The future of Australian property prices

[satanoperca]

I agree with Beej.

We are not in a bubble as long as the following stays constant :

1) IR stay low
2) The govnuts step in with our tax payers money the first sign of trouble to prop up a market
3) Local council remain ego driven and do not allow land to be developed
4) Land banking continues
5) Taxes do not go up to pay for KRUDD deficit
6) Foreign credit to the banks is available
7) The $AU stays high
8) That the GFC has finished and recovery is on its way.
9) The average person believes property is a way to financial freedom
10) Soft lending requirements
11) China is telling the Truth about growth

Nothing much to it really.

Cheers

 

[SusanW]

Mr. Joye and his index play a little deception imho.

Firstly, household income, as he uses it, is not a constant, but a dependent variable of house price.
i.e. when house prices go up, people adapt by
- forming larger households such as when adult children stay at home more or separated couples cohabitate
- residents seek more hours of work, such as by part time or non working partners increasing paid work.
- retirees put off retirement

This is born out in Mr Joye's stats. He says household disposable income went up 44% from 2003 until now. However, the average full time wage went up around 3/4 of that.

Secondly, Mr. Joye chooses to mask affordability by using house price, rather than debt serviceability. Hence, when rates move up from their recent and ongoing historical lows, his index won't show it.

In my view, the least misleading measure across time is derived from
- median full time weekly wage (excluding overtime)
- cost of average 25 year mortgage on median property.
These figures will unmask that most people now borrow more than the historical 80% LVR and many are taking out interest only rather than principal and interest loans.

Finally, if affordability is improving, why have the banks been tightening credit for some time by lower DSRs?

 

[MACCA350]

yup.. notice the near $100 difference between mean and median figures here.

http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6523.0Main+Features12007-08?OpenDocument



S5. DISTRIBUTION OF EQUIVALISED DISPOSABLE HOUSEHOLD INCOME, 2007-08

Looking at that graph the majority of households have an equivalised disposable income somewhere between $300 and $800, taking the middle ground of $550 that works out to a gross equivalised household gross income of $33k (that's no where near the $65k average wage).

Take an average household of 2 adults and 2 young children we have a weighting of 2.1 which equates to an disposable household income of $1155, split that 80/20 between main earner and spouse and you have gross incomes of $60k and $13k with combined gross household income of of $73k for a dual income or $77k for a single gross income.

Using Westpac's borrowing power calculator, that dual income household with no liabilities or credit cards can borrow $305k max

Take the same scenario but using the Median equivalised disposable income of $692 they can borrow $465k max

Given the above, the current Melb median house price of $540k has overshot the mark and I'd expect it to pull back. If it doesn't I'd be wondering who is buying, because those levels are out of reach for the majority of Australian households as clearly shown above.

cheers

 

[adobee]

I can say first hand that the sydney housing market is pretty hot right now.. there is hardly any new supply on the market this year and a huge amount of buyers.. Houses are definetly strong in inner & western rings out to around parramatta (beyong here I am not on the pulse).. With the pressure I am seeing I would believe without a interest rate rise price could increase 10%+ in the next 6 months easily ..

 

[SusanW]

Given the above, the current Melb median house price of $540k has overshot the mark and I'd expect it to pull back. If it doesn't I'd be wondering who is buying, because those levels are out of reach for the majority of Australian households as clearly shown above.

The Melbourne median income would be higher than the australian median income. Regional areas pull the median down (apart from mining towns).

The bank calculators unfortunately don't do one's risk management.
Be safer to plug in the average interest rate for the last two economic cycles.

 

[Beej]

Fujitsu, isn't that an air-conditioner? The property market could do with some cooling. But seriously, are you saying property is good value? Would you buy an investment property now?

I think there was some value around back in late 2008/early 2009, but those value buys are gone for now. There may be some good opportunities later in the year, but we will have to see how things pan out. So no I wouldn't purchase an IP right now unless something exceptional came up.

The median household income is around $65K a year - for all Australians not just first home buyers - with an average mortgage around $350K. In other words, most buyers are indeed "struggling a bit", and will be struggling a lot more if interest rates rise.

It is pretty obvious that the government's stimulus package overshot the mark. Slashing interest rates and pump priming property via the FHB grant has further bloated an already overheated market.

Rudd got it wrong, and interest rates should rise, but elections are won and lost in the swinging seats of the mortgage belt, aka "working families" (formerly the Howard battlers). Better to see Australia's foreign debt skyrocket than suffer the political backlash of rising interest rates.

We'll see, but even media financial advisers are now warning first home buyers to stay out the market. I can't see a crash but I'd suggest we need a correction. Remember the GFC?

The FHBG boost certainly had an impact, and the low interest rates an even greater one again, yes. But remember the RBAs job is not really to try and control house prices, although given the situation in the US etc it is something that they are now keeping more of an eye on than in the past. However I think their main focus is the economy in general, inflation etc, and with housing they have made many noises signalling state government to get their act together to provide incentives for more houses to be built - so their interest is primarily in the supply side with housing.

I expect the next couple of years to be "cooler" than last year - so a bit of a correction in "real" prices, and maybe even another small pull back year in there somewhere, but I also don't see any crash coming. Obviously different markets/regions may perform differently as well.

Cheers,

Beej

 

[Dowdy]

What percentage do you consider a correction BJ

 

[Beej]

I agree with Beej.

We are not in a bubble as long as the following stays constant :

1) IR stay low
2) The govnuts step in with our tax payers money the first sign of trouble to prop up a market
3) Local council remain ego driven and do not allow land to be developed
4) Land banking continues
5) Taxes do not go up to pay for KRUDD deficit
6) Foreign credit to the banks is available
7) The $AU stays high
8) That the GFC has finished and recovery is on its way.
9) The average person believes property is a way to financial freedom
10) Soft lending requirements
11) China is telling the Truth about growth

Nothing much to it really.

Cheers

1) As long as rates stay below 8-9%, business as usual. Above that and prices to start to come under pressure - especially the FHB segment as we saw in early 2008. However, if a shift to high interest rates is commensurate with an inflation break-out, then nominal prices will still continue to rise.
2) Not required.
3)/4) Not required as if more dwellings are built median can stay steady/fall without effecting value of existing property.
5) Unless there were massive tax increases, non issue. Bracket creep etc which is the usual method to increase taxes happens slowly and will not impact housing market materially.
6) Will always be available as we are small fish in the global capital pond, as we don't actually need that much anyway (Check APRA stats)
7) No - lower $AU provides even better value for o/s investors and returning ex-pats so pushes prices UP
8) Yes
9) This is Australia - it's the great Australian dream!
10) Yes
11) Well something is going on in China that's for sure! But yes the AU economy is linked heavily to the China story.

So in summary, the only things that could trigger a big housing correction IMO from here are:

1) Shift from low interest rate environment long term to a high one (10%+), without corresponding high inflation (highly unlikely scenario)
2) A GFC Mark 2
3) Banks significantly tighten lending criteria and tighten credit availability across the board (probably would only happen ig\f there was GFCII)
4) China collapses and takes the AU economy down into deep recession with it.

I think the above summary represents the true risks.

What percentage do you consider a correction BJ

Any year with flat-ish or mildly falling prices is a correction in real terms and/or nominal terms.

Cheers,

Beej

 

[drsmith]

I'm eagerly awaiting the March update to the RBA's Financial Stability Review which contains stats on housing affordability as previously discussed.

https://www.aussiestockforums.com/forums/showthread.php?p=503070&highlight=tightrope#post503070

The RBA links from that discussion are broken but the September 2009 FSR can be accessed from the link below.

http://www.rba.gov.au/publications/fsr/index.html

 

[satanoperca]

1) As long as rates stay below 8-9%, business as usual. Above that and prices to start to come under pressure - especially the FHB segment as we saw in early 2008. However, if a shift to high interest rates is commensurate with an inflation break-out, then nominal prices will still continue to rise.
2) Not required.
3)/4) Not required as if more dwellings are built median can stay steady/fall without effecting value of existing property.
5) Unless there were massive tax increases, non issue. Bracket creep etc which is the usual method to increase taxes happens slowly and will not impact housing market materially.
6) Will always be available as we are small fish in the global capital pond, as we don't actually need that much anyway (Check APRA stats)
7) No - lower $AU provides even better value for o/s investors and returning ex-pats so pushes prices UP
8) Yes
9) This is Australia - it's the great Australian dream!
10) Yes
11) Well something is going on in China that's for sure! But yes the AU economy is linked heavily to the China story.

So in summary, the only things that could trigger a big housing correction IMO from here are:

1) Shift from low interest rate environment long term to a high one (10%+), without corresponding high inflation (highly unlikely scenario)
2) A GFC Mark 2
3) Banks significantly tighten lending criteria and tighten credit availability across the board (probably would only happen ig\f there was GFCII)
4) China collapses and takes the AU economy down into deep recession with it.

I think the above summary represents the true risks.



Any year with flat-ish or mildly falling prices is a correction in real terms and/or nominal terms.

Cheers,

Beej

Thanks Beej for taking the time to respond. It is appreciated even if we do not agree on all aspects of the property market.

1) Disagree, if interest rates were to go back to 8-9% I believe that a lot of the first rung on the property ladder (current FHB) will suffer mortgage stress and a larger than normal would default. 9% IR's would see approx a 40% increase in property payment for those that bought last year. Please look at the current debt to household income ratios. 10% IR's and property wont be a priority, supporting business that employee people will. This country like many others is way to dependant on property increasing every year.
Even the current increases have people screaming. It was the FHB + FHVG that was part of this latest property price rise.
2) If not necessary, why was the FHBG necessary in the first place if the market is robust. Sounds like a ponzi, smells like a ponzi, is a ponzi.
3,4) Adequare town planning and local council more willing to allow development is necessary to add to supply. Making develops release land or pay a tax will add to the supply also.
Your response doesn't make sense, adding to the supply equal to population increases will result in existing properties seeing price declines.
5) Increases taxes will slowly eat away at disposable income effecting not only housing but also retail and many other markets that employee people. Have to pay back the govnuts debt somehow.
6) Ok believe what you will.
7) Fanatastic, sell out a basic need of future generations so the ponzi scheme can keep going. Gee, mothers now have to work to provide a home, why not send the children out to work as well.
8) You better go inform the share market that all is well.
9,10) While lending has been free and easy and credit cheap. What was that credit crunch thing that just happended and required the majority of world leaders to cooperate or else hell might have frozen over.
Dream, thats what the Aboriginals thought before white man arrived. All things can change and will, it is just a matter of time.
11) We agree

Response to your points
1) I am unable to predict what will happen in the future but I hope we do not go down the path of Japan and the US will almost 0% interest rates, as it is a failed concept.
2) Soon to arrive some time later this year, early next at the shock of the govnuts who think all is ok.
3) Slowly happening, no or reduced availability of low doc loans, Westpac moving from 95% LVR's to 87%. Banks increasing rates above the RBA.
4) That is a big question, but I think the knock on effect will be the result of the dying empire, The USA.

Cheers

 

[Mofra]

Given the above, the current Melb median house price of $540k has overshot the mark and I'd expect it to pull back. If it doesn't I'd be wondering who is buying, because those levels are out of reach for the majority of Australian households as clearly shown above.

So you're assuming that most FHBs starting at the median price bracket?
That's not an assumption I'd be brave enough to make.

 

[MACCA350]

So you're assuming that most FHBs starting at the median price bracket?
That's not an assumption I'd be brave enough to make.

I made no mention of the FHB market. It was a simple observation using the graph.

cheers

 

[SM Junkie]

What would you do?

A local real estate agent in my town is trying to double the price of real estate overnight. Here is the story:-

Property A has one old asbestos 3 x 1 house on 1240 sqm and just sold this month for $1.8 million. Property B next door is currently for sale. Property B is strata titled and only 709 sqm with an old 3 x 1 asbestos property. Property B is listed for sale at $1.87 million, but with about half the land size of A. Propety C (opposite side of court to B) sold in October for $2.3 million, but it's size is 1330 sqm and has an old 8 x 2 asbestos house.

By my estimation, property B should have a value of between $900 and $1.1 million? Based on historical sales data.

So is it ok for real estate agents to be driving the market so high. Is his actions legal? If you think it is illegal, would you do anything about it?

 

[explod]

What would you do?

A local real estate agent in my town is trying to double the price of real estate overnight. Here is the story:-

Property A has one old asbestos 3 x 1 house on 1240 sqm and just sold this month for $1.8 million. Property B next door is currently for sale. Property B is strata titled and only 709 sqm with an old 3 x 1 asbestos property. Property B is listed for sale at $1.87 million, but with about half the land size of A. Propety C (opposite side of court to B) sold in October for $2.3 million, but it's size is 1330 sqm and has an old 8 x 2 asbestos house.

By my estimation, property B should have a value of between $900 and $1.1 million? Based on historical sales data.

So is it ok for real estate agents to be driving the market so high. Is his actions legal? If you think it is illegal, would you do anything about it?

Real Estate Agents and anyone else can put any price they want on anything for sale (Should be the vendor's choice however). Its a free country

In reality, agent tells the vendor its a bit dear and the other bloke in the office tells the buyer its a bargain.

All about turn over, price varaiations small but lots of commissions large and good for end of year xmas party at the agents office.

 

[Go Nuke]

Looking at that graph the majority of households have an equivalised disposable income somewhere between $300 and $800, taking the middle ground of $550 that works out to a gross equivalised household gross income of $33k (that's no where near the $65k average wage).

Take an average household of 2 adults and 2 young children we have a weighting of 2.1 which equates to an disposable household income of $1155, split that 80/20 between main earner and spouse and you have gross incomes of $60k and $13k with combined gross household income of of $73k for a dual income or $77k for a single gross income.

Using Westpac's borrowing power calculator, that dual income household with no liabilities or credit cards can borrow $305k max

Take the same scenario but using the Median equivalised disposable income of $692 they can borrow $465k max

Given the above, the current Melb median house price of $540k has overshot the mark and I'd expect it to pull back. If it doesn't I'd be wondering who is buying, because those levels are out of reach for the majority of Australian households as clearly shown above.

cheers

Thank you, thank , thank you MACCA.
Great post.

There are 2 or more lots of figures around, the govenment and other select groups choose to showcase the best looking figures.....not always the most accurate ones!

Given the above, the current Melb median house price of $540k has overshot the mark and I'd expect it to pull back. If it doesn't I'd be wondering who is buying, because those levels are out of reach for the majority of Australian households as clearly shown above.

+1 to that mate!
Immigration helping to pay those prices? Family putting together to buy a place to live in?
Perhaps?

Something I just read today,

http://www.news.com.au/couriermail/story/0,23739,26673347-5011140,00.html

Comes as no suprise to me.

If I may use some of my own circumstances.

Bought a block of land, building a house this year.
Land was $220K and 604sqm block.

Because of covenants we have to build a minimum house of 220sqm's. (about 23 squares I think that is)
This means the price is partialy set by the size of the house.

In all not getting all the fancy trimmings like stone benchtop etc, it looks like its going to cost us about $415K - $420K.

About 20K over our budget.

Not to get into banking details but basicaly I'll be looking at making repayment with an interest rate of 10% on $400K borrowed.

Thats $877/week!

Thats ALOT I think for the average person.

 

[SM Junkie]

Real Estate Agents and anyone else can put any price they want on anything for sale (Should be the vendor's choice however). Its a free country.

Under section 52 of the Trade Practice Act, agents cannot over or under appraise a property. The law stipulates that owners should be able to rely on agents to provide accurate research, advice and information.

The Real Estate agents are supose to work to a Code of Conduct and under several Acts. Which seems like a lot of bull to me if they can really do what they want.

 

[IFocus]

2) If not necessary, why was the FHBG necessary in the first place if the market is robust. Sounds like a ponzi, smells like a ponzi, is a ponzi.

Cheers

FHBG increases were about Treasury fears the world was going to end putting a floor under housing prices to protect the banks capitalization levels.

 

[Aussiejeff]

FHBG increases were about Treasury fears the world was going to end putting a floor under housing prices to protect the banks capitalization levels.

Applying that logic 100%, maybe Treasury should start significantly ramping up the FHBG in coming months, as the unholy spectre of End Of The Worlde Part Deux seems to be rattling in the closet somewhere over the near horizon.

Best to be on the front foot, eh?

 

[MACCA350]

Thank you, thank , thank you MACCA.
+1 to that mate!
Immigration helping to pay those prices? Family putting together to buy a place to live in?
Perhaps?

I'd add Krudd's change in international buying restrictions to that list, and probably stick it at the top of the list.

And no doubt family are helping, in fact we are helping my mother purchase an investment property

If I may use some of my own circumstances.

Bought a block of land, building a house this year.
Land was $220K and 604sqm block.

Interestingly we purchased an 800sq block for $225 last year. Currently there are no blocks available in that size and location. Judging on other blocks for sale in the area our block is now worth around $300k+, that's 33%+ in less than a year :screwy:

Because of covenants we have to build a minimum house of 220sqm's. (about 23 squares I think that is)
This means the price is partialy set by the size of the house.

Same here, I'd have to check the paperwork for the exact figure but from memory its around the same size. Not to mention there are numerous exterior design regulations that can have a similar effect.

cheers

 

[MACCA350]

Surprised the usual suspects haven't posted this yet to facilitate the gloating:

Reiv 6th Feb, 161 auctions and 82% clearance rate

I guess those international buyers are outbidding themselves

cheers