive. Since such a glut of property would depress prices, more renters could afford to be owners. Less demand would then make it more difficult for landlords to hike rents.

Ok so great for a period of time there would be a glut of property available. Then what?? What happens without the private investors?? There will always be those that cannot afford to own a home, or do not want to. Where to they go?

Investors make money over a long period of time as they grow their equity. It is difficult to find a property that is positively geared from purchase. If not for negative gearing, there would be a lost less investors and without them, I see a lot of social problems for the young, the old, the working class who have not been able to become the "home owners" that we all should be.

 

[FxTrader]

Ok so great for a period of time there would be a glut of property available. Then what?? What happens without the private investors?? There will always be those that cannot afford to own a home, or do not want to. Where to they go?

Please review my edited post as I anticipated such questions.

Investors make money over a long period of time as they grow their equity. It is difficult to find a property that is positively geared from purchase

Property experts like Margaret Lomas encourage investors to seek positive cash flow (not positive gearing) when making property purchases. I agree that at currently inflated prices, it's difficult to find positive cash flow properties but not impossible, it takes time and research. Without the subsidy though prices would need to decrease to bring investors back into the market.

If not for negative gearing, there would be a lost less investors and without them, I see a lot of social problems for the young, the old, the working class who have not been able to become the "home owners" that we all should be.

You're making assumptions and predictions here that are unlikely outcomes IMO. Home ownership and equity are declining in Australia due in large part to gov't (local and federal) subsidy and policy distorting the property market and inflating prices. Subsidizing property speculation was probably not the govt's intention when they reintroduced negative gearing.

 

[SM Junkie]

Interesting argument and discussion. So why was negative gearing reintroduced when the research showed its removal didn't impact on rent.

Here we go...conflicting results:

"The Hawke Government abolished negative gearing for property in 1985 only to have it reinstated in 1987. During that period rents increased by 57.5% in Sydney, by 38.2% in Perth and by 32.0% in Brisbane. At the same time building approvals fell by 13.8%,"
Kevin Eddy
http://www.brokernews.com.au/news/newsletter/48704

Wow it was only removed for two years.. interesting.

and from Property Planet
http://www.propertyplanet.com.au/cms-video-archive/negative-gearing-basics.phps

In 1985 the Hawke Government attempted to try and abolish Negative Gearing. It meant that people taking positive steps to fund their retirement were unable to recoup any losses and were left out in the dark.

As a result, the rental market virtually closed down! Rents soared, and the cost of renting was unachievable. Investors started dumping their properties and we were faced with a social disaster.

Perhaps I'm not making assumptions.

 

[indeck]

The govt needs to do one of 2 things, either remove negative gearing and replace it with another policy for investors or maybe reduce the benefit people are getting from it.