The future of Australian property prices

[Smurf1976]

So what is it about this bubble that makes it different from those that came before?

The sheer scale of it seems far bigger than anything Australia has experienced in the past. If / when it pops then we're in for a world of hurt economically and that's true even for those who don't own property.

That plus the effect that high housing costs are having on our overall economic competitiveness. Many will say, and I see their point as valid, that Australian wages are too high by international standards. On the other hand, the cost of housing alone would justify a pretty decent wage hike real quick on affordability grounds. There's a big dilemma there - Australians can't afford to live in their own country on wages that would make us internationally competitive in practically any industry.

 

[InsvestoBoy]

I agree and I been around a lot longer. I am actively looking for a 2 br x 2 bathroom unit with views, balcony, quiet and walking distance to a railway station. Some Saturdays I don't even go for open for inspections because nothing new has come up.

And who is buying? Anyone and Everyone. There are young couples, working couples, Chinese families, gay couples and virtually any type of person you can imagine, come from all cultures and walks of life. All want the same thing as my wife and I. We end up following each other around at the open days.

The thing is, as long as there is so much demand and so little around, prices will not be coming down. Only the junk units stay on the market, good ones we have to try jump on before the first open day as they don't last long.

Everybody I talk to who is looking in our market says the same thing, so little around and too much off the plan stuff where they haven't even turned a sod yet. Today we stayed home, nothing of interest came on the market, the search continues.

I am only new here so I don't know how much my opinion counts for on this matter.

That said, I think this view of "who is buying" forgets the major factor in all of this price rise over the last 20-30 years, which has far outstripped inflation, wages, etc.

The forgotten factor is: mortgage origination! Essentially there is only a very few people, essentially nobody, buying places for cash. That means for increase in the price of housing, or even for it to stay steady, must mean someone can apply for and receive a bank mortgage to pay a little more than the last person who bought it paid.

You can see in articles like this one from a month or so ago, that Aus big 4 banks are already capping their origination on new apartments:
http://www.abc.net.au/news/2016-09-02/foreigners-funding-the-apartment-boom/7809752 ..if there is no new mortgages, then prices on those apartments are not going to magically get bid up to the prices property developers probably assumed and need for decent profits. Also worth to point out, that the banks have their finger on the market pulse, if they sense risk in those apartments enough to cap origination, then there probably is some risk.

But while the banks do essentially loan this money into existence based on your creditworthiness, regulation dictates it's not a magical infinite spigot of credits, those loans are funded from somewhere and that is what makes up the banks "Net Interest Margin" that everyone talks about. Australian private sector is in deficit, it consumes more than it saves, so after bank deposits are used as funding for some loans, the rest comes from overseas. A lot of that "overseas" funding is from Europe and other places in much more precarious financial position than our own.

You can read some more recent stuff about this topic here http://www.afr.com/business/banking...mix-under-the-spotlight-again-20160407-go0vet

I am not predicting it would happen tomorrow or something like that, but let's face it, the funding risk for banks globally is huge, even if we are in a good position, we may "catch a cold when the rest of the world sneezes". You might see a lot of people at the auctions and open houses today, but are they going to be there if the banks can't originate mortgages because of funding stress?

There will always be someone who wants to sell. Maybe they can't afford it anymore, maybe they need a bigger or smaller one, maybe they are selling a deceased estate. If there are no mortgages available to bid at the current price, then supply will have to price offers lower to find bid demand.

That is why I think it is entirely possible for prices to go lower (potentially much lower?) without an obvious shock, regardless of how many are waiting to buy.

 

[InsvestoBoy]

Also one other note, houses as an investment is just like any other investment:

As long as you assume a relatively stable currency purchasing power, then the investment return is bounded by some sort of mathematics. At the very edges, we can all agree that an investment property will never return rents of 100% per annum, or -50% per annum. There are boundaries in the real returns even if the currency purchasing power is fluctuating.

Because of this there must certainly be some upper bound influenced by stuff which falls under the category of "borrower creditworthiness". So even if prices are going to go up, it seems unlikely they will continue at the same pace as we saw over the last decades, because that would mean average house price in Sydney will be $2 million, or $4 million before very long! The higher the price goes, the lower your creditworthiness is, regardless of your industry or job stability. So maybe house prices go up at the pace matching inflation, but if house prices continue rise 10% per annum while the inflation rate is close to 0% and wage growth is also close to 0%, then who will be creditworthy enough to get a mortgage? It doesn't make sense!

 

[sptrawler]

The sheer scale of it seems far bigger than anything Australia has experienced in the past. If / when it pops then we're in for a world of hurt economically and that's true even for those who don't own property.

That plus the effect that high housing costs are having on our overall economic competitiveness. Many will say, and I see their point as valid, that Australian wages are too high by international standards. On the other hand, the cost of housing alone would justify a pretty decent wage hike real quick on affordability grounds. There's a big dilemma there - Australians can't afford to live in their own country on wages that would make us internationally competitive in practically any industry.

That is only because our currency is still relatively high.

 

[So_Cynical]

Roger Montgomery says he is holding 50% cash in his fund because he fears a housing collapse, earning 2% interest is better than losing 20% of your capital in property.

 

[greggles]

Economist Chris Richardson of Deloitte Access Economics predicts Australian property is set to become the "worst investment" over coming decades.

http://www.news.com.au/finance/econ...t/news-story/879ccda89e9a975db95c60a4fefb2c43

 

[Bill M]

Economist Chris Richardson of Deloitte Access Economics predicts Australian property is set to become the "worst investment" over coming decades.

http://www.news.com.au/finance/econ...t/news-story/879ccda89e9a975db95c60a4fefb2c43

Interesting article, and I would like to discuss a couple of points. The young fellow who goes out and eats $22 breakfasts and lives a good life and then complains of house prices is most likely a wasteful person and will most likely end up like a few mates of mine who are 60 y/o and rent rooms or garages to live in. We sacrificed a lot when we bought our property, we never went to cafe's paying $44 for 2 people to have breakfast and now that we are retired we still don't. Saving for a house means going without, it's not buying the latest iphone or the latest new motor car or loading up the credit card to buy those breakfasts that's for sure.

Secondly, the guy is right that transport is crap in Australia, particularly in Sydney. Sure you can still buy a house for 300K on The Central Coast, but the M1 is clogged both ways into the city during peak hours. A train takes 2 hours to get into town and another 2 to get back home. That's 4 hours on top of another 8 of work. But hey I was doing 12 hour shifts during my working days too. It isn't pleasant but you need to do what you need to do to get ahead, right? We need better, faster and more frequent trains. Since they opened the Gosford line some 56 years ago not much has improved, typical successive useless governments.

But the part you failed to quote from the same article is what Dr Nigel Stapledon of the UNSW Business School said. I tend to agree with what his opinion is, seen this play out a few times over the years.
---
He said Sydney had already gone through a period between 2004 and 2011 when the market wasn’t particularly good but the big falls didn’t happen as predicted.
While this had been helped by the resources boom, Dr Stapledon said there shouldn’t be huge falls this time if immigration was kept at reasonable levels.
“We’ve had periods of pretty flat performance pretty frequently,” he said.
“It’s a good story for affordability issues, these things tend to balance out and we want some adjustment.
“Prices can get ahead of themselves but when you talk about prices falling 30-40 per cent, that doesn’t look particularly plausible to me, those scary scenarios.
“It’s still going to be profitable to go in and some people will still do OK in the real estate market but it’s going to be harder.”
http://www.news.com.au/finance/economy/australian-economy/property-set-to-become-worst-investment/news-story/879ccda89e9a975db95c60a4fefb2c43
---

 

[dpgrubesic]

Land will always go up as long as the population increases people need places to live majority of people in Sydney and Melbourne work in or around the city and there is only so much land that is available thus demand is always rising but supply stays the same!

Thus land value will always increase HOWEVER property prices for say apartments can oversupply and there may be a crash may crash regarding certain times of properties but land itself will always make money.

The real question is, will property prices continue to double every 7-10 years maybe/maybe not

 

[Klogg]

Interesting article, and I would like to discuss a couple of points. The young fellow who goes out and eats $22 breakfasts and lives a good life and then complains of house prices is most likely a wasteful person and will most likely end up like a few mates of mine who are 60 y/o and rent rooms or garages to live in. We sacrificed a lot when we bought our property, we never went to cafe's paying $44 for 2 people to have breakfast and now that we are retired we still don't. Saving for a house means going without, it's not buying the latest iphone or the latest new motor car or loading up the credit card to buy those breakfasts that's for sure.

Secondly, the guy is right that transport is crap in Australia, particularly in Sydney. Sure you can still buy a house for 300K on The Central Coast, but the M1 is clogged both ways into the city during peak hours. A train takes 2 hours to get into town and another 2 to get back home. That's 4 hours on top of another 8 of work. But hey I was doing 12 hour shifts during my working days too. It isn't pleasant but you need to do what you need to do to get ahead, right? We need better, faster and more frequent trains. Since they opened the Gosford line some 56 years ago not much has improved, typical successive useless governments.

But the part you failed to quote from the same article is what Dr Nigel Stapledon of the UNSW Business School said. I tend to agree with what his opinion is, seen this play out a few times over the years.
---
He said Sydney had already gone through a period between 2004 and 2011 when the market wasn’t particularly good but the big falls didn’t happen as predicted.
While this had been helped by the resources boom, Dr Stapledon said there shouldn’t be huge falls this time if immigration was kept at reasonable levels.
“We’ve had periods of pretty flat performance pretty frequently,” he said.
“It’s a good story for affordability issues, these things tend to balance out and we want some adjustment.
“Prices can get ahead of themselves but when you talk about prices falling 30-40 per cent, that doesn’t look particularly plausible to me, those scary scenarios.
“It’s still going to be profitable to go in and some people will still do OK in the real estate market but it’s going to be harder.”
http://www.news.com.au/finance/economy/australian-economy/property-set-to-become-worst-investment/news-story/879ccda89e9a975db95c60a4fefb2c43
---

A couple things I'll point out:

- Is there, perhaps, a hint of commitment/availability bias in what you've written?

- Just because the property investment ended up well for you, will it do the same for others in future? Amongst a massive drop in interest rates, it was easier (note: not "easy") to do well. It's possible that people buying the $20 brunches will end up ahead because they haven't committed to a large amount of debt to 'get ahead'
Your working life was had during a time when inflation was high, interest rates tumbled and wages increased faster than they're doing so now. I have no doubt at all that it was hard work (anyone younger who says it was easy is just making excuses for themselves now), but the same outcome will likely not be had if it was repeated now.

- It's not 'buy a house or nothing'. One can rent, save and invest that money elsewhere. Arguably, this is a far better option at present.

- House prices don't need to decline for it to be a bad investment. What if they just don't go up?

 

[Bill M]

- Just because the property investment ended up well for you, will it do the same for others in future? Amongst a massive drop in interest rates, it was easier (note: not "easy") to do well.

What? We had our mortgage in the early 90's, we had interest rates at 18% at one stage. We just stopped going out for a couple years and worked extra jobs/o/t to get ahead. Our mortgage was paid out by 2001. I can assure you it wasn't easy or easier, however now it is because we have no rent or mortgage to pay. This is what everyone should aim for. No use being 60 and still working just to pay the rent.

- It's not 'buy a house or nothing'. One can rent, save and invest that money elsewhere. Arguably, this is a far better option at present.

- House prices don't need to decline for it to be a bad investment. What if they just don't go up?

A lot of people say that about investing money elswhere, fair comment. Some of my mates did that too only to have their saving discipline go down the drain. The overseas travel, fancy cars and nice rental apartments got the better of them, those things cost a lot of money. Those savers saving elsewhere must remain disciplined, otherwise they will get no where. They also have to have the knowledge to protect themselves from sharemarket crashes if they are investing there.

House prices can and do stagnate, a buyer must be prepared for this. The Dr Nigel Stapledon article I posted stated this too. Each to his own but I will say this this, as an older Australian I would rather own my own place outright rather than be paying my pension check out for rent. It's a choice each individual has to make, the hard yards will have to be done sooner or later. You either suffer a bit when you are younger or suffer a lot when you are older.

 

[Klogg]

What? We had our mortgage in the early 90's, we had interest rates at 18% at one stage. We just stopped going out for a couple years and worked extra jobs/o/t to get ahead. Our mortgage was paid out by 2001. I can assure you it wasn't easy or easier, however now it is because we have no rent or mortgage to pay. This is what everyone should aim for. No use being 60 and still working just to pay the rent.

See this graph from the RBA:


You had your mortgage at a time interest rates were above 10% (if at the start of the 90s). Yes, they increased for a period of time, but after that you got the tailwind of lower rates (which means more affordable repayments, meaning people can borrow more).

Yes, it is still do-able with hard work, but the tailwind that once existed to boost the value of your house can no longer be repeated.

Some of my mates did that too only to have their saving discipline go down the drain. The overseas travel, fancy cars and nice rental apartments got the better of them, those things cost a lot of money.

That's not the fault of the strategy, only a matter of poor implementation. In fact, there's nothing stopping someone who bought their house, from redrawing on their mortgage and spending on the same items.

 

[sptrawler]

It's a choice each individual has to make, the hard yards will have to be done sooner or later. You either suffer a bit when you are younger or suffer a lot when you are older.

This is the mantra I've said over and over to my children, did it help? I think not.

There are two problems:
1. The system is geared, to load you up, as you try to increase your wealth.

2. Most people don't have the self discipline, to deny themselves immediate gratification, and the system encourages them to borrow and spend.

Bill, you may remember, when it was difficult to get a loan, even for a small amount.
That made you save, if you didn't have the money you didn't get it, not so now.
Now if you don't have the money, you just get it on credit and whinge when you can't pay for it, then hope someone will take up your cause.

Today, everything is someone else's fault.

 

[Joules MM1]

@David_Scutt

This unbelievable statistic shows the scale of Australia's apartment building boom (via @BIAUS) http://www.businessinsider.com.au/t...han-there-are-in-all-of-north-america-2016-10 … #ausbiz #buildathon

 

[CanOz]

View attachment 68543

@David_Scutt

This unbelievable statistic shows the scale of Australia's apartment building boom (via @BIAUS) http://www.businessinsider.com.au/t...han-there-are-in-all-of-north-america-2016-10 … #ausbiz #buildathon

Nice graphic joules...I've noticed allot more cranes since we started coming to brisbane two years ago....an epidemic with Chinese origins...

 

[lockscombi]

I have a mate at Sydney uni who is living in a tent on another mates rented lawn. He loves it. I'm no camper unfortunately and i'm trying to save millions for house in the Shire.

I'm about 1 million short

 

[ChloeBB]

Also one other note, houses as an investment is just like any other investment:

As long as you assume a relatively stable currency purchasing power, then the investment return is bounded by some sort of mathematics. At the very edges, we can all agree that an investment property will never return rents of 100% per annum, or -50% per annum. There are boundaries in the real returns even if the currency purchasing power is fluctuating.

Because of this there must certainly be some upper bound influenced by stuff which falls under the category of "borrower creditworthiness". So even if prices are going to go up, it seems unlikely they will continue at the same pace as we saw over the last decades, because that would mean average house price in Sydney will be $2 million, or $4 million before very long! The higher the price goes, the lower your creditworthiness is, regardless of your industry or job stability. So maybe house prices go up at the pace matching inflation, but if house prices continue rise 10% per annum while the inflation rate is close to 0% and wage growth is also close to 0%, then who will be creditworthy enough to get a mortgage? It doesn't make sense!

Hi there,

I'm getting married soon and my fiance and I were thinking about buying a house in Sydney as soon as possible.

I was convinced that buying asap is more affordable and smarter option long-term, although it would be a huge (almost impossible) investment for us. Namely, I've red that prices could be growing like crazy in future... but then I did some research and realized that prices are pretty high already. Seems to me that if you're trying to buy a place near-ish the city, you can't get anything decent under 1.2mil (according to this property price info I've found)... Is it just me, or that is quite high?

Anyway, I'm such a newbie when it comes to real estate market and price prediction, but after reading your comment I've started to wonder is it better to wait and save for a few years..

 

[dpgrubesic]

Hi there,

I'm getting married soon and my fiance and I were thinking about buying a house in Sydney as soon as possible.

I was convinced that buying asap is more affordable and smarter option long-term, although it would be a huge (almost impossible) investment for us. Namely, I've red that prices could be growing like crazy in future... but then I did some research and realized that prices are pretty high already. Seems to me that if you're trying to buy a place near-ish the city, you can't get anything decent under 1.2mil (according to this property price info I've found)... Is it just me, or that is quite high?

Anyway, I'm such a newbie when it comes to real estate market and price prediction, but after reading your comment I've started to wonder is it better to wait and save for a few years..

if it a place to live then you just have to pay the money housing prices wont drop in Melbourne or Sydney anytime soon they may not grow at the same levels as seen historically but demand is only increasing but supply stays the same.

My only advice would be steer clear of apartments

 

[lockscombi]

Hi there,

I'm getting married soon and my fiance and I were thinking about buying a house in Sydney as soon as possible.

I was convinced that buying asap is more affordable and smarter option long-term, although it would be a huge (almost impossible) investment for us. Namely, I've red that prices could be growing like crazy in future... but then I did some research and realized that prices are pretty high already. Seems to me that if you're trying to buy a place near-ish the city, you can't get anything decent under 1.2mil (according to this property price info I've found)... Is it just me, or that is quite high?

Anyway, I'm such a newbie when it comes to real estate market and price prediction, but after reading your comment I've started to wonder is it better to wait and save for a few years..

Don't buy a house in Sydney or Melbourne. People have seriously lost the concept of value here. Paying over 1 million in a city with poor infrastructure and deteriorating social conditions is silly imo.

If your rich do what they do. Buy a waterfront house and avoid the public at all costs

 

[Boggo]

My only advice would be steer clear of apartments

I had a look at an apartment in the Adelaide CBD ages ago (being nosey), had to fill out my email address etc.

Recently I have noticed that I am getting a lot more emails promoting existing apartment sales and new developments etc leading me to think that that market may be feeling the pressure.

tech/a may be up to date with what is happening with that area of the market, I think he has sold off the apartments he had on the south coast.

Apparently Sydney and Melbourne apartment prices are feeling the pressure of oversupply but I am just going on what I am reading and hearing, certainly seems to be the case in Adelaide.

 

[Bill M]

Don't buy a house in Sydney or Melbourne. People have seriously lost the concept of value here. Paying over 1 million in a city with poor infrastructure and deteriorating social conditions is silly imo.

If your rich do what they do. Buy a waterfront house and avoid the public at all costs

This is quite a good post. If you don't need to be in Sydney then it's far better to stay out of there. I had a look at last weeks clearance rates and prices at this link and it's way up there. Just have a look at the first 2 properties, a 1 bedroom unit in Alexandria for 673K and a 2 br unit for 950K. Link here: https://www.realestate.com.au/auction-results/nsw

And the do what the rich do? How true. Have any of you done the Spit Bridge to Manly walk? Multi Million $$$ houses, darn nice views and sheltered beaches along the way.

Apparently Sydney and Melbourne apartment prices are feeling the pressure of oversupply but I am just going on what I am reading and hearing, certainly seems to be the case in Adelaide.

Not quite in Sydney Boggo. Still too many buyers and not enough units. Went to one 2 Months ago in Hornsby, old 3 br unit in need of renovation inside and out. Told the agent it was not my cup of tea and wouldn't take it on for 500K. The agent called me after it was sold, went for 760K, too many buyers, not enough good units about.

About 2 weeks ago there was an article on the news about Sydney's population, they said that in 20 years it will jump from the present 4.5 million people to 6.5 million. Are there enough units for another 2 million people? If there isn't enough now, will they get it right by then? Some how I don't think so, but, sometimes those in control do get it right.