The future of Australian property prices

[medicowallet]

So she paid $900k for a ground floor unit when the penthouse sold for $1.5m. Now the penthouse sold for $350k. Being generous, that means her purchase is now worth $250k, maybe. How much does her property now have to appreciate for it to get back to break even? A total of 360%. Assuming a generous 10% annual growth rate, she's going to break even in about three decades. Until then her repayments are going to be a retirement killer.

If the journalist who wrote this understood compound interest they would realise that 10% growth per year gets her back to $900k in about 13-14 years, not 30.

IF they meant to include inflation, depreciation, outgoings etc. then they should have mentioned that.

 

[young-gun]

And here's a question for the property bulls: why wouldn't the banks simply hang on until the market recovers. They claim they have increased deposits from savers, and no problems accessing overseas credit markets for funds. Why would they take such massive losses?

What do the banks know, with their tens of thousands of financial sector employees, about the future of property prices in Australia, that the local dim RE agents don't???

the banks are well aware of whats about to happen, as is the government. you think they would just give out 21k to first home owners cause the genuinely wanted the youth of today to own homes? of course not...it was to save the proeprty market, as is the most recent 10k+ grants being handed out. if anything has come out of being the last bubble to pop, would hopefully be that the banks and gov have had time to prepare as best they can for the pop.

RE agents are either thick, or completely ignorant. i recently read an RE sunshine coast paper. the median house/unit price in '01 was 180k. the median house/unit price in 07 was 500k. bubble? of course not. RE gurus in the paper were claiming - "its been a tough year, but the market is ready to go up, time to buy!". I've done a little bit of driving around while up here. ther eis for sale signs EVERYWHERE on top end holiday homes/units(in alexandra hills) i can only assume it spreads throughout.

 

[jank]

What are peoples predictions of the market?

More falls on the way. Id say Sydney will have a fall of 7%, nationally it will be 9% for the year.

 

[medicowallet]

What are peoples predictions of the market?

More falls on the way. Id say Sydney will have a fall of 7%, nationally it will be 9% for the year.

Too hard to make a firm prediction as it really depends upon Europe, and if the info from China is real or manufactured. I have heard many smart commentators saying that internally China might not be as good as they are reporting. So my pure guestimations are:


I am going 3-5% falls nationally ( I think that the heat will come out of the market over an extended period of small negative growth or flatline ) I think melbourne will perform the worst out of all the capitals, and, shock horror, I think Brisbane will be the best performer out of the capitals.


Either way, property to be down by 20% minimum from its peak.

 

[greebly24]

If the journalist who wrote this understood compound interest they would realise that 10% growth per year gets her back to $900k in about 13-14 years, not 30.

IF they meant to include inflation, depreciation, outgoings etc. then they should have mentioned that.

Sorry mate. The journo wrote the bits in bold. The other bits in between were my musings. But yeah, you are right the compounding effect. Sorry bout that.

I think the main thing to take from the article, and others like it, is that the market for second homes (ie holiday homes) is struggling, particularly in QLD. This probably has something to do with less share market & company profits and less bonuses for financial sector workers, and already existing high debt levels. Captial depreciation is also a vicious circle.

But as an unintended consequence, going without the second homes on non-urban coasts may be supportive of home prices in urban areas. What I've noticed in my beachside suburb in Adelaide is that places being built there are all 'luxury' homes now. Three-storey beachfront mansions, often with pools, have become the norm. This upward expansion is also being seen in the leafier hills suburbs. And if you've got one of those, why do you need a holiday home?

Also overseas travel has become so much cheaper, that might be negatively affecting holiday home prices too. I think it is a generational shift too. Young people seem less keen to buy and upkeep holiday homes that they only use occasionally, preferring instead cheap luxury overseas holidays (to Bali/Thailand etc) with their shrinking leisure time.

I also think some of the median price drops in the cities can be partly attributed to the high-end luxury market. It seems every single new development is called 'luxury', even in poor outer-suburbs areas. I guess developers can maximise profits that way. But with the luxury market struggling, perhaps developers should consider sub-luxury places in the near future. Smaller cheaper places on each block, basically. I think this trend is already visible in inner-city apartments. Less massive penthouses, or whole-floor apartments. More tiny apartments. They also seem increasingly popular with changing demographics too (more asians/indians/young people).

I still don't understand why new developments in the outer suburbs are so up-market. Who, aside from Kim from 'Kath & Kim' wants to live in the best house in the worst street (so she can lord it over her neighbours), a mansion in a poor run-down area? They are given deceptively-attractive names with words like "Farm" or "Glen" or "Fern" or "Grove" in their titles. It doesn't disguise the fact that they are miles out of the cities, built next door to impoverished crime-ridden areas. Would have thought cheap tiny 'starter' homes would be a better bet in those areas.

Good article in the Adelaide Advertiser today about investing in RE in some of those areas. Lots of low-paying jobs, not enough to support a mortgage, but enough to pay rent and so yields are starting to look attractive. Depends on getting good tenants though, and not those 'from hell'.

The trouble with these new pretty-sounding housing estates is that they are mostly purchased by young families by going deeply into debt. You see it in the ads; young families with happy young kids enjoying the lovely amenities. Jump forward five or ten years and you'll see what these new estates turn out like. Lots of divorces (often due to financial troubles related to taking on too much debt) and then lots of children from broken homes roaming the streets at night. Then the amenities need maintenance but the developers fled years earlier. Same old story. Soon the estates start looking very similar to the poor surrounding suburbs they tried to differentiate themselves from.

What is also interesting in the earlier article is that some of the non-urban coastal properties were now being bought by FIFO (Fly In Fly Out) mining workers. Work a week on a remote desert mine, then spend a week off at your cheaply-bought luxury beach house. Not too bad a life (except mining camp life sux).

This has been my personal experience with my parents beach shack on Eyre Peninsula. Some other shacks there have been purchased by FIFO miners as PPORs. You can tell by the massive 4WDs and massive boats out the back. Miners earn great money, but most of them aren't great money managers. Bigger incomes = bigger debts, it seems. One back injury away from losing it all, most of them.

However this FIFO demand hasn't been enough to support prices of shacks there. Few years ago the shacks were selling for $300k. Now my parents said they'd sell theirs for $250k if they could. But they can't. No takers. I think this is due to the fact that despite earning big incomes, miners are unlikely to own holiday homes. They don't seem to have enough time off, and are already away from their PPOR for weeks at a time. Not many of them seem to pack up the kids for a beachside holiday. Most of them seem to live in beachside towns instead, near where they grew up.

My brother and I seriously considered buying the shack off our parents but decided against it. As it is old, it is constant need of maintenance mostly due to exposure to salt water at the beach. My retired father is permanently fixing things on it. He loves doing it, keep him busy, and he has the technical skills to do so. My brother and I don't, and have no desire to eradicate white ants or re-paint walls or re-concrete floors or replace old rain water tanks etc etc etc etc etc with our limited time-off. Would rather just relax at an Asian resort.

Sadly, when my parents do pass away, we'll probably just sell the shack as quick as we can (before it needs more maintenance) which will put downward pressure on surrounding shacks' values too I guess. But that seems to be the way things are headed. Heard some stories about investors buying deceased estates at below market value, then patiently waiting a year or two to sell at market value. Sort-of slow motion flipping.

I'm currently renting. Going forward, I am leaning towards buying a tiny studio inner-city apartment as a crash-pad for work during the week, and also buying a block on the coast not too far from the city to build a house to set my future family up in (strangely, my partner seems to love the idea ). A place where I can spend my weekends and eventual retirement. Then we could sell the city apartment, or rent it out for cash flow, or use it as our city crash-pad when we need to go there. Best of both worlds strategy. And with prices of both inner-city apartments AND coastal blocks "softening", it all seems to be falling into place. High savings, healthy investments, zero debt, property "softening" --- let the good times roll.

Oh yeah, as for the future of Australian property prices, I think it all depends on if US & Euro debt problems cause a China slowdown causing a commodity price crash. The world has never been more inter-dependant. We are in a global situation where there is too much debt that can't be repaid, except by money printing. So we're currently experiencing a deflationary depression where everything, including housing, will get cheaper. Whether they print vast amounts of money to re-pay all the debt and we enter an inflationary stagflation is completely unknown by anyone.

The biggest driver of house price increases anywhere (including China) is credit growth. It's growing slower in Aust now (+5% compared to much higher during the boom), and so house prices are now "softening" slightly (-4%). If international credit markets seize up again, like in '07, and credit growth stops and even shrinks, then property will collapse (just like it did in overseas markets where credit growth went into reverse). Lots less money being borrowed = lower prices for everything. Anything else impossible. But who really knows?

I read that South Australia's population increased by only 0.8% last year. Think that means about 12,000 more people needing about 5,000 more homes in a state of 1.6 million people living in around 600,000 homes already, with over 10,000 homes on the market already too. Not exactly a recipe for a boom either. And with the prices of student apartments here dropping significantly, I guess overseas student numbers might be decreasing too???

Looking at prices round Adelaide, if they were 25% cheaper they'd seem to be reasonably priced. So that's my prediction for the downside in total from their peak last year(2010), 25% less in 2014 on an inflation-adjusted basis. So around 15-20% less in actual dollar terms. So down 5% already, three more years of 5% drops and some inflation, me thinks. Based on anecdotes from many friends waiting for market to recover in order to sell, which will eventually lead to individual then mass capitulation. Bit of wishful thinking in there too

 

[explod]

greebly24 that last post of yours was one of the most thoughtful and well put that I have seen in awhile.

Look forward to reading your outlook as the 2012 market progresses.

 

[young-gun]

The trouble with these new pretty-sounding housing estates is that they are mostly purchased by young families by going deeply into debt. You see it in the ads; young families with happy young kids enjoying the lovely amenities. Jump forward five or ten years and you'll see what these new estates turn out like. Lots of divorces (often due to financial troubles related to taking on too much debt) and then lots of children from broken homes roaming the streets at night. Then the amenities need maintenance but the developers fled years earlier. Same old story. Soon the estates start looking very similar to the poor surrounding suburbs they tried to differentiate themselves from.

indeed this is happening everywhere. perfect example is north 'lakes'(brisbane north) and also to a lesser extent warner lakes. another issue aside to those that you pointed out greebly, is the fact that there is always more and more land released. first they release stage one, and all the first home owners and young families leap at the chance to live in this new 'luxurious' haven. then once the developer flogs them off at sky high prices, they then release stage 2(instantly devaluing all the poor families land that bought just a few months ago) but still release just enough to flog them off at sky high prices aswell. some blocks of which dont even exceed 400m2(and thats a generous sized block) some blocks under 350 even which covenants state MUST have a double story house built. stage 3 is then released and so on and so fourth. great for the developers, bad for the guys that bought and built stage 1. occasionally the riff raff from neighbouring kallangur will venture across the border to spray paint a few walls and deface the fresh new 'upper-class' suburb.

by the time a couple of years have passed why would you buy a 2-3 year old house for 500k when you can build a brand new one in stage 4 for 450k or even less? this brings prices of the initial houses down, as a friend of mine recently realised when they picked up a stage 1 home for an absolute steal(in comparison to peak prices).

without diving too deep into it here i agree with your views on credit growth also(which has accelerated greatly since around 99-00) it's essentially a ponzi scheme.

 

[Garpal Gumnut]

Townsville property is getting cheaper by the month.

Where will it all end?

I just own me house and a block of land about it, so I'm happy, but if I were a seller I'd be worried.

In fact if I were a buyer I'd be worried as it's on the way down.

The Government need to stimulate the economy and stop spending money in to lost politically correct schemes like pink batts and getting Kevvie in to the UN Sec Gen job with the Global Warming Hoax, taxes and pandering to the Greens.

Young couples with children looking at buying a house for life need certainty, not all this upheaval.

gg

 

[sptrawler]

greebly24, well thought out post. What i would add to it is, if your dad has outgoings of $20.000 p/a and his pension doesn't cover it, the shack will be sold.
This is the problem that is going to sink in very soon.
In the 80's everyone wanted $600,000 to retire rich and not a worry in the world.
In 2000 it was moving upto $800,000, now if you ask someone who you work with, how much they would like to retire with $1,000,000 is thrown around.
Most of the baby boomers don't have anywhere near that, so the investment property/ holiday home comes into the retirement equation.
This will really come to the fore in the next couple of years when baby boomers HAVE TO RETIRE, the pension is crap. They won't have any option, but to sell. IMO
Sad reality, age catches up eventually.

 

[Julia]

greebly24 that last post of yours was one of the most thoughtful and well put that I have seen in awhile.

+1. Well thought out and constructed, greebly. Most interesting reading with its combination of objective market comments and personal relevance. Thank you.

 

[ZSlaveski]

Very interesting exposé on Bullion Baron blog about Australian property manipulations and shady characters getting in control of real estate market!

http://www.bullionbaron.com/2012/01/strindberg-identified-as-apfghpc.html

Can not trust any one!

 

[kid hustlr]

Just a couple of quick ones.

When data refers to 'median house prices' does this include houses AND units or just houses?

Secondly, if I wanted to find data on housing growth over the last xyz years. Where is the best place to find this information?

Thanks in advance.

 

[Starcraftmazter]

Just a couple of quick ones.

When data refers to 'median house prices' does this include houses AND units or just houses?

Secondly, if I wanted to find data on housing growth over the last xyz years. Where is the best place to find this information?

Thanks in advance.

Both

http://www.whocrashedtheeconomy.com/realhouseprices1880to2011.gif
Probably ABS

 

[Peak Debt]

Secondly, if I wanted to find data on housing growth over the last xyz years. Where is the best place to find this information?

Thanks in advance.

There are four main organisations, Residex, RPData, APM and ABS.

You can find link to all their house price indices below.

Australian Property Research Data

That link also has auction results, sold property details, industry property reports etc.

 

[matches]

My view on the current level of house prices? even with a price spike in the early 2000's, arrears only got up just above 1% in '07(?)..

My view on the future of house prices? I think ppl will start spending on houses again when they start spending on everything else.

 

[young-gun]

M

My view on the future of house prices? I think ppl will start spending on houses again when they start spending on everything else.

which will be in about 2018/2020, when gen y comes in to pick up the slack, and starts having kids and buying houses etc etc etc.

 

[greebly24]

Sean Quinn, formerly Ireland's richest man worth $4.7 billion Euros, has been declared bankrupt. Lost the lot on Irish property development and bank shares. Bugger. Now his wife's trying to argue in court she didn't know what she was signing when she went guarantor. D'oh!

But even weirder is the former yellow Wiggle, Greg Page, having to rejoin the band. After 15 years of Wiggles' earnings and a $50m severance, he lost the lot developing RE in Sydney. Probably going to have to sell the mansion ($7M) and the Elvis memorabilia collection ($4M) too. Retired a multi-millionaire at 35 due to ongoing illlness, now broke and back to work at 40. Bugger.

Anyone know how you can lose $50m+ on RE in Sydney???

 

[Tysonboss1]

Offourse you can lose when it comes to leveraged developments,

I doubt either example would be bankrupt if it was straight simple nonleveraged real estate, rental collection businesses.

 

[Bill M]

Sean Quinn, formerly Ireland's richest man worth $4.7 billion Euros, has been declared bankrupt. Lost the lot on Irish property development and bank shares.

After 15 years of Wiggles' earnings and a $50m severance, he lost the lot developing RE in Sydney.

What has development got to do with buying an investment property and renting it out? Nothing! 2 totally different things. My IP is going real well, income coming in every Month, good tenant and hassle free.

 

[satanoperca]

It seems that Melbourne’s booming dwelling construction is having the desired effect, with the state’s rental vacancy rate hitting a seven year high of 4.4% according to SQM research

http://www.sqmresearch.com.au/graph_vacancy.php?region=vic%3A%3AMelbourne&type=c&t=1

Rental market not to rosey down here in sunny Melbourne, Bill M.

The amount of new apartments being built or just finished around the CBD is just astonishing. Also over the last few months seeing many development sites for sale with building permits. Rumour has it the banks arn't playing ball anymore with developers.

Oh well, we will see how things work out over the year.

Cheers