The future of Australian property prices

[McLovin]

Yeah, I just don't know how much longer the capital growth party go on for when fewer and fewer locals can afford to buy, and renting is becoming the same.

Just let foreigners start buying. Our capital cities will become like London.

I still think decentralising our states makes sense. We're a long way from that though.

 

[DeepState]

Yeah, I just don't know how much longer the capital growth party go on for when fewer and fewer locals can afford to buy, and renting is becoming the same.

Here's the a key point, I think. Although fewer locals can afford to buy, those already on the property ladder locally are doing so. Further, foreign buyers are coming in with a pretty significant tilt coming ultimately from China in recent years. Chinese property ownership is rampant due to financial repression and also the desire to hold hard assets. A good chunk of the investment properties in China are held totally vacant with no intention of renting. The belief is that renting will spoil the asset because it has been used.

Whether or not you think the cash is tainted, it is coming in via various mechanisms. SB, you'd know that property transactions are being less financed via leverage and thus more by equity. This equity could actually be credit from offshore that is classified as equity in Australia because APRA stats aren't taken on such matters. With easy credit still available and part of CB or government strategy, that's a pretty big pump.

When you have a country with a current account surplus (although trade surplus has now vanished), some of this gets recycled out and smuggled out. This figure is probably large and is likely to get larger as Chinese capital accounts get opened.

The price for property is set at the margin. At any given time there are a finite amount of properties for sale [how many home owners actually make a decision to sell the family home because they made a valuation decision that renting was preferable? Further, it has been observed by others on this thread that investor properties exhibit momentum effects] and, sort of like oil, demand when you are facing rubbish effective interest rates, poor alternative investment choices and a desire just to get the heck outta here means that prices can escalate a lot further due to demand inelasticity. This is particularly so in certain inner city locations so it doesn't impact the entire capital stock equally. Development in these locations is not likely to reduce prices much even if efforts are made to increase density. Development at the borders of urban areas where I think most of the large estates get built might help lower prices in the general vicinity after adjustment for quality. Location location location. Crikey, is this the 'New Normal' of property? Valuation via rentals and domestic income may not be relevant for years as capital movement just swamps it. If your alternatives are worse, property is less bad and therefore a buy.

Ultimately, value will prevail, but we might have to wait a while. Meanwhile capital distortion causes spillovers. Depending on where these are directed, it is not a given that this is altogether a simple matter of efficient capital allocation espoused in some LM-IS curve. This only occurs in theory.

 

[qldfrog]

Following Retiredyoung, property has a very strong emotional component , and I would add coming from O/S is strongly embedded in the Australian psyche;
I would bet anything that even after years of pathetic return and yield, the average Aussie would still remember how you never loose on property;
I bought my first PPOR in a Brisbane suburb after arriving in the 95's at the same price as the vendor bought it 10 years earlier
that was when Australia had double digit inflation, 10+morgage rates and that family did some improvement and paid all the usual rates etc
What a disaster Real estate was for them!!!!
But even this relatively new experience is not acknowledged;
Even the rich and famous are not immune
http://www.brisbanetimes.com.au/domain/real-estate-news/shane-watson-loses-out-on-gold-coast-pad-20140712-zt5lp.html

 

[skyQuake]

...when you are facing rubbish effective interest rates, poor alternative investment choices and a desire just to get the heck outta here means that prices can escalate a lot further due to demand inelasticity. This is particularly so in certain inner city locations so it doesn't impact the entire capital stock equally.

Great post RY.

 

[Glen48]

Following Retiredyoung, property has a very strong emotional component , and I would add coming from O/S is strongly embedded in the Australian psyche;
I would bet anything that even after years of pathetic return and yield, the average Aussie would still remember how you never loose on property;
I bought my first PPOR in a Brisbane suburb after arriving in the 95's at the same price as the vendor bought it 10 years earlier
that was when Australia had double digit inflation, 10+morgage rates and that family did some improvement and paid all the usual rates etc
What a disaster Real estate was for them!!!!
But even this relatively new experience is not acknowledged;
Even the rich and famous are not immune
http://www.brisbanetimes.com.au/domain/real-estate-news/shane-watson-loses-out-on-gold-coast-pad-20140712-zt5lp.html

Same here turned over about 10 properties in my time only made quick money out of two,the last one when up not due to house prices but low interest rates and as IR's
come down there will be another boom.

 

[sydboy007]

Just let foreigners start buying. Our capital cities will become like London.

I still think decentralising our states makes sense. We're a long way from that though.

Easier said than done, but yes it makes great sense to stop trying to cram most of the population into 3 mega cities on the east coast.

If we could get some Govt action on assisting the tradeables sector we might see some businesses moving into more regional areas due to relatively low cost land. That's require more than jawboning from the RBA on the dollar, and some serious policy changes to stop so much money being directed to residential property. I must be dreaming to think anything like that is likely to occur with the current poisonous politics we've got now.

 

[sydboy007]

An interesting concept of expensive housing as a form of inflation hedging. In a previous article he saw investment properties similar to a pension annuity style investment.

http://principlesandinterest.wordpress.com/2014/07/22/when-is-housing-too-expensive-a-hedge-to-hold/

I should be clear at this point that connecting pension hedging to house prices is (today) a minority position. What is the upshot of this minority view? Well, although housing looks (to me) overvalued as a punt given my expectation of a rise in debt-service ratios over the next couple of years (eg it is a hedge that fewer people will be able to afford if rates rise, dampening demand), it doesn’t look like the most expensive hedge out there given changes in cost of other forms of inflation hedging (for those with the means to hedge). And there’s the tax incentive too (eg, as an owner you pay yourself rent out of your gross income, as a renter you pay someone else rent out of your net income). Which is not insubstantial.

 

[Vixs]

Easier said than done, but yes it makes great sense to stop trying to cram most of the population into 3 mega cities on the east coast.

If we could get some Govt action on assisting the tradeables sector we might see some businesses moving into more regional areas due to relatively low cost land. That's require more than jawboning from the RBA on the dollar, and some serious policy changes to stop so much money being directed to residential property. I must be dreaming to think anything like that is likely to occur with the current poisonous politics we've got now.

Now there's a post of yours that I can wholeheartedly say I agree with sydboy007

So much capital is tied up in housing investment, and until it starts looking like a bad idea to the masses nothing's going to change...

 

[Smurf1976]

as IR's come down there will be another boom.

I don't doubt that a further fall is possible, but there's a limit to how much lower IR's can go realistically given that we're already at a very low level.

It's like saying that things will change during Summer as the temperature rises. Then you realise that it's already 42 degrees - there's not a lot of room left for a further rise of any significance.

 

[Glen48]

Yes if banks are charging you to deposit money like they are doing in Europe then you know they have gone about as low as possible.

 

[Macro Polo]

Yes if banks are charging you to deposit money like they are doing in Europe then you know they have gone about as low as possible.

Hi Glen,

The negative deposit rate only applies to excess liquidity held by banks at the ECB.

The negative rate doesn't apply to things like a savings account, only to banks deposits at the central bank.

Banks would not have much fun trying to attract depositors with negative rates.

 

[qldfrog]

I don't doubt that a further fall is possible, but there's a limit to how much lower IR's can go realistically given that we're already at a very low level.

It's like saying that things will change during Summer as the temperature rises. Then you realise that it's already 42 degrees - there's not a lot of room left for a further rise of any significance.

well and that is when a totally unexpected event happens:
for temperature in summer: global warming,


for IR.. who knows, taxing savings is a nice way to have real world negative interest rate and that is happening now coupled with inflation;
ie TDat 3.5% inflation at 3% tax at 52% not much left and you risk your TD being below inflation by the time it matures
IR imho will fall a bit more, but mostly the RBA will let inflation run;
maybe not the official figure (to keep a pretence) but real inflation will go up (as soon as AUD falls, and as a result of taxes aka services bills, rates etc not linked to free market, the mandatory expenses which sems to go up by 6/7% a year irrespective of the economy)
In that case, more reasons to get some brick and walls.

 

[Glen48]

Business can put up prices to compete with inflation but if there is no confidence buyer's will curl up and save.
so watch the news over the next few mths..QE500 is due to cease in Oct which will be the key point.

However house prices will rise as the AUD falls and IR come down.

The French are building 1.6B worth of war ships for Russia but USA want the French to sanction Russia so nothing is certain in the mad world of money.

 

[sydboy007]

http://blog.australiaboomtobust.com/2014/08/propertied-federal-political-class/

The public should ask “Are the property holdings of our federal politicians negatively influencing policy and causing them to ignore evidence?” The parliamentary register of members’ interests may help to answer this question, allowing for a summary report of real estate holdings for each Australian federal politician (which may be jointly owned with their spouse).

It is evident that politicians are heavily invested in the property game, with the 226 members in both houses of parliament with an ownership stake in a total of 563 properties – an average of 2.5 properties per member, conservatively estimated at around $300 million (563 multiplied by the median dwelling price of $530,000 as of July 2014).

Australia’s federal political class own an enormous property portfolio, with only 13 of the 226 members (6 per cent) not holding any real estate. In the Senate, 76 members own a total of 202 properties – 2.7 properties per Senator – estimated to be worth around $107 million.

Further, 91 per cent of all Senators own real estate (57 per cent investment/commercial property/vacant land, 41 per cent owner-occupied and 2 per cent recreational), 75 per cent have a mortgage, and the top ten control a colossal 95 properties.

Senator Xenophon maintains an impressive portfolio of eight investment properties, along with Senator Barry O’Sullivan from the National Party who owns an incredible fifty properties (see Table 2). The high concentration of landed gentry in the Senate acts as a vested interest to pass policies which inflates housing (land) prices.

The 150 members in the House of Representatives also have substantial property interests. In total, they own 361 properties – 2.41 properties per member – estimated to be worth around $191 million.

Moreover, 95 per cent of all Representatives own real estate (54 per cent investment/commercial property/vacant land, 43 per cent owner-occupied and 3 per cent recreational), 86 per cent have a mortgage, and the top ten own an astonishing 92 properties. Double-digit property holdings are maintained by David Gillespie (NP, 18 properties), Clive Palmer (PUP, 13 properties), Natasha Griggs (CLP, 12 properties) and Karen Andrews (LIB, 10 properties) (see Table 2).

The trends in the data suggest a sizeable majority of federal politicians have a vested interest in maintaining high housing prices, particularly since most have mortgages over their own investments. A fall in housing prices may cause many politicians to fall into negative equity, providing a strong incentive for politicians to enact legislation which has helped fuel a housing bubble, enriching owners.

When the top twenty members of the landed gentry in federal parliament own 191 properties, it is difficult to believe that politicians will address the real causes of housing unaffordability, despite the recommendations from government reports.

 

[CanOz]

Wow, that's a great way to spin the facts there...well done.

Anyone who makes more than 150k per year in Australia would very likely own multiple properties. Unless of course they're an overpaid union Bogan that smokes and drinks their salary each month, then uses the other half to pay their alimony...

CanOz

 

[Value Collector]

Business can put up prices to compete with inflation but if there is no confidence buyer's will curl up and save.
so watch the news over the next few mths..QE500 is due to cease in Oct which will be the key point.

However house prices will rise as the AUD falls and IR come down.

The French are building 1.6B worth of war ships for Russia but USA want the French to sanction Russia so nothing is certain in the mad world of money.

You can baffle yourself if you spend to much time trying to read the future by watching the macro events.

In my opinion it's much better just to focus on the micro things happening that affect your portfolio, and spend your time looking for value and adding it to your portfolio where you can.

 

[sydboy007]

Wow, that's a great way to spin the facts there...well done.

Anyone who makes more than 150k per year in Australia would very likely own multiple properties. Unless of course they're an overpaid union Bogan that smokes and drinks their salary each month, then uses the other half to pay their alimony...

CanOz

So you fully believe that a politician with multiple properties would have no second thoughts about pushing through policies that would see more affordable housing released which could cost them tens to hundreds thousands of dollars?

Do you find it interesting that Xenophon has 8 properties and is lobbying for FHBs to be able to tap into their super to buy a property?

 

[satanoperca]

When the top twenty members of the landed gentry in federal parliament own 191 properties, it is difficult to believe that politicians will address the real causes of housing unaffordability, despite the recommendations from government reports.

Why would they? They are in it for themselves, not for the good of the country. Ideals are for those that don't have money, unfortunately.

And secondly, divorce is expensive. Sorry honey, I voted for legislation that will make housing more affordable, but it also means you cannot have your allowance any more for frivolous spending on dresses, haircuts and coffee with your friends as our net wealth will decrease.

Cheers

 

[CanOz]

So you fully believe that a politician with multiple properties would have no second thoughts about pushing through policies that would see more affordable housing released which could cost them tens to hundreds thousands of dollars?

Do you find it interesting that Xenophon has 8 properties and is lobbying for FHBs to be able to tap into their super to buy a property?

And i suppose they benefit from the carbon tax repeal as well? In fact i bet they benefit from all the laws they make somehow, either directly or indirectly...Labor and Liberal, Green or Blue

My main point was the way you spin everything?

Syd are you a labor party spin mule?

 

[satanoperca]

And i suppose they benefit from the carbon tax repeal as well? In fact i bet they benefit from all the laws they make somehow, either directly or indirectly...Labor and Liberal, Green or Blue

My main point was the way you spin everything?

Syd are you a labor party spin mule?

Hi Canoz,

Whether he is Labor biased or not, allowing FHB to access their super does not address the issue of housing affordability and making for a better society for everyone to prosper in.

High property prices do not make a community wealthy, nor does it mean it is a great place to live and prosper.

I think his point is, how can you expect our elected official to make good decision when they are biased towards their own needs. The real question is, are there any elected officials that don't have a vested interest in their policy decisions. I doubt it.

Back to work for me, doing something productive for our society, while benefit me and my family.

Life goes on.