The future of Australian property prices

[robots]

hello,

oh yeah:

http://www.theage.com.au/national/migration-numbers-at-record-high-20091203-k8tf.html

this is fantastic data for australian title holders, plenty more space for people to come so hopefully the government keeps it going

thankyou
robots

 

[Aussiejeff]

hello,

oh yeah:

http://www.theage.com.au/national/migration-numbers-at-record-high-20091203-k8tf.html

this is fantastic data for australian title holders, plenty more space for people to come so hopefully the government keeps it going

thankyou
robots

Yes, fantastic.

Hopefully Oz can get to 50 million by 2050 with cities 3x current populations!

Wonderful opportunity for endless growth & fun times.

[size=-3]PS - Thank gawd I will be pushing daisies well and truly by then![/size]

 

[Beej]

Debt.

While below it's peak the percentage of household income that is used to service loans is still very high, higher than during the interest rate peaks of the late 80's IIRC from RBA information I posted in one of the earlier property threads a few months ago.

Household income can be any number not just 2 and with kids staying home longer is not necessarily a good way to measure income to house price but then neither is 1 income because most wifes work at least part time. Possibly a more accurate way to measure sustainability of prices is debt (not just mortgage debt but all debt ) and the percentage of income required to service that debt.Because house prices are based on supply / demand on one hand and liquidity on the other IMHO, not just supply demand

Yep, both very good points, and certainly supply/demand needs the available liquidity to work and push prices higher. In terms of household debt serviceability, yes there is more absolute household debt than in the 80s peaks etc now, but I recall seeing data showing that serviceability is actually easier now compared to the 80s? Especially say 1990/91 when rates hit 17%+, as the prevailing interest rates have been far lower over the past 10 years than earlier.

So the key really is long term interest rate trends, relative to wage inflation of course (as opposed to real wage growth, which just adds cream to the affordability equation and therefore prices). Ie if interest rates go high and stay high (say 10% plus), and there is no corresponding wage inflation, then many aussie households would be in trouble (as would property prices).

However I see this as a very unlikely scenario - I reckon that if we do move into a higher interest rate environment in the future, it will be *because* there has been a break out of wage inflation, so even though debt servicing costs will rise in nominal terms, debt/income ratios and serviceability ratios will fall due to the inflationary effects, and prices will hold and/or continue to rise in line with that inflationary pull at least, but like the 80s would probably not grow much in real terms (on average) in this scenario.

The most likely scenario for the next few years though I think for Australia is continuation of fairly low interest rates, continued real wage growth/household income growth, and a steady, but not dramatic rise in property values accordingly. I think 2009 was more about undoing the 08 correction, helped along with a bit of government stimulus, so 2010 will see more subdued growth, but growth none-the-less, in most segments, with the possible exception of the lower 25% which could pull back a bit IMO.

Cheers,

Beej

 

[MACCA350]

Just thinking out loud.............

Assuming the RBA takes into account house prices and sales volumes etc and adjusts the cash rate higher to keep the housing market in check(among other things).

Let's say that international buyers have been increasing and is currently around 50% of properties sold.

These international buyers will be using international monies and not really affected by our interest rates changes.

So........wouldn't we get to a point where the RBA cannot affect the housing market..........I mean if they increase rates it only affects local buyers with mortgages and has no effect on international buyers.

There must be a tipping point, ie if the split is 10/90%(local/international) then the RBA rate would have an effect, if the split were 90/10% then surely the RBA rate would have virtually no effect.

The problem then would be that housing could become disjointed from the local population and have no direct correlation to the prosperity of the local community. In other words local incomes could stagnate, interest rates could climb to historic highs yet housing prices could still go through the roof since demand is not local and not subject to local issues.

I know this hypothetical seems extreme, but recent events makes you wonder what the end game is.

cheers

 

[prawn_86]

Macca,

Those international investors would have to convert their currency to AUD so in the conversion the interest differential is taken into account. The only way interest rates would not have an effect on them is if they paid the property off in full.

 

[MACCA350]

Macca,

Those international investors would have to convert their currency to AUD so in the conversion the interest differential is taken into account. The only way interest rates would not have an effect on them is if they paid the property off in full.

Not sure I follow, is the currency conversion directly related to the local interest rate? I didn't think it was.

If they had a mortgage wouldn't it be serviced by their bank in their country, so the only conversion would be when their bank pays for the property in full then they pay their bank in their local currency subject to their countries interest rate.

Or do I have this all wrong and international buyers who wish to buy here and need a mortgage have to take it out through our banks?

cheers

 

[prawn_86]

Not sure I follow, is the currency conversion directly related to the local interest rate? I didn't think it was.

If they had a mortgage wouldn't it be serviced by their bank in their country, so the only conversion would be when their bank pays for the property in full then they pay their bank in their local currency subject to their countries interest rate.

Or do I have this all wrong and international buyers who wish to buy here and need a mortgage have to take it out through our banks?

cheers

Yes, the exchange rate is a direct relationship between the IRs of the 2 countries.

Its a common misconception that you can borrow overseas, pay the cheaper rates, and then invest at a higher yield everywhere. If it was that simple, everyone would be doing it.

Essentially the overseas investors could take out a loan from their bank if they wanted, but they would then need to change their currency into AUD to purchase the property here, so then the repayments for that property (which are in AUD) change each time interest rates change, as does the value of the exchange rate, so they are paying the equivilant amount as having an AUD loan.

Essentially this is what people tried to do back in the early 90's with the Swiss Franc carry trade. Where it came unstuck was that they didnt hedge out their positions and then it all ended up blowing up, because all they were doing in essence was betting on the exchange rate.

 

[robots]

Yes, the exchange rate is a direct relationship between the IRs of the 2 countries.

Its a common misconception that you can borrow overseas, pay the cheaper rates, and then invest at a higher yield everywhere. If it was that simple, everyone would be doing it.

Essentially the overseas investors could take out a loan from their bank if they wanted, but they would then need to change their currency into AUD to purchase the property here, so then the repayments for that property (which are in AUD) change each time interest rates change, as does the value of the exchange rate, so they are paying the equivilant amount as having an AUD loan.

Essentially this is what people tried to do back in the early 90's with the Swiss Franc carry trade. Where it came unstuck was that they didnt hedge out their positions and then it all ended up blowing up, because all they were doing in essence was betting on the exchange rate.

hello,

why so Prawn86 when taken out loan in origin country

for example, friends purchased paris apartment several years ago, loan with a big 4,

500k (aussie) converts into 300K (euro), buy apartment, loan repayments still in aussie

yes, return (weekly, monthly, yearly etc) and asset value currency dependent

hope everyone having a beautiful day

thankyou
robots

 

[MACCA350]

Thanks for clearing that up ............and maybe disregard my whimsical thoughts

cheers

 

[robots]

hello,

no worries man, thats why i am here to help out fellow man in their pursuit of happiness

i hope one day in the future ASF might allow question time back, like what used to occur evening time during the week, great participation from all

thankyou
robots

 

[prawn_86]

500k (aussie) converts into 300K (euro), buy apartment, loan repayments still in aussie

yes, return (weekly, monthly, yearly etc) and asset value currency dependent

As usual, i cant understand what your saying. Are you agreeing or disagreeing with me?

In this example it means the 500k outlay is now subject to currency variations if not hedged, so is a bet on the currency as opposed to the property. So if the Euro fell and the property was sold then you might get back way less.

Any unhedged overseas investment with a loan originating in another country will be a bet on forex rather than the property market. And any hedged investment will cancel out any yeild differences.

 

[Wysiwyg]

hello,

why so Prawn86 when taken out loan in origin country

for example, friends purchased paris apartment several years ago, loan with a big 4,

500k (aussie) converts into 300K (euro), buy apartment, loan repayments still in aussie

yes, return (weekly, monthly, yearly etc) and asset value currency dependent

hope everyone having a beautiful day

thankyou
robots

Say an American took out a loan in America and bought an Australian property. (exchanged to aud from usd) The loan would be serviced in America while the house would be effectively owned in Australia. If currency exchange rates move appreciably in favour of the American investor by the time they wanted to sell, then they could make extra profit on top of the probable property capital gains.

Yes?

 

[prawn_86]

Say an American took out a loan in America and bought an Australian property. (exchanged to aud from usd) The loan would be serviced in America while the house would be effectively owned in Australia. If currency exchange rates move appreciably in favour of the American investor by the time they wanted to sell, then they could make extra profit on top of the probable property capital gains.

Yes?

Yep. And same goes for a loss if the currency moves unfavourably.

As you are now exposed to currency risk as opposed to just market risk from property. So there are now 2 types of risks present.

 

[robots]

hello,

my post is there to assist Macca350, i dont know what you are going on about Prawn86

please re-read my post regarding Paris example, its all there ie.currency risk

please see post #108, bold section regarding post

thankyou
robots

 

[prawn_86]

hello,

my post is there to assist Macca350, i dont know what you are going on about Prawn86

please re-read my post regarding Paris example, its all there ie.currency risk

please see post #108, bold section regarding post

thankyou
robots

Ok i just couldnt tell if you were agreeing or disagreeing.

thanks

 

[robots]

hello,

no worries

thankyou
robots

 

[Wysiwyg]

Yep. And same goes for a loss if the currency moves unfavourably.

As you are now exposed to currency risk as opposed to just market risk from property. So there are now 2 types of risks present.

Property maintenance dollars such as council rates or body corporate fees would be have to be converted yearly from USD to AUD. Alternatively, the foreign owner has a bank account in Australia to pay for property maintenance thus avoiding exchange rates during the ownership.

True?

 

[robots]

hello,

yes thats right, its a currency issue when you "bring it back" either return or asset sale profit/loss

prawn86, how would someone hedge buying a property in the Paris example?

thankyou
robots

 

[robots]

hello,

paradise:

http://www.news.com.au/couriermail/story/0,1,26442202-952,00.html

great family photo, what an asset class

thankyou
robots

 

[satanoperca]

Hello,

Property prices on way down, warns bank

http://www.smh.com.au/business/property-prices-on-way-down-warns-bank-20091204-kays.html

THE National Australia Bank forecasts a 5 per cent decline
in property prices by the end of next year, following higher interest rates and unemployment.

NAB envisages 25-point cash rate increases at the February and March meetings of the Reserve Bank taking the cash rate to 4.25 per cent.

After a pause of about six months, rates would rise to 4.75 per cent by late in the year and 5.5 per cent by mid-late 2011

So an increase of over 30% on mortgage payments with a small correction on prices. The FHB segment of the market will be the one to watch, those who purchased with the lowest interest rates in 50 years & with high LVR's and high RE prices.

Cheers