Australian House Prices Are Severely and Seriously Unaffordable
Australian house prices are severely and seriously unaffordable...Pink Monday in the U.S. costs 79k jobs...the decline and fall of consumer credit and its effect on prices...and more!
Stocks in the U.S. were up overnight. The only really positive news on the day was that existing home sales in the U.S. were up 6.5%. It was unexpected news. A lot of short sales and foreclosure sales boosted the market.
See. Markets work if you let prices function. Median house prices have fallen over 15% in the U.S. in the last year, according to the National Association of Realtors. The median price of US$175,400 is obviously starting to clear some of the inventory over-hang. If prices fall even more, you can expect more buyers to come in off the sidelines and back into the market.
The alternative is to keep those new buyers out of the market by propping up prices through various government-backed lending initiatives. If you want to make homes more affordable, you should let home prices adjust lower, to a level that reflects tighter credit. How hard is it to figure out that if you take away copious amounts of credit from the housing market (in Australia or America) prices are going to fall?
But is that such a bad thing? Well, it is if you own a house and have a large mortgage on it. But let's consider a new study on global housing affordability by Performance Urban Planning. The report concluded that Australia has the most unaffordable housing of all the nations surveyed. Not only that, but according to the report, Australia doesn't even have a single urban area in which housing is merely "moderately unaffordable."
Now before you write in defending the honour of Australia's housing market, let's be clear what the survey's designers consider unaffordable. They use a ratio of Median House Price to Median Household income. A house is "Affordable" if the ratio is 3.0 or less. It's "Moderately unaffordable" if the ratio is 3.1 to 4.0. It's "Seriously Unaffordable" if the ratio is 4.1 to 5.0. And it's "Severely Unaffordable" if the ratio is 5.1 or more.
Australia sports a ratio of 6.3, which is both "Severely Unaffordable" and "Seriously Daloob." New Zealand comes in next t 5.7, followed by Ireland at 5.4 and the U.K. at 5.3. Owing to its large number of metropolitan areas in which there is a wide variety of median prices and incomes, the U.S. nationwide ratio is just 3.2.
Part of the problem in the other countries is that national median incomes and house prices are derived from just a small number of densely populated urban areas. It's a pretty common occurrence in America to pack up your car, change states, and change jobs. You trade lower wages for a lower cost of living. That may be harder to do in more homogenised labour and housing markets, like, say, Australia.
So is today's ratio any higher than historically? You bet it is! According to the study, "In recent decades, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices being generally 3.0 or less times median household incomes."
"This historic affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in Australia, Ireland, New Zealand and the United Kingdom and in some markets of Canada and the United States."
There are other ways to measure affordability, of course. But it really comes down to the mortgage payment. Looking at house prices in terms of household earnings and income, then, is the method that makes the most sense to us. And by that measure, Australia has some of the most expensive housing in the world.
In fact, according to the table below, Australia has over a third of the sixty housing markets ranked "Severely Unaffordable" by the survey. Two of the top three "Severely Unaffordable" markets are in Queensland. And eight of the top twenty "Severely Unaffordable" markets are in Australia, according to the survey.
Source: 5th Annual Demographia International Housing Affordability Survey
If you're in the market for something "Seriously Unaffordable" you should try Bendigo (4.8), Wagga Wagga (4.9). or the goldfields in Ballarat (5.0). The other 24 major urban areas surveyed are either prohibitively expensive, or overvalued, depending on your point of view. So why haven't Aussie house prices fallen more?
"Unlike the other national markets in the Survey," the survey surmises, "Australia has thus far been able to avoid material house price declines. It seems likely that, sooner or later, the inherent instability and unsustainability that characterizes bubbles will lead to house price declines in Australia. However, were it possible for Australia to retain its highly over-valued house prices, there would still be a significant cost. Future generations would pay far more for housing than in the past, and Australia's relative standard of living would decline."
Far be it for us to suggest that Australia's love affair with homeownership could be financially ruinous at these prices. Besides, we don't have to say it when you can see it for yourself in the image below. But the generation psychology of getting rich in property is hard to break. It's worked for the Boomers. Now everyone thinks it will work. Hmmn.
Source:5th Annual Demographia International Housing Affordability Survey
The other side of the affordability ratio is household incomes. And if the job market data from the U.S. on Monday is a preview of what's ahead for Australia, median incomes are going to decline for the people who got fired. In the U.S. alone, over 79,000 pink slips were handed out to start the week.
Maybe it will be remembered as "Pink Monday." Corporations are hoping to stem the rising tide of red ink by slashing jobs. Caterpillar is cutting 20,000 people loose. Sprint Nextel fired 8,000, Home Depot, 7,000. Pfizer is laying of nearly 19,000. And American Express, after reporting an earnings drop of 79%, is sacking 7,000 workers too.
It's a lot of bad news. But the Amex news shows just how bad things are getting in the real economy. "Our fourth-quarter results reflect an operating environment that was among the harshest we have seen in decades," Amex CEO Ken Chenault said. Card member purchases declined by ten percent, year-over-year. Amex reported rising late payments, delinquencies, and is expecting larger default rates by its customers.
Do you see what's happening? Consumers are cutting back their use of credit cards. But even so, they are having trouble servicing their outstanding credit card debt. Households have a cash-flow problem too. They too, are overleveraged and have to reduce the amount of debt they are carrying.
The only way to do that is to cut spending. Thus a double whammy for the retail economy. With one hand, households cut spending, damaging business profits. With the other hand, businesses lay off workers, further reducing household income. And on the cycle goes.
The cycle of rising unemployment, negative earnings news, and recession is obviously a big downer for the stock market. Of course, as we write that, stocks are up on the day. But in a credit depression, asset values fall faster than government efforts to reinflate the money supply.
As we pointed out last week, the value of credit outstanding dwarfs the patchwork efforts of various government spending programs to prop up banks and house prices. We'd expect weaker stock prices, falling house prices (yes, even with interest rate cuts from the RBA), and the build up of a big inflation trade. More on that tomorrow.
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). Dan draws on his network of global contacts from his base in Melbourne. He’s the managing editor of resource newsletter Diggers and Drillers and the editor of The Daily Reckoning Australia.
Comment by Coffee Addict on 27 January 2009:
Who will pay for welfare housing if you and I lose our jobs and/or our other income? Not me. I don’t own a rental property. The answer is anyone that does own a rental property (and of course their lenders). Bill and Dan repeatedly argue that market prices will drop to what people living though a long term credit depression will be able to afford.
Dan refers to Bendigo and Ballarat. I hope that residential accommodation near the old Victoria gold diggings does well as gold mining in those districts kicks the economy there into gear.
Dan also refers to Wagga Wagga. With 2 military bases, a university campus , a large investment by Cargill Meats, good agricultural prices and a bunch of farmers who have adapted (somewhat) to a drier climate the town is seemingly recession proof. As with most regional centres, Wagga Wagga includes a growing population of welfare recipients who bring the median family income level down to the 40K mark (and probably below this mark).
For the purpose of this exercise , we should be careful about the statistical underpinnings of the survey if we are including the incomes of welfare recipients in Housing Commission owned or Centrelink subsidised accommodation. These people are not generally in the housing market. Working families with 2 basic incomes may find the $200K regional centre house to be quite affordable (though possibly not cheap).
There will be a generational exodus from the big cities to more affordable regional centres but I don’t expect real estate prices in regional centres to rise as a consequence. The credit depression will pull down prices in all markets.
The trick of course is to bring your capital city income with you to a regional centre.
Comment by 8020 Financial on 27 January 2009:
Hey Dan great column as always.
I have always been puzzled that so many people regard rising property values as a "good thing".
As far as I can see, a house is a consumption item, what else can you do with one (ultimately) except live in it. Imagine how much easier the life of a typical family would be if they could get a house in a reasonable suburb of Sydney or Melbourne for $200,000 or less (about three times median earnings by my guess).
What concerns me is that when this bubble finally starts to deflate, the only solution to the "housing affordability crisis", Santa Rudd will be there with Other Peoples Money to "help". Although I guess he and his helpers are doing that already with the ridiculous First Home Buyers Grant, best understood as a direct transfer from working and middle class taxpayers to rich property developers.
Comment by Pete on 27 January 2009:
CA: Very good points. As for bringing the income from the City to the regional areas, I can only think of two ways:
- mobile office
- outposted Gov. jobs
It's going to get real messy isn't it.
For a while I have been wondering, what with all the Gov. interventions to save mortgagees and whatnot, whether in the longrun a person would be better off with a house now or not. I understand and completely agree with all the current arguments against buying a house right now. The X factor that we truly cannot predict however is Government intervention, and its effects.
Wait and see I guess!
Comment by encino man on 27 January 2009:
Dan is correct ! letting housing drop to a real level of income versus price ratio would be a great thing, but I dont see good old human nature letting that one go with out a huge fight on the part of the real estate industry, they do a vested interest in talking it up " ( telling lots and lots of lies) they have nice fat commision checks to get, so they are not about to throw out the golden goose.
( I should know as I have a real estate licence) the REI have a stake in keeping the average schmuck suckered for a as long as possible, but I see real estate in NZ has tanked.....gone down the plug hole actually, its a headin down folks !............yeeeeeha ! come on baby ! anyway WHEN RE comes down in Aus, it will give all my friends the chance to buy RE at a good prices.
about time !
Comment by Drew on 27 January 2009:
It certainly will be interesting to see where house prices go. I expect the same direction as employment, down I think its not the direction of house prices that should be questioned but how far down will they go.
I expect that the number of houses to market will increase and buying interest to decrease. Just to make that clear that means there will be a shortage, of buyers. Next to be realised will be its not the number of overall people versus houses that determine a market the real supply demand is number of houses on market versus number of buyers, I'm not sure why some dont see this simple point.
The UK has been an interesting "Housing Shortage" market to watch collapse and I expect it will play out the same here. The market goes from a buying feeding frenzy fuelled by easy credit, to where did all the buyers go. As listings rise and buyers are no where to be found the same rubbish about oh we arent like US will be widely spruiked by the industry. As prices slowly deflate Industry groups will shout its just a slight correction. Finally just like the US UK Spain Ireland NZ etc etc the public finally say well who would have thought that a real estate bubble could happen in Australia.
Highly geared investment property owners are sitting like a rabbit in the headlights the car is fast approaching but they insist they are as safe as houses.
When everyone knows that something is a great, never loose money, sure thing investment, then by its nature its over bought and over priced.
Just ask anyone the way to be rich is buy a house, just dont tell a pom or a yank.
Comment by mike on 27 January 2009:
Didn't people originally leave Britian and Ireland because it was crowded and expensive and nobody could afford a garden, while Australia was uncrowded and cheap.
Well at least there's still the sun I suppose.
Comment by beyondtool on 27 January 2009:
I don't think a mass exodus from the cities is going to be based on affordable housing in the medium term. Cities have jobs, and if you've ever tried to live in a regional center you'd know that it's hard going even with an average job. I was forced to move from Lismore 5 years ago due to a lack of opportunities to Brisbane. Especially with the impacts on farming and mining jobs. I can't see people running from the cities unless there are next to no jobs or opportunities, period.
Although there is a housing "shortage" in Australia it's mainly because we don't live in our families pockets like many other cultures do and Australians used to generations ago. I think the current 30 somethings living at home were the first sign of the coming housing price plunge.
The smash and grab on retires super last year is starting to flowing onto housing prices slowly. But it's the baby boomers set to cop the full force of the economic depression this year, with more layoffs, established businesses going under and continued financial uncertainty. That's when the real trouble is sure to start.
But like I keep repeating to my friends it's not an economic crisis it's a "correction".
Comment by BlackSwans&Economics on 28 January 2009:
Isn't it so obivious which way house prices are headed, that every time you see the FHO ads on TV you get angry.
To those that say well if prices fall then I just wont sell, thats great but not everyone will be so lucky and forced sales in your area will reprice your home.
I found this recent Australian report quiet sobering, here is a summary, I hope its ok to post. Rising unemployment this year is likely to almost double the number of households at risk of forced sale or foreclosure, erasing the effects of falling interest rates and petrol prices. The number of borrowers under mortgage stress, described as those having to reprioritise expenditure or refinance to make repayments, will rise by 46% to 929,000 by July, from the current level. Those under severe stress, who are behind in repayments or trying to sell or being foreclosed, will increase 87% to 302,000 by July. We are going to see a lot of people who get unemployed but can't get reemployed quickly and are going to have to make a hard decision about whether they sell their property. Unemployment to rise to 5% by July and 7% by the end of 2009. Property values in turn were likely to fall because of the larger numbers of people who are forced to put their house on the market.
So remember housing shortage, no housing bubble. Or is it no housing shortage, housing bubble. I think we are about to find out.
Comment by Gerry on 28 January 2009:
Pete....The argument for owning a modest house in the right location when all the investment and market timing issues are set aside (which are difficult and arguable to predict) is that a house is not a piece of paper that may or may not have future value. shelter is a basic necessity.. and yes there will be deflation, inflation, temporary oversupply or whatever. I appreciate these are investment pages and economy took over from community in the bull market, before survival mode now starts to kick in and bring some reality to those who have not experienced hardship.There are better apparent investments than housing and I would not enter the housing market as an "investor". A change of mentality to survival mode of preserving capital and lifestyle choices is important.Everyone still thinks they will somehow make money in a period of calamity as they are smarter than others and read and analyse everything ...not sure the evidence supports this.I can tell from the various informed opinions even on this site, and differing constructive conclusions (i mean that sincerely) that many informed among you are still going to get burnt. Not doing too good myself.
One argument for gold is that is has some intrinsic value...historically true and much better than paper promises if there is little return and total capital exposure in a real crisis.i'm not big on gold but see the attraction, although you cant live in it or eat it. My only real point is that if you dont own any bricks amd morter at all, then look at the basic shelter in other ways than economic and investment perspectives. If you can manage to get a house that ticks all the boxes,(includes employment) that you propose to and would want to live in then my advice is to work towards that goal in this climate especially but I don't suggest any timing of the market only to put aside pure "investment" decisions. If you do that it will not matter in 10 years but you wont be holding only pieces of paper.
Just a thought but clearly not "investment" advice which is still the prevailing mindset that will burn many.
Comment by Pete on 28 January 2009:
Thanks Gerry
Unfortunately for some a house is still an investment - an investment of future earnings if you need a loan.
How much future earnings you invest in a house depends on how much you have at the moment and how much the house costs. If you can increase how much you have at the moment (saving/investing) and/or reduce the price of the house, then you will rely a lot less on future earnings.
As with all loans, of course there is also the consideration of interest rates.
Now with our future seeming quite shaky and uncertain, it seems unwise to invest any significant future earnings to anything that will not either
a) make you more money, and/or
b) save you money, and/or
c) allow you to easily liquidate to purchase necessities.
(Note that purchasing a house makes the 'shelter' part of 'c)' redundant, however you still have to pay rates, house maintenance and so on.)
I could probably add a 'd) retain the value of your money' which would seem important to readers here.
I guess I really have been describing Gold...but it makes sense, right? I would think that shares, property, etc could also fit well here if we were in different times.
And yes the elephant in the room here is whether you would even need to get a loan to purchase a house anyway. I would need one, but for someone who would not, then this is a different story altogether.
Comment by Bertie on 28 January 2009:
So are Aussie houses overpriced? Will we see a crash????
Comment by Pete on 28 January 2009:
Actually looking at the coloured graph, Sydney was "seriously unaffordable" ever since the 80's. I have no idea what that means!
Comment by Greg Atkinson on 28 January 2009:
Pete, let me put my old engineering hat on for a few minutes (i.e. pick the data apart) and throw a few things up in the air:
1. I see no point in talking about an average or median price in Sydney. The city covers too much area and there are vast differences in lifestyle and incomes. As demographics experts have pointed out on numerous occasions we need to break Sydney up into a few areas to get a good grasp on properties prices, but nobody seems to do that much. No use trying to find common ground between Hunters Hill and Camperdown. (in engineering terms there is no baseline)
2. I would suggest there is no use looking at Sydney property prices as far back the 1980's simply because some suburbs did not even exist back then. Sydney was a lot different in the 1980's and Mental As Anything was big.
3. The graph is flawed I would say..because if it says Sydney was "seriously unaffordable" from the 1980's how could people keep buying homes? How can you have a definition like that and yet show homes prices kept increasing? It is a bit like saying something is in decline but then showing a graph showing the exact opposite.
The problem with property data is always the same, the property industry massage the data one way to suit their argument and the doom crowd massage it the other way. Somewhere in the middle is the truth I suspect.
Comment by Pete on 28 January 2009:
Hi Greg,
1. Good point
2. Haha, another good point.
3. In a feeble defence of the graph and the strange affordability rating system, perhaps it could be that Sydney's median prices were unaffordable, and got worse with the credit bubble and all the investment bankers over time? Perhaps Mental As Anything bought up half the properties in the CBD
I'm with you on the property data manipulation...it's never a clear picture is it. I still find some statistics useful as indicators, but not as 'proof'.
Comment by BlackSwans&Economics on 28 January 2009:
Highly geared property investors are like rabbits in the headlights, the car is fast approaching but they insist they are as safe as houses.
When everyone knows an investment is a sure thing, you cant go wrong, it will make you rich, never loses value, then by its very nature its over bought and over priced. Crowded out..
Just ask anyone, your mum, dad, brother, sister, a stranger in the street, Rudd or Swan, even my working dog knows the way to get rich is to buy a few houses in the big smoke. If you have family living in UK or US perhaps dont ask them because its different here in Australia, bigger better houses, there is a shortage, we love houses more than anyone, prices never fall or maybe its just the long hours we spend in the sun.
Thank goodness prices of farms like mine havent suffered from this affluenza.
Comment by Ross on 28 January 2009:
Belatedly appending coffee addict's comments on Wagga. Dual income was as much a feature of country city/town life as it was in many capitals, welfare migration is another and that displaced older housing stocks leaving the younger generation building in the regional cities where availability of services continues to displace people from smaller towns without industry or mining income over and above farming. The biggest issue I saw in terms of price was the inefficiency and high price to build. City builders just weren't interested in investing in more advanced pre-fabrication and costs were excessive. Housing prefab technology is one worthy area for govt industry investment and one that meets most EVA preconditions and where we could be competitive global niche markets.
Comment by Gerry on 28 January 2009:
Good response Paul and appreciate your position and logic. A lot of dealers will make money out of gold as the focus continues for sound reasons and hopefully others who invest will time things right.The one modest ideally located house ownership aim was just a way of thinking for those without a house. If you invest in gold be sure you have possession of it.I have seen past scandals.(there are more Bernies out there) A certificate of ownership is a piece of paper too. Just keep it in mind and keep control of your assets.
Comment by Greg Atkinson on 28 January 2009:
Pete..I am with you regarding the property data. I suck it all in and then try and make some sense out of it..if I can.
Comment by Paul on 30 January 2009:
bravo coffee addict. as usual to the point and correct. also i love the use of the word depression, and it is a depression, not a mamby pamby recession. i fear there is much worse to come in the cities, but it does a group on non thinkers good to get whapped on the head for doing just that. personal note to dan, you cant eat gold.
Comment by barney on 2 February 2009:
so with interest rates being cut pretty severely, what is going to happen in the next 12-18 months?
With both rents and property prices. Can both fall at the same time?
I have mortgage payment which is below what it costs to rent. would i be better off keeping the mortgage, or going onto the rental market?
(assuming that if i sold the property, it would be for price which yields me a profit(even modest))
Comment by Cam on 3 February 2009:
Hey Barney - I bought real estate based on a lifestyle decision (sick of renting) but to do so had to put the 'life savings' into it... there was no thought of selling in the short term for capital gain. But with little savings outside of the house, the prospect of a property crash had me considering selling up, and going back to renting...
Anyway, I'm NOT selling up after factoring in the 'value' of not having to move home, and particularly if you intend to rent for a period and then buy back in when the investment timing is right - the high fees associated with selling and then buying again, moving costs and just the time spent searching for the right place has a $ value... it adds up. I would sit tight, particularly as you say you pay less in mortgage repayments than rent... in the long run I think rents will track inflation = up.
Comment by Pete on 3 February 2009:
Cam: why will rents track inflation up?
I can think of some scenarios that would contradict rising rents:
- no rise in wages
- market flooded with houses to rent
- landlords who can't afford the capital loss of a house are forced into renting
- unemployment forces some renters to move into other rental properties, share housing/consolidated housing
- empty speculator houses increase supply(bought to renovate and then sell, not ever rented) need tenants because the speculator does not want to take a capital loss
(You may be surprised at the number of 'empty' houses in Australia. That is, houses with zero occupants. Yes, some people find real estate investing(?) easier without tenants and just relying on capital growth / renovations).
Basically, rents track 'wages' not inflation. If wages are inflated, people can pay more rent. People do not borrow money to pay rent, therefore unless they get paid a lot, the credit bubble has no effect on rents.
Consider this: If you are a landlord and you put a property for rent at $X...and no-one can afford it, what do you do? Do you sit there hoping someone will come along and pay? No, you are forced to drop your price because having no tenants is costing you money every single day.
I know this is akin to hearsay, but I have seen graphs (inflation adjusted)that show rent prices vs. interest rates, over the entire 80's, 90's, 00's for Australia's capital cities. You would think there would be a change in rents when the double digit interest rates of the 80's hit, surely?
Nope! Rents were almost flat, the whole way with only the most minor deviations.
Simply:
Rents correlate with wages.
House prices correlate with the availability of capital.
Comment by Pete on 3 February 2009:
Oh and conversely, rents would rise if:
- wages rise (is that likely?)
- employment rises (more monetary competition for houses)
- the cost of living decreases (people have a bit more to spend)
I would have listed 'monetary inflation' as a reason for rents to rise, but as stated previously, this would not be a correlation unless wages also rose. Typically wages do rise over time, especially in prosperous times and in-line with inflation. However in a recession I do not think that pay-rises are likely, especially with reported inflation to be low (regardless of the reality).
In a deflating environment where money is worth more (somehow), I would expect that rents may even decrease slightly, depending on whether landlords are leveraged or not.
Note: I am a renter, but you should consider my points critically for what they are worth, not my bias.
Comment by Benjamin on 4 February 2009:
I totally agree with Pat. And Barney, yes of course, both RENT and PROPERTY prices can GO DOWN.
It's already been happening in Sydney's Eastern suburbs and other established suburbs. My investment unit has had offers going down by 7.8% from last year, and yet I'm renting it out to a new tenant at $37/week lower rent than the previous tenant (who's financing business did poorly last year).
The only tenants from whom landlords can squeeze impossible $1,000/week rents from these days, are tenants who do not need to rent anymore. Tenants who were earning heaps, but are now in jail !!
The best hedge for landlords these days is to fight hard to keep good tenants who pay well. That way landlords would avoid any cashflow problems with their investment loans.
Comment by Russell on 8 February 2009:
A response to Petes comments about stimuli that could increase rents. Upwards pressure on rents can also be provided by rental subsidies. I lived for a while in Darwin during an era when houses were apparently in short supply, and the major employer, the govt, gave public servants a rental subsidy to offset the price of rents. Of course every time the subsidy increased, because the committee who deliberated these things decided rents had increased substantially, rents also increased again by about the amount of the subsidy.
In the correction which is coming, if people are forced to sell their homes, which will be likely for over leveraged households where jobs are lost, then the demand for rental property should increase, and therefore so should rents. The same economic circumstances which forced the house sales will put pressure on the same people when it comes to paying their rent, and the govts (state and national) may step in and provide more subsidies more widely......which is also likely to increase the overall price of rents.
Comment by rick e on 9 February 2009:
I have moved to Brisbane QLD from Sydney and have had problems getting a rental property in QLD around 6 kilometres from CBD, in Sydney I had to drop my rent down and still have had no one to rent it out my house in Gladesville.
Comment by kathy on 10 February 2009:
i'm curious as to the effect all the flooding up north and the fires down south will have on the cost of building and housing demand. More than 800 homes down south and and unknown number up north will have builders and building supplies in high demand for the next year or two. After Mackays floods last year they are still finishing repairs and builders are still hard to get your hands on.
If this is going to be a yearly pattern of mass home destruction i think we are going to be looking at a very unpredicatable and strange cycle in housing with home owners going broke while others with insurance checks are building and yet others still locked out.
I do agree with job loss numbers going up rents can't go too high but of course the government will give assistance to renters helping to drive prices up further. Remember this is a package to help keep things the same and all those making decisions are making them to suit their own idea of success they are not thinking much beond their own portfolios and bugger the causalties, there can be nothing gained by them if houses drop and rents go down.
Comment by Coffee Addict on 10 February 2009:
Kathy. Crooks are attracted to disaster areas like bees to honey. People who are insured will have to go through the insurance companies. Some others will be at the mercy of the shonks. Prefab homes would be a good option in the circumstances.
Because the industry is otherwise quite flat, there shouldn't be any massive price excalations in Melbourne for renovations and like: - but then again it all depends on how the reconstruction is managed. I don't know about Ingham. Flood mitigation measures can be a lot more expensive and insurability can be more complicated. Traditional Queenslander houses should be mandatory in flood zones me thinks.
I understand that total damage may be in the vicinity of $500m (based on what an insurance commentator said on TV).
Comment by Nicholas on 12 February 2009:
Good discussion.
One thing that has crossed my mind is that there has to be a natural floor in house prices because of the cost to build which is unlikely to fall unless the cost of labour is driven down which would be unlikely unless unemployment was 10%.
Comment by Bryce on 18 February 2009:
Pete.
Great analogy re: rent and inflation. I have been pondering this very question for some time. What you propose makes perfect sense.
bravo!
Comment by Wally on 19 February 2009:
Thank you so much Dan for your article. It is so hard to find the truth in main steam media, they should be held accountable along with the banks and government for this mess, ultimately caused by the biggest debt-indunced housing bubble the world has EVER seen. Been living in Vancouver for 6 years and similar situation here, real estate industry and developers own the media, and local and provincial governments; but this has not stopped prices declining upward of 15% (as at January 2009) since May 2008! Seems like Oz has been late to the bubble burst party, although the real stats are well hidden there and are simply not reported. There is absolutely no way Oz can escape this one, read up on Japans dark period if you know want to know what will happen to real estate values in the next 10 years. Government assistance will not make one ounce of difference, the debt bubble has burst and money is returning to its rightful owners. If I return before the next election and Rudd extends that stupid first homer buyers grant (and yes, I will be a first home buyer in Oz) then he has lost one vote.
Comment by Wally on 19 February 2009:
Nicholas, I would argue that cost doesn't drive value but rather rent and personal income. Maybe someone with more smarts can eleborate on this?
Comment by Robert Stowasser on 21 February 2009:
Nicholas, the value of any improvements on a piece of land i.e. a house can be readily valued by a prospective purchaser. What causes bubbles and subsequent busts in housing markets is not the value of the improvements. It is the speculative price paid for the unimproved positional value of the land. Why, as an example, would anyone in their right mind pay 6 million for a small beachfront property with an old shack on it unless there was a belief that the asking price would continue to rise? Things become much clearer when we think in terms of 'land bubbles' and not 'housing bubbles'. We would all be far better off, rich and poor alike, if residential land prices were stable and based on sound economic realities and not on speculation. Fundamental shifts in taxation policy are required to eliminate this speculative land value. Reducing the tax burden from productive activity (income tax, company tax etc) towards taxation based on consumption of natural resources (including collecting revenue from the unimproved value of residential land) would go a long way towards restoring sanity to land prices and therefore the elimination of land driven economic bubbles and busts. Enter the vested interests...
Comment by william johnstone on 25 February 2009:
We all like to think that we have 'crystal balls' and intelligence greater than thy neighbour. In agreement with Gerry's post on 28th Jan, security and shelter was the main purpose of bricks and mortar since adam revealed what was beneath the leaf to eve. Perhaps these humble perceptions must be appreciated once again? The Jewish original idealogy of take this one sheep and return three within 7days bred speculative investors instantly . Live in your home rent your house buy a home and sell a home trade shares gold whichever works for you in a positive way. Research without media influence and remain optimistic, the future is how we as individuals percieve and create it to be. These discussions should be more about translating personal experiences rather than contemplating a negative tommorow.
Comment by Greg Atkinson on 26 February 2009:
Hi all,
I think one problem we have with looking at home price trends in Australia is that simply housing styles have changed so much. This also applies to comparisons between incomes and housing as well.
For example back in the 1960's not all new homes would have had a garage, quite often a basic home was built with a view to adding an extra room when money was available. However if you fast forward to today it is not uncommon for a first home to be 3 bedrooms with a double garage and a family room. So comparing the "average home in the 60's/70's to a home now is just a pretty silly comparison in my view. (but plenty of researchers make these comparisons)
Therefore maybe the only way to know how prices are really moving is to have some data set where you factor in the land price per square meter and then add some type of premium to take into account the typical dwelling used in that area. Maybe this would also give us a clearer view regarding how much influence land prices have on home prices as well?
Just a thought.
Greg
Comment by real estate on 27 February 2009:
I believe that the single biggest cap on the residential housing market is always total annual after tax income of those in the market for a home.
Over 30 years people were either gifted or found new ways top generate higher incomes. Predominantly this meant working overtime and both parents working. After that point is reached then the only way for people to increase their incomes is natural wage growth. Remember I'm talking about the majority here, not those who have a lot of money to invest etc.
So if wages cannot keep up with mortgages prices must be contained. It's a very self correcting phenomenon that is here to stay.
I'll be interested to view a residential market and how it performs without any crutches like the first home grant etc.
The key to future growth in housing is less expensive buildings and that will become an economic imperative
Comment by rotha yu on 28 February 2009:
First I would like to quote Wally "If I return before the next election and Rudd extends that stupid first homer buyers grant (and yes, I will be a first home buyer in Oz) then he has lost one vote." Who should we give our vote to, if all the politician are similar? When they are in opposition, they argue about housing affordability problem, however, when they are in government they tend to do nothing about it. I think this is because the government and the Reserve Bank want people to owe large debt in order to control people's spending habbit through their monetary policy. If people spend less, due to heavy debt, then they want people to spend more by lowering the interest rate. If people spend more, and inflation rise, they constraint people's spending by rising the interest rate.
If the government want people to own home quicker, then they can release more land quickly. Think about it Australia has very large land area with small population. Every Australian should be able to own their block of land without the need to work 30 years for it.
Yet again, if you own your own block of land outright, the government and the Reserve Bank can't control your spending.
Comment by Dave on 1 March 2009:
We are 6-12 months behind the UK in the property cycle. Look at what happened there, in a similar market that had a "housing shortage ... an 18% decline in London property prices over the last 12 months.
But of course that couldn't happen here, could it
Comment by Biker Pete on 1 March 2009:
"I'll be interested to view a residential market and how it performs without any crutches like the first home grant etc." Real Estate, 27th
Well, Rudd probably has two choices. He can do an 'Obama' and try to save people's homes if/when/after realty crashes; or he can take the smarter option and a.) maintain downward pressure on low interest rates; and b.) extend the FHBG. Easier and politically smarter to do both the latter. I know that won't please the goldbugs here, but 'Real Estate's' comment about kicking away the crutches to observe how many Aussies fall over is probably hypothetical. It's unlikely to happen. Rudd won't make Bush's crippling mistakes!~
Comment by Thrifty on 2 March 2009:
Very nice article Dan.
Greg Atkinson, I'm an engineer too, and disagree with your first 3 points.
1&2. I see a point to talking about a median price for Sydney. Even with growth, there would still be expected to be the same distribution of people, from the lower income to the upper income. Thus, measures of central tendency are useful, especially when that median is compared with income.
3. Houses that are seriously unaffordable can still be purchased provided that there is credit. It just means that the repayments are higher. As long as enough other people keep thinking that the house prices will keep rising, the phenomenon is self-perpetuating to a point. We had a situation with such a long run that many people forgot their history.
It's a lot like any of the popular delusions of crowds. Remember Beanie Babies? They were seriously unaffordable too, people still bought them. For a while. Same with tulips. The truth was not in the middle.
Your comment on the 26 of Feb is far more prescient. You are right, house sizes have certainly gotten larger. And the actual "needs" are still the same, it's just that the "wants" have changed and now people confuse "wants" with "needs" (especially my wife!). People aren't going to suddenly die or get seriously ill or malnourished if they live in a smaller house. When push comes to shove people realize just how minimal their needs really are.
A quick googling unearthed this very interesting piece of information:
http://www.rba.gov.au/Speeches/2008/sp_so_270308.html
House prices have tracked very closely with house construction costs. It is only recently (since 1988) that the house prices have drifted up to double what the cost of the construction is. Perhaps construction materials are somewhat cheaper than they used to be; I suspect the average increase in house size is more than 30%, maybe 60%.
This means that there is a large latent supply of housing, should push come to shove. Multiple families (most likely, related families) can and will occupy the same houses if stressed, with a lot more comfort than was possible in the 1960s. What this would mean is a lot of potential empty houses, with minimal rental yield and negative capital appreciation. The smart investment decision is then to sell early. This positive feedback loop continues until the house prices get low enough that the rental yield is attractive again. It will likely overshoot.
What will bring this about is
1) Poor economic conditions, enough unemployment, lowered real wages.
2) Long enough plateau or mild decline in house prices, enough to kill the widespread belief that "housing only ever goes up!", especially in the lending sector. If the lenders tighten credit, it does not matter what the real estate industry or the average person thinks housing will do, because at 7 times income, houses are bought only with credit at such prices.
3) People trimming their budget or selling their properties in anticipation of 1.
Looks like we are seeing "1" now. We have "2" as well. "3" is starting to happen.
Also have a look at the US market. Houses have gotten bigger over time there as well. It certainly hasn't saved them from the housing bust.
Note also that house prices dip below house costs. Prior to 1988 this was true more often than not. The key to understanding that is the car market. Rich people pay the construction costs for new cars. Average people pay a used car price, which is way below the new car price (and cost of construction in many cases).
Unfortunately, the market can be wrong a long time, and nowhere is this more true than in RE (waiting 20 years to buy a house!). However, the patient are as close to being rewarded as they have ever been. 20 years of buildup does not mean that a reckoning will not come, any more than 20 years of tinder buildup meant that a bushfire was never going to happen. It just means that when it does it will be more severe.
Comment by Dingle on 2 March 2009:
....an 18% decline in London property prices over the last 12 months.....this is true, albeit somewhat massaged: the fact is a lot of the property drops in London and the major cities are in new build properties that have gone up at a rate of knots, the property market stalls, investors in those new flats panic and want to sell quick so drop the price: it happens. I lived in Leeds which like every other UK city was throwing up blocks of trendy cardboard flats (you know, 200sqft for 400k!), people/developers see the financial system going belly up and panic sell, dropping prices to attract a non-existant buyers......hey presto over 45% of new build flats in Leeds are lying empty cause A) no one wants to buy and B) no one wants to rent in a block where half the building is empty. I'm not saying the price drops are in new builds only but it's these areas that push the figures up to a drop of 18%. Still pretty bad no matter how you look at it...
Comment by Greg Atkinson on 2 March 2009:
Dave, regarding the London property market hasn't the correction been made worse by the tax hike on “non domicile” foreigners living in the U.K? From what I read the top end property market in London was hit hard by this new tax and this dragged down the average house prices across London. (and I would guess the U.K as well)
Comment by Pete on 2 March 2009:
Russell (8th Feb):
You said "In the correction which is coming, if people are forced to sell their homes, which will be likely for over leveraged households where jobs are lost, then the demand for rental property should increase, and therefore so should rents."
I thought that too initially and it made sense.
Except for one thing:
For every house transaction there will be a buyer and a seller.
For these distressed sellers selling at low prices...who is buying? And why are they buying?
I think that the buyers will be both FHB's and investors. Even if rents drop, unless they drop as much as house prices, the returns will still seem worthwhile for investors.
But you might then ask, how can investors buy houses when there is no money in the markets?
Well, put simply, if you have to sell a house, you either sell it...or you dont. If you dont sell it, you rent it. If you do sell it, the buyer rents it.
Therefore there should be no rental shortage, given that reasoning.
(unless bank foreclosures cannot sell the houses and they sit as empty shells...which we know wont happen because banks will drop the price as low as they have to, eventually. Consider zero-reserve auctions)
Comment by Greg Atkinson on 2 March 2009:
Hi Thrifty, Sorry I cannot agree, I stand by my point that Sydney 20-30 years ago was simply another city. How do you massage the data to cover suburbs that did not exist 30 years ago? Sydney is not London or New York, Sydney is still expanding in terms of new housing land. (and is subject to different tax laws, government policies etc) In addition, according to the link you posted the RBA has not got a handle on land prices either and according to the RBA economist "There are no doubt a number of factors that could be contributing to the observed level of land prices, and the relative importance of these is probably best left to experts" and "...the run-up in real housing prices may not be fully explained by demand-side factors and that supply-side ones – especially policies on land usage – may also have played a role."
So if you cannot fully explain what is driving up land prices, then how can you make a useful comparison of these prices over time across an expanding city with changing demographics? The answer is you cannot with any accuracy, although people seem to want to. In other words, if we can not explain why a trend is the way it is, then how can we possible say where it is heading next?
I am not for or against prices going up in Sydney or anywhere else, I just wanted to highlight that the data being used is flawed and subject to misinterpretation. (and can be twisted to suit the property bulls and bears)
Comment by rick e on 2 March 2009:
In Sydney transport roads are reaching capacity, the roads are full.
The trains haven’t expanded or upgraded to satisfaction. So inner-city living prices remain high due to accesses. For now until job losses.
Comment by Biker Pete on 3 March 2009:
Comparing asset classes, realty has performed admirably against the ASX and even cash. Super is barely break-even these days, even if you're salpacked to the max. By the end of this week, the interest rate will have fallen fifty percent, in less than eight months. Smart FHBs will take the $21K, buy in at around $400K, then lock in a low rate of interest for the longest period possible. Even an 18% fall (if we do follow the UK and US down... and I doubt we will) pales to insignificance when you factor in a 50% reduction in interest... and rising rents!
Comment by Pete on 3 March 2009:
Nice one Biker Pete the real estate bull
"when you factor in a 50% reduction in interest... and rising rents!"
Lets make some assumptions:
- interest rates will stay low
- rents will rise
- people will stay employed and therefore able to service mortgages and rents
- capital appreciation in real estate will continue on its current course...forever
- there will be no tax reform
While we are at it, let us assume the GFC is over and that real estate in Australia is at a completely affordable level.
Now that I have made those assumptions I can totally see where you are coming from.
Consider...if just one of those assumptions is wrong - what does that mean?
Yes, real estate bulls belong in the loony bin
Comment by Ray on 3 March 2009:
I am over 60 years old. During the past 30 odd years I have invested my hard earned in both shares, share market funds and real estate rental properties. Over those years I have never made any real long term gains from shares, the share market has without fail always bit me on the bum.
In 2006 I sold a business to retire and my accountant and my investment manager said start a self managed super fund which I did. They both said invest the money in the stock market but I chose to hold it in cash because of my past experiences.
I invested a similar sum in residential rental property. Had I have taken notice of the so called "experts" who have more of their interests at heart than mine, I would now have lost 50% of my hard earned by now.
I am more than happy to hold real estate which has increased 50%. or my cash.
If you like gambling go to the casino, or the stock exchange theirs not much difference between the two.
Comment by Pete on 3 March 2009:
Ray perhaps you should join a club with Biker Pete
I am not 60 years old, but I do understand that investment trends spanning 30 years do NOT equate to investment trends or cycles that will necessarily continue forever.
If I had a time machine, perhaps I could bring you back a sample from the extravagance of 1929.
Besides the hundred other counter points already made against the real estate bulls who post here, there are two simple points:
1) just because a trend is positive for 30 years does not mean it will be for the next 30. Ask the Romans how their empire is doing.
2) i simply do not care for your great investment stories of yesteryear. Jumping on the speculation bandwagon whilst the biggest credit bubble in history unfolded is no more wise than being a sheep in a flock. More lucky than anything, real estate bulls helped contribute to the problems that the youth are facing today. How about you wait for the real estate bubble to collapse and then you can tell me about how real estate is such a good investment. Seriously, your so called 'investment' figures are no better than saying "hey guess what I bet on red four times in a row at the roullette table, and my return was 200% of capital!"
If you are really a firm believer in real estate - prove to us how wrong we are by buying a beach side holiday home on the coast tomorrow. I've heard they're going at a good price.
Normally I wouldn't care about what you RE bulls say on sites like this, however I do really hate the thought that someone might actually think there was something to what you are saying.
Comment by Pete on 3 March 2009:
Ray perhaps you should befriend Biker Pete
I am not 60 years old, but I do understand that investment trends spanning 30 years do NOT equate to investment trends or cycles that will necessarily continue forever.
If I had a time machine, perhaps I could bring you back a sample from the extravagance of 1929.
Besides the hundred other counter points already made against the real estate bulls who post here, there are two simple points:
1) just because a trend is positive for 30 years does not mean it will be for the next 30. Ask the Romans how their empire is doing.
2) i simply do not care for your great investment stories of yesteryear. Jumping on the speculation bandwagon whilst the biggest credit bubble in history unfolded is no more wise than being a sheep in a flock. More lucky than anything, real estate bulls helped contribute to the problems that the youth are facing today. How about you wait for the real estate bubble to collapse and then you can tell me about how real estate is such a good investment.
Comment by Don on 3 March 2009:
Pete,
I just hope you don't end up renting one of Biker Pete's places whilst you are riding this out. He doesn't sound like a very forgiving landlord however you can't live in a place made of share certificates either. We all have to live somewhere....
Comment by Pete on 4 March 2009:
Don - yes we all have to live somewhere. It is more the assertion that 'there will be a shortage of places to live' that I believe is incorrect.
Then again, I am not advocating current investment in shares as I think that could be a major folly aswell (depending on the sector you invest in). I haven't really heard anyone on here saying things like "I have a major shareholding in BHP and RIO and they have performed well for me over the last 8 years". I guess in the current climate that would already seem stupid. In the not too far future I expect the real estate bulls to feel the same way.
On a side note I do find it interesting how some people call investing in shares "gambling". I think if you do not know the market and do not know your company well, then you are gambling (speculating). Shares are not a 'set and forget' investment in my opinion. Anyone who does not take an active and continued interest in their investments seems foolish to me.
Comment by Coffee Addict on 4 March 2009:
Hi Pete.
There is probably nothing wrong with any of Biker Pete's places. Better to have a landlord that is switched on to the "business" than a set and forget dill who does no maintenance then expects top dollar on sale. No different to the share market really.
( Off the subject of real estate, I have absolutely no idea where some of the gold juniors are going in the near to medium term. Perhaps like Biker Pete, holding on to what you know isn't such a bad strategy IF you can afford to ride a storm out. Speculative but not quite gambling.
I am OK about holds like ALK and CTO. The market has I think written off the value of ALK's iron and nickel holdings and never did assign a value for the rare earth or zirconium. I am hoping the Newmont deal puts a floor on how low ALK can go . I am comfortable with a CTO hold because I bought it cheaply and I have no reason not to believe they can't ramp up production quickly. I never did buy BDG but note their good cash position. With adjoining leases to CGT I would like to see the two companies get together given the superiority of some CGT prospects and the CGT's better exploration approach. BDG should have learnt from previous mistakes though. A big risk in the sector is management egosgetting in the way of common sense . I am currently trying to analyse where CGT is in more detail. The company is now dominated by major shareholders – a key benefit that doesn’t help much in the area of financial transparency. My gamble here is that the key shareholders will swap notes, determine how deep their pockets are, identify opportunities then pursue a a financial direction that will benefit all the shareholders. But for now its a roller coaster. Cheers)
Comment by Pete on 4 March 2009:
Hi CA
Please note that I have no problem with the quality of Biker Pete's places at all. For all I know he has no mortgages on them and makes decent cash from their rents.
The issue I have is when people like this take their good fortune of the past and suggest that this will continue into the future. The idea of wisdom being directly correlated with investment success in this respect is laughable to me because anyone could have done what Biker Pete did. It had nothing to do with wisdom as such, and everything to do with an unstable market.
Even Mr Buffett will have a hard time proving how wise he is in the current and future market environment.
Real Estate bulls are bullish on capital growth of real estate assets, and rental returns on real estate assets, typically using leverage to achieve a large real estate portfolio. My point is that I think this 'investment' approach is very flawed and relies on some significant assumptions of the future. It concerns me that some people might follow their flawed logic because it is the 'majority voice' not because sound reasoning.
As for CGT and the other juniors, I think they are promising. The difference between holding them and any other asset is that all the indicators point to growth in the next few years.
Management is a tricky one...I dumped some good smallcap oil shares recently partly due to the seemingly excessive payouts to management. It is my opinion that before production targets are ultimately met, management should be taking home the bare minimum pay. Let them profit when everyone else does. It is sad when you see operating capital eaten by management paychecks.
Operating capital is still a scary factor in all smallcaps...and I suspect the gold juniors have higher than average overheads.
Comment by Greg Atkinson on 4 March 2009:
Pete and CA, I am currently a property and stocks turtle. I hope that I can live in my nice hard shell, take a few hits and come out when the nasty bear market has passed. Every now and then I will pop my head out and nibble on some tasty worms but be ready at all times, to pull in my head if danger approaches. In other words, why do any of us try and guess what to do at the moment?...it is chaos out there
The only thing I am a little bullish about is...be ready to shoot me down...oil. I just figure we are not quite over our little addiction with the black stuff quite yet. (oh and Uranium..I think that was one of your picks CA?)
Comment by Pete on 4 March 2009:
Greg - one problem with the turtle approach is the notion that assets of all classes are at the beginning of a re-valuation. When this bear market passes, things still wont be the same at all. Perhaps a little bit like Japans 1980's experience.
It comes down to present perspective vs. future perspective. Will todays low be considered an extravagant high tomorrow (or in 5 years time).
Obviously it always comes down to what you think the market will do, and why. The main thing is to continually reasses your position and consider what the market is going to do.
As for Oil, I am bullish with you on that one. I am waiting for a further stock market scrap before I buy into that though.
Comment by Pete on 4 March 2009:
Greg: I'm with you on the Oil, but not so sure about the turtle approach. If we are having a huge asset revaluation, perhaps it will be a very long time before prices are like this again.
Comment by Greg Atkinson on 4 March 2009:
Pete I think you are right...but I am still hiding in my shell. I do nibble on some of the ETF's from time to time and on the odd blue chip stock. I would probably be more aggressive if I was not nursing some wounds from last year
Comment by Pete on 4 March 2009:
I'm about 40% gold, 40% cash and 20% other shares at the moment. I'm not really looking to buy until the rally starts...then i'll buy gold.
I might even stock up on some nice oil stocks once the rally is over too, or possibly before it starts (depending on whether it even looks like starting).
It occurs to me that with all this talk of rallies, perhaps we ARE in a rally...? Perhaps it is just not significant and the fact that we are not dropping like a stone completely is the rally itself before a bigger drop? Speculation I guess
Comment by Chris on 9 March 2009:
THRIFTY, I really do not get where you are coming from endorsing this mind set that the younger generation want bigger better more luxurious items than their parents have worked a life time for. I just want a 2 bedroom apartment big enough to accommodate my wife and first child. We are now living in a 1 bedroom apartment 16km from the city in which my couch is situated right next to my dishwasher.
We both earn very good money but even if we were stupid enough to believe the rhetoric sprooked by the 'land rats' we would pay $300,000 or $580 a week for the honour. Thats on a 25 year loan which we would have to avoid having any more children plus live and raise out current child for several years to come in this apartment. All i want is the opportunity to have a modest backyard for me to spend time with my children something my parents never thought twice about and i have been robbed of in this current environment due to greed.
The point i make is that generations to come will be punished for an entire generation who has allowed developers to build thousands of apartments that are designed to be cheap and nasty to construct for the soul purpose of maximum profits. It has created an urban sprawl that will be rendered null and void years after these investors have made their millions.
I don't mind working hard for anything, i have become very successful b doing just that. I haven't purchased property in Australia to date as i feel that all i am doing is inevitably rewarding a generation of investors who sort to destroy the younger generation for the benefit of themselves and their retirement. These house prices have destroyed a lot more than peoples finances, there is an entire under current of people feeling detached from the world they grew up in, my generation were lead to believe that if you rent then you are a second class citizen, a failure!!
Comment by The Outback Oracle on 11 March 2009:
Perhaps I am a little late to this forum but I'd make a couple of observations
1. The First Home Buyers grant was NEVER intended to help First Home BUYERS!!! Indeed Michael Matusak quoted figures on ABC radio indicating that almost all the FHBG has gone into the selling price. Indeed i believe his figures are probably still skewed because of the otherwise falling values.
The MSM and Government are fond of trumpeting how sound our Banks are. The Banks were bailed out once in March 2008 when the Reserve took over a whole lot of mortgages. Admittedly these were 'First grade" but the necessity was to give the Banks an injection of Cash Reserves. The FHBG was designed to put a prop under the RE market so the the Banks appeared "SOUND". A significant decline in the RE market combined with a bit more of a tightening in the GFC (say as a result of European Banks falling over) will mean that the Big 4 Banks will fall over. Our big danger lies in our External Account.
Everything in this economy, including the Big 4 Banks (and all the smaller ones), is leveraged to the eyeballs in Real Estate. The potential for a total disaster here is VERY high. The FHBG was a bailout of tha Banks!!!! Nothing more...nothing less.
2. I have just joined the 60 year old crowd too. My memory is still pretty good
Now when i studied Economics, "housing" in the National Accounts was a CONSUMPTION" item. I believe it was during that clown Malcolm Fraser's term as Prime Minister that, quite suddenly. I found that housing had been moved from "consumption" to "investment". About the same time our "Overseas Borrowings" became "Capital Inflow"!!!!!!!
Ah I did buy BHP about 8 to 10 years ago (approximately). I believe the price was about $6 or some such. I didn't have a lot of money at the time so I am not rich off the proceeds!!!!
Comment by Biker Pete on 12 March 2009:
"There is some base-line level of consumption for things like energy, food and water - even in depressions. This base-line consumption is bound to rise, if for no other reason than _population rises over time_. ........ If you want to be sure your money sees the other side of this thing, stick with the necessities." Chris Mayer, TDR
Uhhh, something missing from your list of necessities, Chris, unless we're going to revert to living in trees!
Comment by Greg Atkinson on 12 March 2009:
Biker Pete I am with you on the baseline...in fact it goes for mobile phones and cars as well. The complicated thing is to work out the price baseline as well. For example when coal demand drops so does the price for coal as buyers become the price givers. So first we get a whack from falling demand then another slap across the head when prices fall. The question for me is are we getting close to seeing both baselines being reached? Maybe we are getting close on the demand side...but I feel there is a little bit to go on the price side of things?
Comment by Pete on 12 March 2009:
How would we develop a housing baseline when the demand varies based on geographic, sociographic, and employment factors? It seems too variable to me.
Also consider the total rooms available, not just houses. If two strangers need a place to live, it is an assumption that they would live in two separate houses (or even two separate rooms). Sharing houses may become more common over time.
Then there is the demand/supply issue. If there is high demand in a city, rather than increase supply in that city, perhaps people will move to other cities or to the country. I do not believe that location is fixed at all in this sense, aside from human laziness, resistance to change and employment opportunities.
If I could get paid double my wage to work in a rural area, i'd be there tomorrow. If I was unemployed and could get a good job in a rural area, i'd also move.
Thats my inflation adjusted two cents worth...
Comment by Pete on 12 March 2009:
How would we develop a housing baseline when the demand varies based on geographic, sociographic, and employment factors? It seems too variable to me.
Also consider the total rooms available, not just houses. If two strangers need a place to live, it is an assumption that they would live in two separate houses (or even two separate rooms). Sharing houses may become more common over time.
Then there is the demand/supply issue. If there is high demand in a city, rather than increase supply in that city, perhaps people will move to other cities or to the country. I do not believe that location is fixed at all in this sense, aside from human laziness, resistance to change and employment opportunities.
If I could get paid double my wage to work in a rural area, i'd be there tomorrow. If I was unemployed and could get a good job in a rural area, i'd also move.
Comment by Pete on 12 March 2009:
How would we develop a housing baseline when the demand varies based on geographic, sociographic, and employment factors? It seems too variable.
Also consider the total rooms available, not just houses. If two strangers need a place to live, it is an assumption that they would live in two separate houses (or even two separate rooms). Sharing houses may become more common over time.
Then there is the demand/supply issue. If there is high demand in a city, rather than increase supply in that city, perhaps people will move to other cities or to the country. I do not believe that location is fixed at all in this sense, aside from human laziness, resistance to change and employment opportunities.
Comment by Greg Atkinson on 12 March 2009:
Pete for housing I reckon you are right..it is just too complicated. The best I can guess is that around 2002, before the commodities boom, would be a good place to start for the mining states. But this is real finger in the air stuff. As I have mentioned before I just do not think we have enough reliable data to determine property baselines. I once owned a house in inner city Sydney and in spite of the fact that planes got redirected over it when the new runway opened, prices soared...go figure
Comment by Pete on 12 March 2009:
2002 might be okay for mining, but still very hard to predict. There was that entire town in WA that came undone because BHP closed their mine.
Was that 'prices soared' pun intended
I hope you did well out of the sale...people are strange creatures
Comment by Greg Atkinson on 12 March 2009:
Pete..no pun intended, I am not that clever! But it works well
Anyway I am with you on the difficulty in picking house prices and baselines, the hot spots often turn out to be duds and areas you thought would not do well become "trendy".
Comment by Biker Pete on 12 March 2009:
Still waiting for The Property Crash that has been predicted by the eKEENomists for well over a year, now. Last year both suburbs in which we invest rose, by 1 - 3%. We don't _need_ capital appreciation, due to high rents and low interest, but it's interesting that yesterday's NHSC Report shows a shortage of 202,000 houses right now. With a 20% reduction in building approvals (despite the FHBG) it's hard to see how you can continue to push a doom'n'gloom picture for realty, Pete. The last of our 'shared-occupancy' leases ends early April. Too many problems to take _that_ path again. With queues for any expired lease, the Packed-to-the-Rafters scenario won't happen again!
Comment by Pete on 12 March 2009:
Biker Pete:
If there is anything I have learned about these economic problems... things often take longer than expected to break.
People predicted the 08 financial crisis many years beforehand, but actually picking a firm date is the hard bit.
Basically it comes down to fundamentals - if there are obvious signs that a crisis will occur, it is then just a matter of timing. In the case of real estate, Australia's timing has sure been lagging the rest of the world, but the fact that our crash has barely started does not indicate our immunity from it in any way.
It certainly does not help however when Governments try to prop up the real estate sector with these FHB grants and any amount of market manipulation. Ultimately all this does is further distort the market and lead the way for a bigger crash.
And worst of all, the people who are getting into the market right now are the people who can least afford to. I think it is shameful of the Gov to fight to keep a bubble alive using youthful naivety as cannon fodder.
Comment by Biker Pete on 13 March 2009:
Ah, but you'd rather that in their youthful naivety they paid off our rentals, Pete. Can't argue with that!
It would also be naive to believe that any market will ever be free of political intervention. An investor needs to factor that in... along with falling interest, rising rents due to reduced construction and a lot of other key factors which make this an evolutionary algorithm, rather than a static one: Keen's most obvious mathematical flaw. Politicians who wish to remain in power can't have hundreds of thousands of voters dispossessed of their homes, as GW discovered... ! So despite the alarmist media stories, I'd expect to see FHBGs extended, interest continuing to fall, smart players locking in very low fixed rates, reduction of stamp duty, and families purchasing properties together. As you've noted "...if there are obvious signs that a crisis will occur, it is just a matter of timing." There's copious data to show an extreme housing shortage, soon; a crisis if there ever was one! 
Comment by bob on 13 March 2009:
I agree with Biker. There is extreme housing shortage.
But i have a question.
It seems that this is deliberate and results from strategies used by govt to keep pressure on rents and property prices. Govt seems to use legislated rorts like negative gearing, slow release of land for sale and delayed building approvals and high immigration intake to prop up prices. The result is a housing shortage.
The question i have is: if it goes too far, wouldn't there be some kind of communal backlash? Or does the govt already have plans set aside for the wave of homeless such poorly thought out policies will produce?
Comment by Pete on 13 March 2009:
So many points I disagree with here:
- how do you factor in governmental intervention when policies change from year to year? Real Estate is hardly a 12 month investment for most people
- how much do you expect interest rates (mortgage rates) to fall? Do you honestly think the banks will loan below 5% interest? Regardless of what the RBA's rate is, the banks require a certain rate to meet the risk of the loan. Home owners are far from AAA rated, low risk clients. Also consider how much money the banks borrow from overseas. The lower our RBA rates go, the less worthwhile it is for our banks and especially overseas banks.
- you are correct about voters, although incorrect about GW, he couldn't have another term even if the voters wanted him to. Consider how much power the gov. actually has to keep house prices high artificially, without completely destroying the rest of the economy. One way or another real estate prices will fall, taking some banks and other companies with them.
- the problem as I see it, with all this talk about people locking in low rates and being smart, and this crisis that is occurring - is that having a mortgage is a 25 year commitment. So if rates and gov. grants favour you for a few years, should you ignore the remaining 20 years that you will be in debt? Yes debt will reduce over time, assuming you can make repayments. But you are suggesting that house prices will continue to go up and up, or else this whole idea is a load of nonsense. Do you honestly expect the median house price to be 1million dollars in 10 years (assuming current inflation levels)? All this talk of crisis and housing shortage...is a myth made up by the media, REIA and its cronies.
Comment by Biker Pete on 13 March 2009:
Yes, we disagree on so many points, Pete. Let's start with points on which we agree. First, realty as long-term. Agreed... although we have often made immense gains within a two-to-three year period. Those days are over. George W: We agree that he couldn't have survived, even if he'd been able to stand. Media: Yes, there's a lot of hype. PerthNow, for example, recently had no less than four separate articles headed: 'Homes Groan.' That's hype all right!
Agreed there will be minimal capital appreciation in the short term. We'd also agree that these are highly unusual times, which may last for many years. Warnings by TDR, over eighteen months ago, alerted us to this and we bailed on the ASX and converted Super ASX to cash. So despite your fears for us, we have more Super than debt, a lot of top-quality properties in highly desirable suburbs... and cash. We aren't alone in this. Friends have even _more_ 'tangible' assets. We're all in a position to keep buying more property should it fall... . Now to areas in which we totally disagree: Interest rates _will_ plummet to historical lows. Banks _will_ lend immense amounts to those with assets. Smart operators _will_ lock in for maximum periods possible. Sectors of the property market will experience _immunity._ Rents _will_ continue to rise. (We're about to raise rents on two homes, by 10% and 12%.) Some large sectors of the community will reach retirement age, _homeless_; unable to pay high rents. What is most amusing on this blog is the bitter vitriol with which many decry the FHBG. Pure fear that realty will survive unscathed; that you picked the wrong horse when all your mounts were given the bullet! 
Loved your closing comment 3rd March, BTW. You're just full of marshmallowy goodness!!~ 
Comment by FHB Terry on 14 March 2009:
Great reading all the above, I have 1 week to go until a property I have a contract on goes unconditional. I am not very educated in matters of the global economy but I dont want to be in the class of"
youthful naivety as cannon fodder" as Pete so kindly referred to.
I am 30, with family & currently rent. I have no investments / assets, and a bunch of debts that keep me from being able to save up for a house deposit, so how then could I go wrong assuming the following situations....
I buy a house for $380K,(3bed,pool,2kms from Sunshine Coast beach) using FHBG as deposit. Later this year (or even now) I fix my my rates & end up paying the same, if not less, than what I pay for rent now.
Situation 1) property value continues to rise, I resell in 1-2yrs & have some money to re-invest/ go back to renting with some money in bank.
Situation 2) property value falls. I pay mortgage off at similar amount to renting. Wait for property to go up, resell in 5-10 years. Have some money to re-invest / go back to renting with some money in bank.
Situation 3) property value falls. I pay mortgage off at similar amount to renting. Property value never gets back to what it is at the moment. 30 years later I finish paying off mortgage & can atleast retire rent-free. (situation 3 hopefully never happens because I think I would go insane living in the 1 place for that long)
* please, all readers feel free to comment, call me stupid/smart/whatever - I dont like to gamble on anything, but I do need to think about my future for my families sake. If I dont buy now & keep renting & waiting & watching, by the time the market is "perfect" time to buy I may not have the FHBG & definately wont have $10K+ saved up for deposit. I dont want to "miss the boat" with real estate again.
Comment by Sandor on 15 March 2009:
Frankly guys, I am not even considering the houses prices here... I am from Europe here in Australia (around Melbourne) since December. House prices are just unbelievable for the value. The housing standards are way below any that I have seen ever before (even compared to California where they also build wooden houses due to high risk of earthquake what is nowhere here). Even you get better built houses in Finland where most of the houses are wooden.
Honestly, this is a joke over here as well as that real estate agents say that all houses got cracked due to the dry weather... What? 80cm - 1m concrete on iron-web basis and you can dig half of the ground out and the house will stay as it is. No way I spend a single cent on those bungalows called houses here. I will build myself my own if I will ever, probably waiting a few months-years before buying land since, again, prices compared to other commodities and salaries are nonsense. I could buy land for cash now, but again, prices are unrealistic so I am not going to do this (I prefer low risk so I feel fine until I get just a little bit more than inflation guaranteed - what I get now and I hope that the bank will not collapse; at least no signs yet).
About the 18% loss in the U.K.: one of my best friends owns a house in London (zone 1, Vauxhall). He had an offer for GBP 650K when he considered selling in 2006. He thought 700K will be okay and waited a bit... he still lives there and the same real estate agent advised him to expect 400K a few days ago. Otherwise it is a nice solid brick home (great for our nasty karaoke nights - we really cannot sing and at least neighbors are not going nuts like they would in block houses).
Just my two cents, cheers.
Comment by Pete on 15 March 2009:
Biker Pete: I agree with those things that you stated we agree on
Depending on your leverage, you may well be in a good position. If you own your properties, then who cares if they fall in value unless you need to sell them. However when leverage comes into play is when things get nasty.
Consider the assumptions you make:
a) banks 'will' lend you money
b) interest rates 'will' stay low
c) rents 'will' increase
d) you will not 'need' to sell any property at a loss due to liquidity needs
See, I would think that the best time to buy property (if you are unleveraged) is when interest rates are at their highest, and hence property prices are at their lowest. If you already have capital, that's fantastic. Although you could also put that money in the bank...for the short-term.
See, I think people who consider 'current' interest rates to be short-termists - people who aren't looking more than a year or two into the future. This kind of thing isn't such a problem for personal loans, car loans, etc. But it sure is for buying a house, because that housing loan may span several different interest rate peaks and troughs. Yes, it's a good idea to start a loan in an interest rate trough. But do you know what kind of a trough this is? Yes, lock in a fixed rate for 5 years if you can...but what happens then? What if you're still stuck paying off this house, which is in negative equity and a low rental return ratio? And your fixed term expires and you see hefty 20% interest rates?
Those 20% rates would be tolerable for people entering that market, as prices would be low, and it would be manageable (barely). But for the speculator who bought a house at double that price 5 years earlier, it will feel like 30 or 40% interest rates. Ouch.
So anyway, i'll go over your points one at a time, as usual:
- just because some people will be able to buy in a falling market, does not mean that it will be enough to prop the market up. To think that those people would have so much effect on the market is just a tad arrogant.
- why will interest rates go lower? if you were a bank, would you loan to anyone at 4%? What if it cost you 3% to loan that money. Is it worth the banks risk to earn 1%? (Nope)
- maybe banks will not lend to people, especially if they want to increase their reserve ratio compared to loans. The rules changed to lend to people freely, they can change again to restrict lending
- I do not disagree that smart people would lock in low rates (ignoring that they were not smart when they decided to buy in the first place). Unless you are naive and think they will go lower, why wouldnt you.
- which sectors will be immune? Gov. buildings? The office of lehman brothers? Everything will come down to negotiation unless it is on a longterm lease contract. Even then, people will move if they are forced to.
- heres an example of raised rents going wrong: I just moved out of a house that raised its rent, to a cheaper one. That same place raised its rent again, looking to cash in. It's currently still empty after two months being vacant. Sure, people need a place to live, but most of us aren't stupid. Landlords who raise rent whenever they can lose the loyalty of their tenants. Greed isn't something people hold in high esteem.
As for my closing comment - yes I agree, marshmallows would pad a cell nicely.
Comment by Pete on 16 March 2009:
FHB Terry:
I'll go over your scenario's with my take on things (note that I take no responsibility for your decisions, this is just my thoughts)
- Scenario 1: Fantastic if it works for you. This will make you a property speculator. Speculators have done very well for the last seven or eight years. Personally I do not believe that trend will continue.
- Scenario 2: Speculator talk again, you assume A) property prices will go up again (more than inflation) and B) mortgage repayments will be a similar price to renting...for the medium to long term. What happens if B) is only true for a year? What if you lock in low interest rates for five years...and then interest rates rocket up to 20%? Also consider that rents may drop.
- Scenario 3: Again, assuming that mortgage rate will be close to rental rate. Question: Why buy a house if you do not plan on staying there for 30 years?
Overall, I think your scenarios assume a lot of things and you talk like a speculator. This may well be a product of media and your peers - perhaps you need to consider what you are really thinking/saying, and why?
You make many assumptions. If you truly believe that these assumptions may be likely, or close to correct, then you should take your own advice.
I am concerned for you that you cannot save for a deposit, yet you wish to purchase a house worth several hundred thousand dollars. It really sounds like you are what banks consider a 'sub-prime' borrower. The media seems to have stopped using that term and has taken GFC over again. That does not make the current sub-prime reality any less real.
I feel for those that worry about 'missing the boat', because this causes decisions based on fear. I believe longterm financial decisons should not be emotional (although some investors disagree with that). So many people are scared of missing this boat...but shouldnt because it is land-locked.
I hope that was of some value to you Terry. I really do feel for you, family means everything, and of course you want to do what seems right. I once read a book that said there are no wrong decisions in life, just different experiences. It was a good book.
Comment by Pete on 16 March 2009:
Oh, and Sandor: Thank you
Comment by sam on 17 March 2009:
Well, well... I'm not surprised in the slightest by these figures. If you've been around as long as I have, Australia is outrageously expensive whether it be for food and supplies including the humble Australian home. As a retired Real Estate Agent and seeing the rise of prices over the last 20 years, I and my fellow agents over the years can be blamed for artificially stimulating this heavy rise for the Aussie house, and the greedy vendors. I like them have made a bloody bundle selling my houses and apartments back into the market again. At the end of the day, I can't see it going the other way, as Australian's as a whole are dumb and will pay huge prices for a over priced item. As long a the market price for houses remains high, we are going to make a bundle. I hope and pray prices don't go the way they have in the US and UK....thanks Australia!!
Comment by Biker Pete, ROFLMAO on 17 March 2009:
One scenario you haven't considered is that if values fall, you can rent the house to someone else... as soon as _six months_ after you buy it with your FHBG, FHB Terry. You'll not only enjoy a high rental return, in a locked-in low interest rate environment, but you'll enjoy many tax write-offs, as well. I'm amused by the four previous posts. Highly creative scenarios written by activists _keen_ to damage the property market. The dead giveaway in many of the posts in this blog, is the unbridled enthusiasm for The Crash. Funniest Home Confession is that of Sam, the Reformed Realtor. Simply _priceless_ imagination and humour!~
Comment by Greg Atkinson on 18 March 2009:
Remember that house prices held up quite well in Australian during the last recession in the early 1990's even though unemployment reached quite high levels. So I am wondering why things would be different this time around? The main argument seems to be Australian house prices are expensive compared to the U.S, U.K etc. and that these real estate markets have taken a hit and so ours will to. But how exactly is the price of the home in the U.S or U.K relevant to someone buying a house this week in Sydney? Are they going to say "oh no, it is too expensive let's slip over th Idaho and snap up a bargain?" Me thinks not...
Comment by Pete on 18 March 2009:
Greg: I think that is because the prices were not so overinflated then in comparison to wage levels (ratio). I agree that comparing countries definitely falls short of suggesting that there is a correlation between those countries. However I think that we can compare the driving forces behind the falls in those countries, with our driving forces, and then consider the likelihood of these things occurring here in Aus.
Biker Pete:
I've done my best to make logical arguments (with occassional emotives), so I see no point in arguing with you anymore as your arguments are based on what is happening today, without considering major driving forces that will affect the future. If you think house prices will continue to go up and up as they have in the last 20 years, of course you are entitled to that opinion. Personally I see your logic flawed as you choose to look at the current situation with economic blinkers on, but that is less to do with you and more to do with a generation of people (most of) who think the same things.
As that Einstein quote goes(something like): 'Never expect the same people who caused a problem to be able to fix it'
And incidentally, I see nothing wrong with hoping for a crash if it brings unrealistic, manipulated and inflated prices back towards equilibrium. People will be hurt if prices stay this high, just as people will be hurt if they fall considerably. It is a lose/lose situation for the current market, but falling house prices is a win for future generations.
Of course everyone is entitled to their opinions...
Comment by Claytonator on 18 March 2009:
My parents listed our Central Coast NSW home in late 1989 for $290k. The response was swift and the timing was right. The agent and my father decided to relist it for $340k... Once again within a month there was serious interest. The process repeated and the house was listed for $390k... Within a month or two the best offer was $375k. My parents were caught in the greed trap and decided to wait even though interest rates were rising quickly. In another two or three months or early to mid 1990 my parents sold our house for $275k....... We're not there yet Greg however the stock market crashed in 1987 and property slowed up in 1990. Our stocks have now crashed again, I wonder whether history will repeat?
Comment by Paul T Hutchinson on 18 March 2009:
Classic Case Shiller Housing Price Chart,
When you look at the graph of the Case-Shiller residential real-estate index, an index dating from 1890 to the present and an index which measures the cost of housing in comparison to other goods, the first thing you see is that the 2001 to 2006 bubble stands out like a fifty foot saguaro cactus in a patch of daisies. There simply has never been anything like it before.
When you know what you are looking at — the biggest bubble in history — it is scary. To be precise, the Case-Shiller Index in its entire 110-year history had never crossed 140 until the recent bubble. In 2006, it reached 210. Every single real-estate bubble in the past has at best been followed by a fall back to at least the 110 level in the postwar era, although the bubble preceding the Great Depression witnessed a fall to 60.
What this means is that in the best-case scenario, real-estate prices have to fall in the medium to long run by almost half.
Comment by Pete on 18 March 2009:
Another thought occurred to be that dispute the claim of "rents will rise in the future"
That is unemployment.
Consider:
- unemployed people cannot pay expensive rent, will move to cheaper places.
- unemployed will move in to group houses to share the rent if they can't afford anywhere else. This would reduce the total number of rented properties WITH tenants, thus increasing supply of AVAILABLE rental properties
- unemployed people cannot pay the mortgage of the house they live in! (without other income). This means they will be forced to a) sell, b) rent the house out. Scenario a) means more properties available for investors (someone has to buy the place, or the bank forecloses and they WILL sell it at any cost). Scenario b) means more properties AVAILABLE for rent
There are probably more examples, but in each of those scenarios, with higher unemployment, there is an increase in the properties AVAILABLE for rent.
Economics 101: Supply and Demand...excess supply leads to lower prices (more competition).
Has anyone noticed talk of unemployment in the press this year? (sarcasm)
Comment by Travis on 18 March 2009:
I agree with biker in that nobody is acknowledging the massive damage that incredibly high house prices are going to do to the next generation (and their inherited economy. Instead of being able to manage housing debt and then take on productive investments they will be stuck for years.
Comment by Biker Pete, SROFLMAO... ;) on 18 March 2009:
Talking with my niece, in the main street last week, I advised her to take the $21K FHBG and _buy_ rather than rent. Her response? "I get rent subsidies while I'm unemployed, Uncle Pete." As advised some posts ago, two of our leases end this month. Rent IS going up in these two homes... by 10% and 12%. There is an immense shortage of high-quality houses near the ocean. We have many more applicants than we can accept, Pete. Those who were accepted were as happy as lotto winners...!~
Comment by Greg Atkinson on 18 March 2009:
Pete I am guessing we will see the top taken off properties in affluent areas (as is already happening), the mining boom towns and places like the Gold Coast. We may even seen prices remain flat for some years but I just can't see a U.S or U.K style property crash happening here. But you make some good point and if you do not mind I would like to use some of them in my blog..is that okay?
Comment by Temjin on 18 March 2009:
Greg Atkinson, because this is not a typical recession like you have faced in the early 1990s. There were NO global bank failures and massive bailouts / stimulus packages back then. There were also very little of massive financial weapon of destruction (i.e. mortgaged debt obligations dervatives, etc) that are now valued at very little to the dollar back then. There were also no "sudden" freeze in the global credit market and/or close calls to financial system collapse (even hyped ones) back then. It IS different this time. The last 30 years of credit boom has pretty much brainwashed everyone into thinking this recession would just be the same like a decade ago and we will be back in boom-la-la land in no time.
To think Australia's economy is isolated from the rest of the world and is fairly "immune" from this GFC is simply naive. There are simply too much misplaced optimism going around. In which I blame the media and those with vested interest parties are responsible for creating it.
Comment by Pete on 18 March 2009:
Biker Pete: Things must be great in your world. But there is a world outside of that. There are communities, cities, states and then our entire country.
It appears your sphere of reference is but a tiny speck compared to the economic outlook of our country as a whole. I hope people are aware of that when reading your posts.
That said, I won't claim to be Dr Housing Solution. All I see is a problem, and logical reasoning telling me that this trend just cannot continue.
Something else to consider is that perhaps housing prices won't fall in nominal terms, due to impending inflation. That means that they will fall in real terms, whilst interest rates would soar and eat everyone alive. I think this really depends on the Governments determination to prop up the housing bubble.
Greg: You're welcome to use my comments in your blog. Even the bad ones
Over and out...
Comment by Biker Pete, RAOFGMAO... on 18 March 2009:
Thanks for your 'you're-a-speck-in-the-universe' perspective, Pete. We spend up to four months traveling every year, so we're not quite as insulated as you'd like to imagine. It was the price of coastal California, thirty years ago, in fact, which saw us playing Monopoly along whole WA beach fronts for the next decade. Once CGT was introduced, we built houses... .
You exercise remarkable logic in your posts. Consider your two recent gems: (1) "... your arguments are based on what is happening today, without considering major driving forces that will affect the future..." and (2) "...logical reasoning telling me that this trend just cannot continue." On one hand your supposition rejects today's realities, for tomorrow's possibilities; while you plead 'logical reasoning' is then telling _you_ that this can't continue. That's not logic... it's emotional claptrap... and based on the trend in your posts, not just highly fanciful supposition, but extremely optimistic wishful thinking. Here's a tip, Pete: Property isn't going to fall into your hands... you have to _work_ to attain wealth. Works for me!! ~Oh.... and Steve, you can use my stuff in your blog, too!
Comment by Ned S on 18 March 2009:
I see HUGE value in this site - But apart from the authors (Bill, Dan and the ever more rabid MG - Gawd bless him!!!) there are only four main contributors - Pete, Biker Pete, Coffee Addict and Greg Atkinson. BORING! Ya'll might be sa darn honky as they say. But I'll scoot orf to more fertile fields looking for a slightly more contrarian contrarian's position for now - Toodle Pip.
Comment by Pete on 19 March 2009:
Biker Pete: I cannot show you what the future will bring. We both clearly have our own ideas of what will happen in the future, and we base them on different things. You base yours on 30+ years of experience, and I base mine on contrarian readings and what I perceive to be logic.
I still believe that your experience is completely 'relative' to the time period you have experienced, and the notion that just because you have experienced a fairly steady upward trend in real estate in your life-time, does not indicate that this will continue on forever and ever. Of course you dispute that, you're heavily into real estate and you probably believe that so called investing in real-estate makes you wise.
As i've said before, we are all entitled to our opinions. What concerns me is that your opinion may influence others to sell themselves into this notion of debt = wealth, if its in real estate. And you're certainly not alone with that point of view. Thats is the truly sad thing about here and now, that every day someone is misinformed, tricked or just plain blind-sided into propping up this real estate cliff-hanger.
Please reply to this comment and also include something about the positives of 'equity' based credit. I couldn't think of any.
Comment by Greg Atkinson on 20 March 2009:
Temjin relax, did I say Australia was immune form the GFC? If you read what I have posted here and on my blog you will see I have been talking about a recession in Australian since last year. However this does not mean Australian will face the same issues as other economies and I am quite aware that all recessions have their own flavor. However as far as I am aware there is no data to suggest that banks in Australia banks have cut back lending for residential property for the average punter. All I am trying to do is focus on facts rather than fear..running around saying the sky is about to fall on the property market is not a fact based discussion. As I have mentioned earlier, there will be areas in Australia that will see major prices falls, but can people really justify claims that we are about to see Australian home prices crash based on facts? (remember our home loans are not the same as the U.S!)
Comment by Pete on 20 March 2009:
Greg: I'm not trying to gang up on your here, but you said "However as far as I am aware there is no data to suggest that banks in Australia banks have cut back lending for residential property for the average punter."
Something worth considering is what happens when banks cut back lending?
My immediate thought is: Less availability of credit = less ability for people to buy houses = reduced available demand = lower house prices.
It might be that banks are currently too scared to stop lending in case they spark the fall in real estate themselves.
I do definitely believe that people can be stupid. People can be collectively stupid too. Even major bank CEOs and Prime Ministers can be stupid. Perhaps the banks are really expecting the Gov. to save our economy, and are holding out for that day.
And that...is why we are in a lot of trouble.
Comment by Greg Atkinson on 21 March 2009:
Pete, feel free to gang up, I am always more than happy to hear counter arguments. I agree that if banks stopped lending we would have a problem and a guess a few developers have already had that problem. Anyway I have posted the other side of the property debate now on the blog, you will probably have some comments I guess
Comment by Pete on 21 March 2009:
Greg: I really do think that the banks are too scared to stop lending, and are holding out as best they can, putting on fake smiles and touting their rubbish economy speak to try and keep some market confidence.
Sooner or later the banking/lending house of cards will start to fall and there'll be no stopping it.
I think unemployment will be the trigger (foreclosures, etc).
Comment by Jane on 22 March 2009:
Why bother staying in Australia. As soon as I finish medical school I am out of here !
I can get a nice house in Germany, get a lot of good training, wait until the bubble bursts then return (10 years later), or maybe travel the world a bit more.
If I am still alive - I have cancer
Comment by Cameron on 22 March 2009:
Dear Sir,
What are the benefits of buying a house in the current situation, if you have cash, opposed to if you need to get a loan?
Cameron
Comment by Pete on 22 March 2009:
Jane: I have felt the same thing: Why stay, especially if the Gov. wants to intervene and prolong the problem?
I am not sure how green the grass is overseas. People in Oz seem to think it is the best country in the world. Maybe it is patriotism, maybe it is some kind of weird self-love. Or maybe it is great here...for now (it may not be the nicest place to ride out a Depression).
As for your cancer, I hope you can beat it. My girlfriend had bone cancer and fortunately managed to get rid of it. My Dad had leukaemia and didn't. Its just one of those things you can't foretell.
Comment by j on 23 March 2009:
Hi all,
I was following this thread with great interest as a potential first home owner. Anyway, my mortage broker just informed me that banks will soon (this April) require 10% deposit on homes as opposed to the current 5% (not sure about mortage lenders). Like Pete, I interpreted this as potential lower demand in the near future which I believed will lower property prices. This has made me very uneasy about buying a home anytime soon - especially considering that the first home owners grant will prob. be extended. Anyway, thought you guys might be interested in this bit of info.
Comment by Pete on 24 March 2009:
Thanks j - that's an interesting move by the banks
Comment by Pete on 24 March 2009:
Cameron: An interesting question.
I know someone close to me in this exact position - they have capital, and they want to buy a house(s) with it, to generate an income.
My advice to them was: Wait a while.
My reasoning: House prices will fall - get two in the future for the price of one now.
Yes, that is assuming house prices fall.
The difference between buying a house using capital, and getting a loan are pretty straight forward. Using capital, you can still lose money if you are forced to sell at a loss, etc. Using credit (mortgage) you are subject to every single force that affects debt. This also includes not being able to service the debt purely with rental money, if rents drop.
I'm sure there are plenty more factors I have not added here.
The main argument I have heard for buying a house with pure capital right now is that "interest rates are too low, my cash isn't earning anything".
Does that mean it is a good idea to sink it into an asset in these economic times?
People can be such short-termists! Think at least a year or two ahead. Will interest rates be this low next year? After taxes and everything else, how much does the house value need to appreciate this year just to compare with savings in the bank?
I won't mention gold...
Also consider: In a years time, if credit availability drops, who will be in the best position to make purchases? Simply, the people with capital.
People in this country rely on loans for almost everything. If those loans are hard to come by, people will have to sell at prices that other people can pay, even if that is much lower. And there will always be people that 'need' to sell. This chain reaction will force more leveraged people to sell.
That is why our average mortgage was a bit more than 3 times wages - because that is a serviceable level. People can save a good portion of that kind of money if they really have to. At our current 6-7 times wages, those amounts are not easy for people to save. Most first home buyers arent on 100K+ wages.
Sorry I went off on a tangent. My point was: If you have significant capital and want to buy real-estate, your best bet is to wait. You will have a lot of power in a credit-starved market.
Comment by Kinny on 25 March 2009:
interesting read so far. Seems like Pete has an answer for everything.
This is what I have seen so far:
1. the govt will do whatever it takes to keep property prices from deflating. FHOG, ruddbank, stimulus packages.
2. the RBA will do whatever it takes to assist. The reserve bank cash rate is at 3.25% and for anyone who borrows over $250K the variable rate loan is sitting at 5.21%. With a cash rate at 3.25% there is room for the RBA to further drop interest rates and they will.
I agree it will stay low for a short period however people can choose to fix 3 yrs for about 5.3% and 10 yrs for under 7%. (For first home owners who have purchased please consider doing this after a couple more rate drops.)
3. you are suggesting that we will have a credit starved market. Every over country is slashing interest rates and every other country is stimulating their own economy.
a credit starved market means that there will be a contraction in the money supply which means you are expecting a depression. With the amount of bailout money going around the world and with printing presses working overtime, I can't see this happening. I agree the cash has not hit the streets yet however when it does I can only see inflation going rampant. What causes Inflation? an increase in the money supply.
4. what happens when fiat currency is created out of nothing?
it devalues the dollar. Why? because there is more cash out there then the day before.
So when your dollar devalues, it means the prices of goods and services increases.
This will also mean that wages will increase, in line with goods and services increasing.
So if you have a loan of $250K today, you will be paying it back off faster because you have borrowed it when your dollar had more value. The loan amount stays the same and you pay it back with more dollars which have inflated.
Anyhow, plenty more to add but need to head off to work.
Abit of food for thought.
Comment by Pete on 25 March 2009:
Kinny:
You said,"a credit starved market means that there will be a contraction in the money supply which means you are expecting a depression."
Yes, you are correct that these things would lead to a Depression. What I am expecting though is either of two extremes:
1) Depression
2) Massive inflation (possibly hyperinflation)
I think that we will eventually get 1) unless we get 2). Even if we get 2), we might still get 1) eventually. Look at Zimbabwe.
Thats my long-term view. The short-medium term view (3-5 years) looks to me like it will be a Recession/Depression. I am not sure how much the Gov. will try and intervene.
You said,
"So when your dollar devalues, it means the prices of goods and services increases.
This will also mean that wages will increase, in line with goods and services increasing."
I think what you have said is a bit misleading, in that these things (goods, services, wages) might not all go up at the same RATE. Goods prices can fluctuate easily, services rates can also change fairly easily, but wages are another matter altogether.
With wages, consider:
High unemployment = more competition for jobs. There may be less jobs available too. Maybe we 'can' work in sweatshops for low wages? I don't think that high inflation guarantees higher wages, but I think generally wages would rise. Whether they rise at even close to the same level as inflation is another matter.
In fact, I generally agree with your points. Except for this one:
"So if you have a loan of $250K today, you will be paying it back off faster because you have borrowed it when your dollar had more value. The loan amount stays the same and you pay it back with more dollars which have inflated."
It is a good theory. In fact, it is a theory that many may be using today, or planning to use tomorrow.
Consider: If you were a bank, and inflation was 10%, what interest rate would you lend at? The answer is of course '10% + risk premium + profit margin'.
I'm no bank manager, but that seems simple enough. Lets say that rate equals 14%. On a 250K loan, that is $35,000 interest.
Lets say inflation is even higher and/or banks are more risk averse and/or need more profit, and they set their rates at 20%. For a 250K loan, the interest is: $50,000.
(Note that is just the INTEREST before any principle is paid. If you cannot pay those amounts for some reason, then you are in trouble).
For interests sake (no pun intended), lets look at a 400K loan, at 14% interest: $56,000. 20% interest: $80,000.
Those values are MUCH higher than rents. In fact, they are 3 to 4 times as much as rents. Yes, with the CURRENT market and high inflation, rents might go up. But 3 or 4 times? No. There are in fact legal issues if a landlord even tries that on his tenants.
(I have already explained why I believe rents will not go up, so I won't explain that again.)
Overall, I think one of the things that makes people think they are wise to purchase a house in the current market is the fortnight rents vs mortgage repayments calculation. Remember that this is the CURRENT situation. Interest rates can fluctuate heavily (and we've seen them late last century), whilst at the same time wages will not (they might go up, but not by 3 or 4 times).
Obviously, some people have their minds set on mortgages and have done calculations that seem to perfectly support their decision. I hope some of those people will consider some different scenarios and how they might handle them.
- Can someone please let me know if I got the bank/interest rate part wrong.
Comment by Kinny on 25 March 2009:
Thanks for your comments Pete.
Buying a property is one of the biggest commitments you can make in a lifetime. Especially for the first home owner.
- If you are thinking of purchasing your first home or a home to live in pls factor in a minimum 3% increase into your repayments and make sure you can still live comfortably.
- Consider locking in all or 2/3rds of your home loan when you believe interest rates have bottomed. (basically if interest rates start moving up and you decide to break out of your fixed ie selling property, paying down loan etc, you will have minimal break costs because the variable rate is higher than your fixed rate.
The bank would pay next to nothing to break out of the contract).
- Try and keep informed on the market, especially around what is happening overseas. Don't take what others say as gospel but be willing to listen and to keep an open mind. DYOR.
- Make additional payments into your mortgage in good times so that you have a buffer in bad times.
- Don't spend more than you can afford to when purchasing your first home. You have plenty of time to upgrade properties in the years to come.
The less you borrow for your home the faster you can pay it off.
- It is a buyers market at the moment so price in another 10+% drop when negotiating on a property. i.e advertised for $500K, - 10% = $450K willing to pay, - 10% = offer 405K. Begin negotiations even lower and see what you can get. Don't be afraid to let the vendor sit it out, 1, 2, 3 weeks when u make ur first offer.
I hope this helps if you deciding to get into the market.
If you are sitting on the sidelines I think it would be worth waiting to see how the next 6 - 12 months pans out.
Comment by denko on 26 March 2009:
Thanks for the article Dan
Interesting responses and comment much appreciated too.
I consider many arguments supporting sustained housing prices in Australia are the stale comment that was pervasive in the US three to four years ago. Some basic retro - surfing of the net provides thousands of urls; try any US county, say "Miami" : "Housing Prices" : "2004" : "2005" which leads to many articles on limited supply, increased immigration, population growth, and the emphatic exhortation of the inevitable and forever upward spiral of house prices.
“Oh yeah?”
All that talk now in hindsight largely the "puff" & "hoopla" of the realtors – and essentially bunkum.
In our Australian context :- house prices do not equalize internationally as easily as for instance the renowned "hamburger index" – as houses do not transport as well as hamburgers.
(Notwithstanding that a comparable and ubiquitous hamburger from say Guatemala or Guinea Bissau proves to be slightly chill and the tomato and pickle inevitably rather soggy by the time their hamburgers reach our fast-food outlets.)
In contrast to a "Mighty Mac", international capital enters and withdraws or equalizes instantaneously; at the click of a keyboard vast amounts of money are transferred about the world.
The US has always had the cheapest money - borrowings in the US are at wholesale prices, whereas we've always paid a premium to cover the idiosyncracy of a (internationally deemed nutty and absurd) welfare politic - that is – a retail ‘plus’ price.
Mortgage Money Available / Houses = Average House price at the market margin.
The denominator to that simple equation is clearly at a material risk at wholesale; So how long before those prices are impacted at the Australian retail market.
--------------------------------------------
Then off course - the jobs, jobs, jobs! Those go - and house prices will plummet.
--------------------------------------------
Available 'Housing Supply' is an extremely flexible or spongy concept, especially at the Y Generation “still-living-at-home-with-mum-an-dad-dammit” margin¿
Comment by Pete on 26 March 2009:
Kinny: I agree with your points. Buying a house is a huge commitment.
It is not my place to tell people they shouldn't buy a house - every case is different.
I just hope people will do a variety of sums before they jump in. And I also hope they will take no notice of the hype and nonsense that floats around our country at the moment.
Financial advisors will have probably played a large part in ruining lives with their X + Y = Z calculations based on the current market. I think it is sad when people don't think for themselves and instead take this shoddy advice they paid too much for as an 'expert' opinion. The only things these guys are experts at is earning their wage.
Comment by Ned S on 26 March 2009:
Housing shortage? Hmmm??? Maybe ... But if so it is at least partially government induced. With the upside from goverment's perspective being that a shortage, be it real or even just perceived, supports the banking and building and real estate and allied industries I'd guess. My case:
There are loads of older Australians (both singles and couples) who live in three and even four bedroom houses but only really use one bedroom. The other bedrooms are thought of as guest bedrooms and studies and sewing rooms or just plain old storage rooms etc. So there is considerable unused housing capacity available. And much of it is in very desirable locations.
As these houses are owned by older Australians, they are very often mortgage free. And the Federal government's current taxation legislation quite actively discourages better utilization of this spare capacity by virtue of the fact that the moment any portion of a Principal Place of Residence/Main Residence is rented out, the property becomes exposed to Capital Gains Tax (albeit on a prorata basis) - Which is a very unattractive proposition for any owner of a mortgage free property who wants to rent out their spare capacity. Because there is no bank mortgage interest component expense to be claimed as a deduction. But owner would probably have to beware of their state government lining up to stiff them for land tax depending on just what their specific financial circumstances were I'd imagine - Although I'm not specifically checked that. But irrespective, there is lots of downside potential and very limitted upside potential, taxation wise. Especially considering that many of these houses were bought many years ago and the capital growth component on them since then has been huge. So huge in fact, that even if prices DID drop by 50%, many of the owners would still be being hurt by Capital Gains Tax on sale.
So Australians generally, are encouraged to borrow more, and to build more excess capacity, typically in the less central and less convenient locations, rather than to better utilize the surplus capacity that already exists in more desirable locations. I certainly regard that as malinvestment.
I have sent an email to all Federal Cabinert Ministers I could think of who might be vaguely interested in this - Just on the off chance they hadn't already realized??? And did get a reply back saying it would be considered as part of a future general review of the housing situation in Australia.
My punt: Expect no change. The various industry lobby groups I mention sound very powerful to me. And I've yet to hear even one Australian politician so much as mouth the word malinvestment in relation to anything ever - Just doesn't seem to be part of politicians' vocabulary?
On a slightly different but still related topic, it would appear that the populations of both the UK and Canada were under the impressions that they had housing shortages until their housing markets tanked. (Anyone who is interested should be able to Google that for themselves - Sorry, but I checked it a good while ago and don't feel the need to do it again.) I didn't check Ireland or Spain though if anyone else feels enthusiastic. And the US wasn't of much interest to me as they pretty obviously seemed to have over supplied anyway.
Comment by Ned S on 26 March 2009:
Just a general comment on house prices going down: In normal business cycles house prices go down. Any long term Australian property owner knows this from their own experience if nothing else.
Drops of 10 and 15 and 20% (Ouch) are quite common and typically don't rebound quickly at all. That's just the property market.
Of course "this time" might not be a normal business cycle. Maybe they'll go WAY down - Rather than just the usual percent. Maybe they'll not especially go down at all - Because of all the hocus pocus fixes the various world governments are coming up with (Including Australia's FHOG). I simply don't know. Although I will admit that a nice comfortable 15% drop would make me feel happier because my personal read is that they are overpriced.
But what I do strongly suspect is that if I own a respectable albeit lower end price bracket property close to all the usual desired services and amenities that I'm not so heavily in hock on that nothing I'm not insured against can ever force me to sell, then the property will make me a buck long term at least.
Especially if I was a bit canny when I bought it and looked for some "extra" potential - Like the ability to pretty easily add a bedroom or even two to a low set (very cheaply!) - Or turn that extra tiolet and large rumpus room underneath into a genuine granny's flat maybe?
Not that I necessarily want to execute the potential - That would cost me capital and destroy said potential for the next bloke. But I definitely do want it to be there for me to point out to the next buyer.
Real estate agents talk about location. But location is only half the story. You want location AND you want potential.
Beware of TOO much of the location factor - You'll pay a premium for it and you'll be sitting on a property the average Joe simply can't afford - Namely, you'll be trying to sell to a very small, very select, very picky portion of the market.
Apart from the REAL desperado boondocks no amenities/no facilities/no nothing suburbs, it is those location based higher end properties that crash and burn the most when slumps come. Of course, you can make a LOT of money from them by buying them and maybe tarting them up a bit and flipping them in boom years when 10% of the population has become convinced it is their right to aspire to properties with water views and jetties and triple car tiled garages and open fireplaces and fully ducted air conditioning and dedicated media rooms and floor to ceiling marbled bathrooms and kitchens to die for with redundant benchspace in the middle of the same - Rather than the usual 2% - Just don't get caught with one that is only halfway tarted up when the market slumps. (Big Ouch)
While I'm giving out totally unsolicited and presumably unwanted advice: Don't buy a nice basic property as an investment if it has lots of big trees close to the house. They might look pretty BUT: They drop leaves in your gutters and rust them out them. They grow roots in your sewerage and drainage pipes - Yuk and $$$$. They break in storms and damage your house - A lot! And some councils won't even let you cut them out. Not that you'd desperately want to - Because that costs a LOT too! Palms are the best of a bad breed if you are in area where they grow. But big Eucalypts - Never.
Comment by Greg Atkinson on 27 March 2009:
Has anyone heard about real estate developers tweaking sales contracts recently to give them room to wiggle out of starting work or completing the project on time without any penalty and leaving the buyer entirely with the risk? I have heard for example that people with a FHBG could lose their entitlement to this grant if foundations were not laid within a certain time frame....but they would still be liable to pay the full amount when unit/house was completed.
Comment by Kinny on 27 March 2009:
Ned S, my understanding of the principle place of residence rule/6 year rule, is that you can rent your principle place of residence out for 6 years and if you sell before the 6 years is up you pay nil capital gains tax.
Alot of builders/renovators have taken advantage of this in recent years by buying a standard home, moving in, renovating them up and offloading them without having to pay capital gains tax. Mind you I bet some have been caught out in the last 12-18 months, especially renovating the upper end of the market homes. =P
Comment by Pete on 28 March 2009:
Kinny: Yep, they're what we call 'flippers'. No, not famous TV dolphins, these are people that buy houses for the pure purpose of increased capital gains.
Named flippers because they buy, modify, then sell. (Flip!)
I have zero sympathy for flippers that get caught out when the market turns. These people are speculators to the max. They aren't looking to improve anything out there, just to leverage off a huge capital appreciation rates in the market.
Usually they will target mid-market houses, not so much the lower end, and not upper-end mansions. Taking out huge loans, they use leverage to buy the house, then renovate (sometimes pretty dodgily...its all about 'appearance'), and then sell at a higher price. After their own labour and renovation costs, they expect a certain margin of 'profit'. Catch the surprise on their faces when they sell at the same price they bought the place for, or less, after a years worth of work.
Thats what you get when you take huge risks and expect money for nothing (a 50K renovation increasing a house price by 200K? It may have worked in the past, but that doesn't mean the 200K due to added 'home value').
Flippers will be very hard done by in a turning market...and I expect they will be almost completely absent from a falling market.
Just the presence of 'flippers' should be warning enough to people that the market is somewhat misaligned. When average Joe Bloggs goes from Vetinarian to 'house flipper', its a sign that things are ready to turn for the worse.
The free-lunches are over...
Comment by Pete on 28 March 2009:
Oh, and consider the TV shows for flippers:
- Hot Property?
- Renovation Rescue
- Backyard Blitz
- The Block
- Ground Force
Yes, some of these aren't necessarily targeted directly at flippers. However it does show how 'renovating' and home improvement has become a bit of an institution in Australian society of late. It seems everyone either wants a bit of capital appreciation, or just a better lifestyle.
Comment by bob on 29 March 2009:
I wonder if the government will ever have the courage and integrity to phase out negative gearing on existing property.
Negative gearing has been one of the main drivers in making housing unaffordable. Investors are egged on by a tax system to speculate and encouraged to use the tax breaks to outbid genuine home buyers at sales of existing properties. Very few homes are built by investors. So we end up with a designer mess.
It is material for a comedy of sorts. Any script writers out there?
Comment by Pete on 29 March 2009:
Bob: It's so hard to tell with the pollies. With the supposed 'Tax Reform' crap going on (Ken Henry) I think it's possible...but you just know its a vote killer...
Right now is a great time for Tax Reform. We are in a transitionary phase where most people will get hurt financially anyway. A great time to sow the seeds of a good tax structure (phasing out Neg Gearing would take a few years anyway).
Some people on here have posted some great ideas about how to get rid of it, such as treating real-estate like a business, etc.
I think in hindsight, as you are alluding to, once negative gearing is gone, we will look back on it and say "what were we thinking?". Unfortunately it is just such a 'way of life' for Australians at the moment that a lot of us don't see the problem with it.
Although, sadly, I half expect the Gov. to implement something similar to Neg Gearing when house prices well and truly slump and they want to try and increase investment (again!). If they do that, you can be sure they won't learn their lesson and get rid of it when the market picks up again.
Bring on the $50K FHOG, etc...
Comment by Ross on 30 March 2009:
Pete, Henry and Garnault and the Access Economics tossers (not forgetting the latter lapdog McKibbin) were all part of the team that pushed the great debt funded services economy swindle that whooped up GDP so they could clip the ticket with GST and make the capital & trade accounts look better on a ratio basis than they really were on a real world (debt service) basis. n
Now Henry sees discretionary trade and services getting flattened he is going to look for his expanded nanny state level of tax receipts from the old sources (land and death duties).
Comment by Ned S on 30 March 2009:
Kinny - I don't think you'll find the 6 year rule applies in the case of an owner remaining in residence and renting out some spare capacity. It only applies if the owner has moved out of the property altogether. (I'm not a professional in the area, but that is my understanding.)
On 27 March 2009 Kinny wrote:
"Ned S, my understanding of the principle place of residence rule/6 year rule, is that you can rent your principle place of residence out for 6 years and if you sell before the 6 years is up you pay nil capital gains tax.
Alot of builders/renovators have taken advantage of this in recent years by buying a standard home, moving in, renovating them up and offloading them without having to pay capital gains tax. Mind you I bet some have been caught out in the last 12-18 months, especially renovating the upper end of the market homes."
Comment by Trish Hunt on 31 March 2009:
The tax breaks aren't just for investors. Owner occupiers have a number of tax breaks available to them which also help to artificially increase prices.
Owner Occupiers
1. First home buyer's grant.
2. Capital Gains Tax concessions (i.e. none paid).
3. Stamp duty concessions in most states.
4. Land tax concessions in most states.
Investors
1. Expenses written off against personal income (negative gearing) if expenses > income from the property
Hence, owner occupiers aren't as hard done by as the media make them out to be. I know people who move into a place, do it up, and sell it at a $100k+ profit over and above the cost of the property with renovations...and yet pay no tax!
Comment by Trish Hunt on 31 March 2009:
Ned S is correct when he says that if you rent out a portion of your house, then sell it, then that portion is subject to CGT. It happened to me.
Comment by Chris Yorke on 9 April 2009:
I wondered why i stopped getting emails from you about new year. Anyway, i have re-registered. I make it my early morning to business to read your reviews.
If I could, I would provide a useful chart (though you probably have your own) comparing rents and house costs along with real construction costs and real incomes for the whole country. This chart shows things got badly out of whack about 2000, and much worse by 2008. To return to the same price/rent ratios of 1990, there would need to be a fall in prices of another 10% in real terms (I think they declined by 10% already last year), plus a rise in real rents of 15%, I estimate. Until last year, I doubted this re-balancing point would be reached, but now that outcome seems increasingly probable.
Comment by Bargeass on 13 April 2009:
The main driver's of the Australian property markets are (1) Demographics - the Greedy Baby Boomers (2) government land rationing - includes density and (3) Property developers being big contributor to Labour governments.
Comment by Pete on 14 April 2009:
So you think availability of credit is not one of the main drivers?
People can't buy Real Estate if they can't get the money...
Comment by Thrifty on 14 April 2009:
Pete, reading your comments is like reading my own thoughts. We are on exactly the same page. Even down to the real pricing of houses - houses may hold their nominal value but will be accompanied by high inflation and hence, interest rates. Either way there is only one way, and that is down.
On a related note, I find the following analogy helpful. The house price to income ratio is like a person's state of alertness. It varies a bit but it can't ever get too high or too low.* Economic stimulus (e.g. FHOG, negative gearing, low interest rates) equates to a chemical stimulant. The more stimulus you add, the more alert you feel for a while. If you keep drinking cups of coffee, you can probably pull an all-nighter and be somewhat productive. Maybe at 6:00am the next day, you can pop some speed or do a few lines of coke and be even somewhat useful for another few hours.
Make no mistake though, once you go down that path there is no getting around the fact that there are penalties to pay - sleeping the next few days, poor performance, compromised immune system, etc. You can have some more "hair of the dog", but you end up just becoming an addict.
* The reason the price/income ratio varies homeostatically is because there is negative feedback preventing it getting too high or too low. For the negative feedback keeping houses from being too low, you can ask a RE spruiker. This is held up by the replacement cost of housing and scarcity of land in desirable spots. It certainly can't go to zero, but certainly can go below replacement house + land costs, in much the same way the used car market operates.
However, the upper limit is also subject to negative feedback. It is easy enough to work out what this limit is. All we have to do is find the maximum house price possible for a given disposable income (assuming frugality in living expenses).
To calculate the housing side of things,
Debt Service = Principal Payment plus Interest Payment.
Assume interest only loan, as this makes the house price bigger for the same debt service.
Interest Payment = (House Price) * (Loan To Value Ratio) * (Interest Rate)
Assume:
-100% Loan to Value Ratio (no bank will loan more).
-Interest rate at historic lows and realistic low for a bank, e.g. 5%.
So Interest Payment = 5% * (House Price), or House Price = Interest Payment * 20.
Now to work out the income side. Tax for someone on $55k or median income is 21%. How much are other expenses? I think the most frugally the median person could cut those down would be to maybe $1500/year for food (wheat bix + milk diet), $1600/year transport (assume rail or bus), $500 per year for clothes. Electricity is probably going to be maybe $750 or so. Medical and others might be an extra $1k. So $5k, or 9% of median income. In total, taxes and basic expenses will be at least 30% of median income.
Note that in reality the average Australian is going to sell their home far before they eat homebrand Wheat Biscuits for every meal, give up alcohol and even cut into the entertainment budget. (They are not the committed miser that I am.) So really, we can easily double or triple the $5k figure. This means more like 40-50% of median income will not be able to be pared back. People also have kids, and they cost money. (Consider that the banks consider mortgage stress to be when 30% of income is spent on mortgage, I am being conservative by saying that it is 50%).
So we can say half of median income is the maximum that can be put towards interest payments before we see defaults. Or 2 * Interest Payment = Income, or Interest Payment = Income /2
Substitute that back into our house price formula.
We had: House Price = 20* Interest Payment
Which becomes: House Price = 20 * (Income /2), or
House Price = 10 * Income.
Folks, we are at multiples of 7-8 in Australia already! To expect higher prices is to expect
-a bunch of greater (and yet somehow miserly) fools to suddenly emerge from the woodwork, willing to dispense with all modern conveniences, determined to own a house at all costs, or have a large cash savings to throw at housing
-no new houses to be built
-banks to be content with interest only loans, when people have only a set number of years to earn income.
-interests rates to stay where they are, indefinitely, instead of nearer to long term averages (e.g. 9%).
-banks to keep lending at or near 100% LTV, or to overvalue a house in a stagnant/declining market.
-unemployment not to cause people to sell their houses, or default, which will make banks more cautious
-the Australian economy (dependent on Japan, China and the US) not to follow
-Rudd/RBA to keep spending money and it not turn into inflation, and the banks not to up their interest rates to get a real return.
There is literally no margin of safety in the system, everything has been tweaked to produce a maximum house price in terms of income without default. It only takes a small hiccup to upset the applecart. That is why I feel no urgency to buy a house. I don't see how it can possibly build my wealth and renting is less than interest payments anyway (which are thrown away either way I look at it).
Comment by Ned S on 14 April 2009:
Bargeass (I like your handle!) - I think you could be being a bit unkind to the "Greedy Baby Boomers" - They've basically been told for years that the Australian Government expects them to provide for their own retirement if they want it to be at anything above pension/poverty/penuary level.
Some of them who probably quite wisely felt they didn't understand the stock markets very well, have gambled on housing instead. And taken advantage of the same negative gearing rules there that apply to stocks (or any investments) - If my understanding of the general tax situation regarding borrowing for investment purposes is correct?
Australian house prices are unrealistically and stupidly high. But the blame lies with government - Not with people who've been made fearful for their retirement by government. Nor with recent First Home Buyers who've taken the government bait to keep house prices unrealistically inflated. (Part of which is fear induced also in that if they don't jump now they might never own a house in this apparently ever rising market.)
If it is any consolation to you personally, logic says to me that the post baby boomer generations really must eventually get their day when all asset prices (houses, commercial real estate, stocks etc) eventually crash really big time as many retired baby boomers start having to sell their investments to live off. (Its a complicated question whether that will actually happen en masse - But the probability is higher rather than lower I suspect.)
But as always, government will be doing its very best to ensure such bad things don't happen - Including and most especially insidiously very intentionally targeting positive inflation year after year after year to devalue our money and encourage all people to take on debt and keep the banks well fed. (While masquerading as "inflation fighters" - Yeh right; Pull the other one because it plays Jingle Bells as the saying goes.)
In the developed Western nations at least, we have had governments worldwide for many years (and still do) that have actively encouraged their populations to take on debt and actively discouraging saving money by intentonally devaluing our money. (Plus throwing all us plebs a few bones like negative gearing and First Home Owner Grants.)
I have a personal opinion on that which I will not express here as it would involve using some words that are not generally regarded as appropriate in polite company. So I'll just settle for saying that the whole Western monetary system is evil, rotten, corrupt, deceptive and manipulative - And fully endorsed by government.
But this certainly isn't showing any signs of changing any time soon. And if one at least understands these basics, they've probably got a better chance of having some long term financial reward from life than if they don't - BUT A VERY BIG "BOO HISS" TO GOVERNMENT ANYWAY! (From all people with a bit of savvy regardless of what year they were born in.)
> Comment by Bargeass on 13 April 2009:
> The main driver's of the Australian property markets are (1)
> Demographics - the Greedy Baby Boomers (2) government land
> rationing - includes density and (3) Property developers being
> big contributor to Labour governments.
Comment by Ned S on 14 April 2009:
Trish - It's a really rotten thing to have happen to anyone. I feel for you.
I had reason to check it quite thoroughly when aged family members were approached by a very well meaning intermediary re renting out a vacant granny flat under their house to a financially disadvantaged lady who was looking for affordable accomodation. I had to say to them "Don't do it - It will expose you to tax penalties on future sale that you don't even want to contemplate!"
It is a bad and rotten law put in place/allowed to exist by bad and rotten government that supports the finacial well being of its banks and its builders and allied industries and its real estate agents and the general promulgation of the concept that there is a "housing shortage" in Australia, rather than it supports its general citizens' financial well being or access to truthful information.
Additionally FYI: It is ALSO my understanding that the six year rule only really got put in place to protect government diplomats who'd been deployed overseas - And wanted to rent out their houses while away; But in the interests of "fairness", it had to apply to everyone of course.
> Comment by Trish Hunt on 31 March 2009:
> Ned S is correct when he says that if you rent out a portion of
> your house, then sell it, then that portion is subject to CGT.
> It happened to me.
Comment by Ned S on 14 April 2009:
There is actually a SOLUTION to BAD GOVERNMENT (other than the American Constitutional right to bear arms and shoot them which is a bit drastic for anyone with non-violent inclinations) - It is called "Don't pay your taxes" - Leastways not until we get listened to! - But everyone who is not a wage and salary earner (namely all small businesses people and investors) have to unite and do it - Or the odd miscreant who goes down that track alone just ends up in jail of course.
Comment by Pete on 15 April 2009:
Thrifty:
Thanks for your comments, very interesting too. It seems that only the minority of people actually do these basic calculations. I remember a few years back I was trying to decide what to invest some money in. All the RE bulls said i'd be foolish not to invest in RE. Well, lets just say I didn't particularly want to rush in to a lifetime of debt. I did my own research, investigations and basic calculations and found nice sites like this (and bubblepedia dot net dot au).
Exactly as you say, there is no margin of safety in our current system. As I mentioned in the comments of a different article, in Australia our high LTV's are only barely dropping now to 90%. In the UK for example, the majority of loans are 75% LTV already.
Consider a first home buyer requiring an LTV of 75%. Thats 25% deposit on a house, lets say $280K. Thats a 70K deposit! Who could afford that? No-one saves anymore, thats why the FHOG is so important to sales in the current market.
So we'll see how shy banks become in a falling market. Because once it starts, the banks won't want mortgages with negative equity on their books. I think they'll hike LTV's first, and rates second (with inflation and need for increased profit).
It is a gloomy topic really. Look what the Gov's loose policies have got us into? Its a horrible mess, and unfortunately the RE bulls prefer to keep the party going, rather than face reality (perhaps they're on 20 coffees a day now). Hard to say what the Gov will do next, but I hope it's not more vote chasing.
Comment by Pete on 15 April 2009:
Ned S: I agree with your point that the blame does lie (no pun intended) with the Gov, but I think that is not the only place.
Some very big contributers include:
- biased media (I think lots are still bullish)
- real estate agents
- financial planners/advisors (the "easy choice" advice)
- financial spokespeople (supposed experts, like Ric Battellino from the RBA. I dislike him a lot)
On an only slightly related note, is anyone sick of Bernie Fraser on that Superannuation ad? "As you all know, markets bla bla bla, and they will recover"... yeah...So give all your super to them so they can 'invest' it. I think it is immoral (for whatever that is worth)
Comment by Thrifty on 15 April 2009:
Pete, interesting comments again. I agree with you as to LTV (thanks for the tip on the UK banks being at 75% - an indication as to what they will do here in Aus). What follows is my thinking out loud about the topic.
The banks have a range of different LTV loans on their books. They will have their loans worked out to maintain a constant real rate of return. For every fixed rate contract they would have some sort of borrowing or instrument they would be paying for at a lower rate. The rest is free to float.
What do they want to avoid? They want to avoid having a lot of inadequately secured assets (negative equity) on their books that they will be forced to sell and realize a loss, never collecting the interest calculated when entering the deal. They can't not foreclose - if they wait, the mortgagee will do a simple calculation and determine that it's less costly to mail the keys back. These are not all of their asset base (other people's loans). It is only the high LTV loans.
Ideally, they would prefer to have house prices stay where they are. Hence they will spruik about how the market is not overvalued, how low-doc loans are equivalent to subprime and hence not a problem here, blah blah blah. Their actions will show what they really believe.
Meanwhile there is the hot potato - existing high LTV loans on the books. The smart banker will want to pass on this hot potato (both new and existing high LTV loans) to other stupid and greedy banks, while not alienating their existing asset base - why lose a 60% LTV loan, when it is making payments? It may drop 40% in value, but that is the client's problem, not the bank's.
The smart banker will also make darn sure that he has no exposure when he makes fixed rate loans. This means matching them with appropriate wholesale funds, using some sort of instrument if available, and when that runs out, using worst case interest rates.
The solution to the problem of new and existing high LTV loans on the books: the smart banker will lower LTV ratios, and hire ultra-conservative valuers. I know from a reliable source that the latter is happening already.
Raising interest rates (at least, until inflation rises as well) is both socially unacceptable and unecessary. The problem is high LTV ratios, not interest rates.
Of course, this whole situation has been evident for years, and highly evident since about 2003-2004 or so. It is like a vessel of supercooled water, waiting for a catalyst to freeze. That's the thing about value investing - you can always predict what is undervalued or overvalued, just not when matters return to proper valuations. Although if you can see a catalyst, it increases probability of when.
There are several catalysts now evident.
1. Unemployment rising due to GFC. This will directly cause forced sales, and more people renting, co-sharing, living with family members. This will drop valuations. This will also drop tax revenues. The government will borrow, causing future inflation, or risk a depression. You win either way if you don't own housing. Depression means forced sales, and higher interest rates mean forced sales.
2. Banks using more conservative valuations. (causes forced sales and reduced numbers of qualified buyers)
3. I think banks are lowering LTV as well. I remember back in 2005 I was hearing a lot about interest only loans, 100% LTV and the like. I don't hear about that now. (Same as in 2.)
4. Drops in >$500k properties. (reduces buyer confidence)
5. The last of the easily influenced sheep buying in to the government's "Crazy Runout Sale!!!" increase in FHOG, leaving few such sheep remaining.
These factors will bring about an increase in sellers and a decrease in buyers. Note that a sufficient condition to limit buyers is reduced confidence in housing OR tightened lending standards. Either will suffice, and both will have an effect.
---
To address your other comments, yes, I went through exactly the same process as you did several years ago. I had the advantage of taking some accounting (both high school and uni), finance and a real estate course in university. I am an engineer, but I have always been interested in business. One thing I remember from university is that even dropout engineers will ace any business course they try (reason being is that engineering is harder and entry standards are higher).
On that topic, all the RE bulls I know personally are the sorts to struggle with a high school physics class. They are not systems thinkers. Their MO is to do what is conditioned, and watch their peers. They are such herd followers that even if they can do the math, if 90% of their friends and the media think something, they will completely ignore the math. Even engineers turned MBAs I knew and accounting TAs were talking about the "New Economy" back in 1999, when everything I saw pointed to bust, e.g. "Pro-Forma financial statements" - remember those?
I would not take their advice in high school and I won't start now. There are other RE bulls I do not know personally who are smarter, but like Battellino, have a vested interest.*
The real estate course was very useful. It taught me to calculate profit in a rental, including all the expenses that RE spruikers conveniently forget to mention. There are several different methods of valuation. Basically, you can only make money one of two ways. As an income stream, or in capital appreciation. What most sheeple don't understand is that there are limits to capital appreciation with respect to income, if you study history. And when those limits are reached - they don't end in a plateau. The most plateau-like outcome is Japan's real estate price drop.
Combining my study of history with my real estate valuation toolkit, like you I saw that Australian RE was in a massive bubble, and not to invest unless I found something at a crazy price and close enough to work to make a case for purchasing based on transport costs and growing my own food, which of course I did not find.
The fact is, herd thinking dominates society at present. A herd of house buyers, a herd of bankers handing out loans at stupid LTV ratios. And if/when houses are again at < 3 * Income, the banking herd will have learned the wrong lesson - not that LTV of 90% were stupid to make at Price/Income ratio of 7, it's that LTV of 90% were stupid to make at all. The same way with the house buying herd - they will have a deep distrust in bricks, mortar and mortgages for many years to come, even when it is unwarranted.
---
* The thing I love about the RBA is that their info is great - it was reading the RBA reports that first put me on to the housing bubble. All you have to do is ignore the text and focus on the tables and graphs. If you do that, it's quite comical how their prognisticator of the day is writing about how safe and rosy the future is while the graphs and tables tell a completely different story.
The media bias you mention is interesting, and I believe due to advertizing. I also suspect that they are presently in the process of blackmailing the real estate industry. Notice how news.com.au always intersperses a spruiking story with a doom and gloom story. Doom and gloom gets circulation, and spruiking gets money. Doom and gloom is also a threat. "Well, Mr REI. It has been a little while since we printed the last heavily subsidized RE story, and unfortunately, the price of advertizing has gone up - every time we print one of your stories, our journalistic integrity is at stake. We were thinking about digging up some more unemployment figures or foreclosure stats for our next article, and unleashing our moderators. What's that you say? You want to buy some more advertizing? Why didn't you say so!"
Comment by Ned S on 15 April 2009:
Bernie Fraser - Yes, the ex RBA boss turned superannuation salesman. Far better to ponder the thoughts of Ian MacFarlane I think - That "other" ex RBA governer who suggested some years ago (if memory serves me correctly - and I think it does?) that it was a bit of a concern that Australians had begun to rely so heavily on superannaution with it's inherent exposure to the risks of international stock market fluctuations for their retirements whereas before the days of superannuation, Australians would had been busy getting their house paid off and getting some savings in the bank. And who also came out with this little gem some years ago: "If we are not careful, there is potential for conflict between the generations. The young may resent the tax burden imposed on them to pay for pension and health expenditure on the old. This will particularly be the case if they see the old owning most of the community’s assets." MacFarlane was nobody's fool!
But sadly MacFarlane was a lonely voice of caution, sense, reason and even profound wisdom crying in a bubble and boom wilderness.
Even the current drone (Glenn Stevens) is smart enough to have eventually figured out he has a BIG problem now - And that it just might have been a good idea if the RBA had been a bit proactive in trying to prick the Australian housing bubble when it was forming - Which would have meant even HIGHER interest rates - A sensible alternative but MOST politically unpalatable of course. (John Howard got voted out over precisely that issue if my recollection/take on the things that led to his political demise is correct?) But either way, right now Mr Stevens is having to do just the opposite - Drive interest rates down. Quite perverse really - I suspect poor Mr Stevens is not sleeping all that well some nights as he contemplates Australia's mid term future?
I have the knife into superannaution big time - A scheme that by default FORCES a sizable percentage of Australian's incomes into Australian stock markets week after week and year after year totally irrespective of whether the market fundamentals warrent more buying or not sounds like an incredibly effective way to create a bubble to me. And just how might that all end we might ask?
Ponzi scheme comes to mind the moment one realises that it is based very largely on the concept that stock markets always go up (if you wait long enough) and that future generations will continue being silly enough en masse to keep supporting it ad infinitum.
And the Americans do it (401k - they call their superannuation) and the Japanese do it. And while I have not specifically looked, I'd imagine it's a pretty fair bet that lots of other developed countries do it as well. IT IS ALL A BIT OF A WORRY PEOPLE.
Comment by Ned S on 15 April 2009:
I can't helping thinking of all those people who are relying on using their superannuation payout to pay off their home loan when they retire. Western world governments have allowed things to become so badly out of whack now that they have no alternative but to keep trying to drive asset price bubbles up. A depression is the obvious solution. But a depression is so politically unacceptable that world governments will fight it tooth and nail. But somehow I get that very bad feeling that even if they "win", they will have only delayed the eventual day of reckoning.
If they should "win", then LOOK OUT FOR THE CRASH OF 2014 - IT'S GOING TO BE A DOOZY!!!
Comment by Greg Atkinson on 15 April 2009:
Eureka, finally I found some hard(ish) data that might be interesting for people. The National Housing Supply Council has figures for new housing costs per square metre. I wonder if we can get those figures for say the U.S?
Funnily enough, Sydney is not the most expensive Australian major city according to the data...in fact it is one of the least expensive cities?
I have posted some of the data here:
Average Cost for new housing
Comment by Thrifty on 15 April 2009:
Ned S, I doubt that we will see a conventional 1930s style depression. I think that the governments of the world will do what they usually do since then - inflate their way out of trouble. If this means printing money to employ people in "make work" New Deal type work, then that's what they will do.
This would mean that say, in 2020, we may still have median $480k houses. We would also have $15 value meals from McDonalds, and median incomes of $120k. The house keeps its price but not its value. It is more politically acceptable because the pain goes to everyone not just those who are left holding the bag (property owners) when the bubble pops.
Comment by Ned S on 15 April 2009:
Thrifty - I agree - There is no question that governments are aiming for an inflationary style slump rather than a deflationary one. There is some question as to whether they'll suceed. I think America will. But I'm not so sure about some other countries - Japan for instance?
But either way, I have seen the aftermath of Russia's 1990s inflationary depression - It was very bad. So the concept of an inflationary depression is scary too - Simply put, middle class people are very likely to get wiped out financially either way from I can make of it.
Comment by Pete on 17 April 2009:
Good points Ned and Thrifty.
Thrifty, as for your comment about median prices in 2020 - you assume that everything will inflate at the same rate. Sure, things might inflate steadily in a bullish environment where everybody is confident of a wealthy future. I suspect that there will not consistent be such inflation in Australia's future though.
- Wages: With a high unemployment rate, would these inflate at the rate of inflation? Or does higher competition between workers keep this down? (Also consider that earnings of businesses/employers might not inflate evenly too)
- Assets: Are only worth what someone will (and can) pay for them. Assets that have a good P/E ratio (a real one, not a 'on the books' one) will be more valued as money earners. When it comes to preserving wealth in an inflationary environment, the P/E needs to be pretty good (low). This includes Real Estate/Rents. Rents will drop (as they correlate with wages), requiring a reduced price of RE for a good P/E (if that makes sense).
- Commodities: I suspect these will go up in price a lot. They are fairly liquid in trading, and are valued pretty well. Gold for instance should do very well. Oil too. Some others might not do quite as well. Food should do well (hard to tell).
- Cash: This depends on bank interest rates. Banks will probably be really keen to get deposits in when they start losing money from the popping RE bubble (that is my assumption anyway). In this case, they may offer competitive rates, but probably still not matching the real inflation rate. Still, in the short-term I think you could definitely do worse than have some cash (no-one else will have any, which gives you buying power). Not a good long-term option as inflation slowly erodes its purchasing power. Keyword is slowly. Assets could erode it much quicker.
I know this is a real estate article, I just thought i'd give my 2cents.
I might retire from commenting on real estate for a little while, I am finding it is draining me a bit. The seemingly endless uphill battle of an RE bear, pushing back against ignorant bulls. Besides, I think by this stage anyone who is still bullish on RE because they can't think for themselves, deserves to be bullish.
Comment by Greg Atkinson on 17 April 2009:
Pete I think you have misrepresented the RE discussion. Many people including myself are not RE bulls but do question the view that Australian RE prices will suffer a U.S. or U.K. collapse. In addition to label people who are RE bulls as "ignorant" is playing man as they say and not the ball. We should discuss issues based on facts, and not label either side of the debate as ignorant.
Remember the article that kicked off this discussion thread stated that Australia housing were seriously affordable and like many articles posted in DR predicts housing prices will collapse. However there is a viable alternative view regarding the direction of property prices and that is that prices may only slightly decline or remain flat for a few years This is not being bullish, but I have noted in a number of discussions anyone who merely raises this option is labeled a RE bull.
In any case, let's respect everyone's opinions and be careful who we label as ignorant, because one day they just might be proved correct!
Comment by Michael on 17 April 2009:
Barge-ass - "The main driver's of the Australian property markets are (1) Demographics - the Greedy Baby Boomers (2) government land rationing - includes density and (3) Property developers being big contributor to Labour governments".
Research seems to indicate that "land banking" by Government is a myth. There are huge reserves of land held by developers who hold in anticipation of optimum market conditions. Austalia's residential property price insanity is a function of easy and cheap credit. When this dries up, prices must fall.
Comment by Thrifty on 17 April 2009:
Pete,
You are right - those are figures I used merely to show how inflation works, in general, just to indicate to a theoretical bystander that you lose real wealth even if your house stays at present inflated nominal prices. And even if you pay inflated dollars to pay that house off, the bank will ensure it gets a real rate of return. The best you get is a 5 year window, and you pay to get that.
At the end of the day, I want to know how many hamburgers (or some other routine purchase) my investment is going to buy in x years.
Regarding your other comments:
Wages - I would doubt that this varies much. I checked this on Economagic.com - http://www.economagic.com/em-cgi/data.exe/rba/glcawoet
CPI was about 7.5% annual increases during the 1980s, and 2.5% or so up to he present.
Looks like the RBA agrees:
http://www.rba.gov.au/monetarypolicy/about_monetary_policy.html
The wages appear to be in that same ballpark. Too lazy to create a spreadsheet and calculate the real wage over time. There was a bit of stagnation in the early 1990s. Perhaps we could have that again - not surprising if employers hold the whip hand again.
Assets:
In general I agree with you. I suspect that credit tightening has the potential to further drive down shares in aggregate through further margin calls. High inflation means high interest rates, which means that P/E ratios should be low enough to beat bank interest rates as there is an increased element of risk (excepting growth expectations). So low P/E ratios will be forced. Additionally, those who borrow to buy will only buy if the expected return exceeds the rate they borrow at.
Rents and RE:
I agree with you here. Rents are more tied to wages/inflation than anything else. Ultimately their price will be determined by available credit. Lower LTV and higher interest rates will both act to constrain prices. Once the "up and up forever" consensus gets hammered by a massive shared experience of money loss, negative equity, bankruptcy etc, the market will not be sustainable on a capital appreciation valuation. Thus, the floor will be set by rental return.
Note, this rental return needs to include all expenses + profit, and beat bank interest, since that is the alternative to put money which is less risky AND it will be used to buy this real estate otherwise it is nothing but a risky money loser.
This is what a lot of RE bulls don't get - if you have 10% interest rates with no capital appreciation, and rents don't rise (which they can't, considering how rents are nearly at interest payments and those who buy homes are under mortgage stress as it is - the alternative is shared living), that means that the house you bought for $480k now yielding 5% in rent must now yield a 12% (or something > 10%) return in the market. Add in allowances for vacancies, rates, repairs, depreciation, property management fees, you would be looking at something higher, e.g. 13%.
So now, if you were getting 5% in rent, you get $24k per year. Divide that figure by 0.13 and that's what your $480k house is now worth. $184k. That's rougly 3 times median income, which I believe is world average.
This is where the average RE bull starts chanting "There's no place like home! There's no place like home!" while praying to wake up in Kansas, in between groping around for newspaper cuttings about housing shortages written by none other than RE industry spokespeople (we'll conveniently ignore the census data that says otherwise). Got help them if interest rates go higher than 10%.
Commodities: I agree with you in general. There is a chance that gold will spike like it did in the 1970s. In inflation it should do well.
Cash:Good at the start, but not good soon after, as taxes start taking their toll. You may get inflation + something small, but after tax it will be below inflation.
Quitting RE commenting: I'm not sure why you held out as long as you did to be honest. I don't enjoy arguing with RE bulls, as nothing I say will make the slightest impact. Most own property, which is a difficult and onerous thing to sell. It is easier to convince themselves that pigs will start flying than to rent or realize a loss. The only argument that will truly make an impact is the banker coming to repossess their possessions. It's not an argument I can make.
A person either understands that there is a fundamental limit to the price of houses on the upside, or he doesn't. It's a bit like modifying a car - you might double the output kW for a given engine volume, but by doing so you have to prepare every component in the system to operate at peak efficiency. Bigger turbo, bigger intercooler, bigger exhaust, bigger intake, same engine. Eventually though there is a point of diminishing returns and no more power can be gotten out - see F1 cars.
The problem with being a RE bull is that the system created a system analagous to the F1 car, where everything is tweaked to produce a maximum house price/income. This works great in F1, where each component has been engineered to not break down during a typical race. Where you are relying on that which fluctuates, e.g. interest rates, world financial conditions, employment to align for your benefit, you do not have a finely engineered engine. You have instead built your house on sand, or in yet another analogy, you have built your farm north of Goyder's Line. (Actually, you have built your farm not just north of Goyder's Line, but in the centre of Australia somewhere one of those freak years it gets some rain. Instead of Price/Income, you have Annual Rainfall.)
http://www.southaustralianhistory.com.au/goyder.htm
As you say, ultimately the market determines price. If people can't afford to pay, they will find alternatives. Much like SUVs recently and the Edsel back a while ago, cost to produce does not determine market price. A dream home is only a few plaster sheets away from being a duplex.
If you don't decide to keep posting here, let me know, I'll create some sort of anonymous email account to get in touch with me if you like. A further exchange of ideas might be useful for both of us.
Comment by Max on 17 April 2009:
I for one would never join the volunteer bush fireys, why should I risk my life and limb to save property which I can never afford, to protect the interests of a group that I am locked out of because I am young? I would never become a nurse or a doctor or a cop - why work to protect a society which treats me as a second class citizen becase I am locked out of the housing market... I am taking my young family to houston where we can afford a roof over our heads and the babyboomers of australia can rot!
Comment by Pete on 20 April 2009:
Thrifty: I'll keep posting, just a lot less often (Ned S seems to be doing okay).
One of the main reasons I posted was to provide some counter points to people who might be confused or undecided on whether to buy property. I figure that if I helped just one person think for themselves instead of listening to the overwhelming noise of RE bullishness in Australia, then I am happy.
In previous months finding information to support bearishness on RE was a bit hard to come by. Nowdays though I think if anyone is still bullish on RE - let them be. There is more than enough information out there to make relatively informed decisions about this stuff.
Thanks for your posts, you pointed out some stuff that I didn't actually consider (like the 10x earnings maximum). Happy to keep in touch.
If Gov. intervention somehow manages to keep RE prices afloat for longer than expected, RE bears can take comfort from the extra time they will have to prepare for the even bigger crash.
Comment by Paul on 17 May 2009:
With many saying the First Home Owner Grants actually pushes up house prices, is that what the Government wants. Given that when house prices increase,so do council rates, capital gain tax revenue, and state stamp duties etc.
What makes me wonder, is why is there little barriers to homelessness, yet if one is to make a effort to build a roof over their head, they are faced with all the barriers such as permits, planning, zoning, fees, insurance etc. Whilst I’m not advocating building anarchy, much can be said about the obstacles in placed to build what is a necessity. It seems there are just too many vested interests involved in the housing industry, so I supposed it’s just wishful thinking that it could be made easier for those in struggle street. Those that support all the regulations point to health and safety, I wonder if they are implying that being homeless is a safer and healthier option?
I suppose the whole economy relies on debt, and what better way to insure people turn up to work on rainy cold Monday morning is to enslave them to it.
Comment by Dave on 17 May 2009:
Moses asked the Pharoah to let his people go, when they were enslaved to a cruel and heartless tyrant. Coming back to modern times, people still want to dominate and disempower others, only the vehicle through which they do it has changed. Today we are debt slaves, chained to a financial system sucking the life out of us. All of us work for the government and banking system, but given the illusion of freedom by cheap entertainment & novelties. Why do we keep voting these people into power? Why don't we demand more?
We can blame everyone else, but the fact is human ignorance will always allow such monsters to be created and manipulate us. If we enjoy the bliss of ignorance it will come back to haunt us.
Comment by Pete on 18 May 2009:
Good points Paul.
Re: the council taxes, etc. Yes, they certainly gain from higher Real Estate prices. I guess they saw that a lot of money was going into it and thought it was good going to be skimming their percentage. What is really 'sad' is that they seem to think it is a good idea to continue to keep prices aloft to get more revenue.
Shame about the moral consequences to it all - debt enslavement advocated by the authority you trust(?) to govern you.
Sadly the crooks will go completely unpunished. Except for their Real Estate portfolios.
Comment by Lachlan on 18 May 2009:
Re: real estate. There has never been so much inventory in my local agents window. Further, he tells me that prices have already dropped and "everything is negotiable". I do live in a rural area however. I do know people in suburban areas that think the market will always move along and that its actually still steady know. Maybe it is still steady there for the time being. However me thinks that what is already happening in my town is coming their way fast. I just cant see how the next leg down in the global economic scenario wont be a broader scale disaster with Aussie property included.
Comment by S_lee on 8 June 2009:
I just found this site, and might mail it to my friend, he just bought another house at the cost of $400G. And owing nearly $250.G on his own house. He also is earning a large amount of money p/week but the expenses inc land rates - bills etc - give him the wages of someone from centrelink. His only hope is that houses are going to rise at least 10% in value a year, so he can sell one off in around five years, and end up paying off his mortgage. I own my house and have already been shoved onto centre link wages, so I've given up
about buying anymore so called assets.
But after reading the comments here, it all looks like downhill from now on.
Comment by Lachlan on 8 June 2009:
In my small town (pop.700) the real estate scene, vibrant just a year ago, is dead. Meanwhile 70mins drive from here in high density residential areas the market seems to be holding in to some degree. I just did a hop from home owner (small acreage) to short term rental in town to farm living (feed animals for rent). I am still paying out the rent contract on the house in town because not only are house/land sales dead but so too is the rental market. The reason according to the agents in town is that people are both leaving here, or not coming here in the first place due to the cost of living/fuel prices etc. I assume that this movement back to high density areas artifically supports the market there ie its not supported by underlying economic growth.
Local real estate not very happy .:(
Comment by Biker Pete on 8 June 2009:
Location, location, location.
Pete makes his true intentions very clear in a single line: "RE bears can take comfort from the extra time they will have to prepare for the even bigger crash."
Put property down, so we can pick property up.
Comment by Biker Pete on 8 June 2009:
Lachlan, I live in double garages 110 km from home, while completing houses our family of four is building in a small, thriving coastal city. We still have homes in a town further south, which priced itself out of our market: Land more expensive, site preparation excessive, building costs 15%+ higher.... but income over $10,000 PA less... therefore rents up to $100 PW less for the same house. There are currently just _two_ houses for rent in the beachside suburb in which we have built quite a few homes. We're not Gold Bears, or Super Bears, or Cash Bears. We do align with those who are troubled by the US scene and, for that reason (combined with our ignorance!) we probably are Share Bears (at present). I'd apologise to those whose circumstances are less than ours, but our current good fortune is, at least in part, due to following a concerted plan over a lo-n-g time... and adjusting (as in the 110-km relocation) when this was the right move. Any advice I might want to give you about life (after 60+ years of trial and error) might bring howls of derision in a forum in which there's great pessimism about property... and huge optimism that house prices will crash. If you are young enough to move at will, you probably do need to travel more. We never built until we'd seen a great deal of the world... so we can't blame our sons for spending their twenties doing the same! Remember as Greg Atkinson once stated in this forum: There are many property markets.
We agree that some will fall... some will plateau... and some will rise. Location does make a difference... .
Comment by Greg Atkinson on 8 June 2009:
Biker Pete (and Lachlan)..I am trying to get a grip on the feeling in the housing market as opposed to looking at statistics and graphs etc which bore me to tears. When you have time can you pop over and share your thoughts on the subject? So far it seems both sides of the home prices debate are looking at the same data and seeing different things!
Life is much more simple here in Japan...a home is a home and if you mention capital gain you often get a blank stare
Comment by Biker Pete on 8 June 2009:
OK... we'll drop in for a look, Greg. We have friends in Tokyo... and my wife is now jotting in stopovers for the return leg of our RTW trip, commencing early July. That should see us in Tokyo mid-Jan '10. I'll email you a day or two before, if you like. I imagine a coffee will be around A$20.00(?) A past stopover left us a little confused about Japan and my wife hasn't given it a high priority for MC touring, so far.
With virtually no capital gain in two decades, I'm not surprised the Japanese are quizzical! Still, their economy _overall_ has been in stall mode a very long time... .
Independence, a comfortable retirement, good bike tyres and northern hemisphere summers are all we want from property. A tent by a canal, lake, river, stream, sea, or ocean vista, a great bottle of wine and friends with yachts isn't too much to ask... ! It works for us.
It will be interesting to assess England and Scotland four years on. We have three weeks touring in a friend's new Peugeot. Bit of a change from our MC touring, but how could we turn down an offer like 'take one of my cars'? I'll probably bore you all with perceptions of the US and Canadian property scene. While our route now follows the Canadian border, my navigator has planned a series of border crossings into the US to see how much has really changed... .
The two of us spent the weekend levelling the latest project, carting away trailerloads of sand. Looked for bargain properties and found nothing. A ground floor 2BR apartment on the beachfront for under $500K looked promising, but we couldn't make the maths work... . Far better returns building 4BR2BRDGHC places ourselves... .
Comment by Greg Atkinson on 8 June 2009:
Biker Pete - yes let me know when your Tokyo plans are settled. I am down the bottom part of Japan but am often in Tokyo. A cup of coffee will only cost you $20 if you follow the tourists
Comment by Biker Pete on 8 June 2009:
Thanks, Greg. I'll let you know what's happening. We're travellers rather than tourists, as you've no doubt gathered from my posts, but sometimes we shell out for a few luxuries. Won't tell you what four nights in a good New York hotel is costing us!!
Comment by Lachlan on 8 June 2009:
Gidday Biker Pete and Greg
I'm having visions of myself locked in a cellar, eyes taped apart and property investment promotionals being played over and over before me
Honestly though I do appreciate the potential in property since I did benefit myself. My wife and I bought into property in this little town literally a week before every property previously listed was gone. It was good luck. We had been struggling to buy a block for years because we had low income and needed a place to relocate an existing business, a nursery.
The bad luck came when my wife left. It was a shock to everyone. So after a brief but acute nervous spasm I/we sold the property. It was hard to sell because it had a defunct business on it. However I stuck to my price because there was still nothing much else here for anyone to buy and demand was hot....back then. Eventually we sold and realised 320% gain on our original investment.
However I see the future for myself still in farming or horticulture and thats the type of environment I wish my littln's to grow up around. We (2 kids and myself) at least live on a farm now however I wish to own one (medium term) so I can work/develop my land as i see fit.
To get there (and beyond, since primary production dont make big $) I am pursuing investment in various things and saving my income (self employed).
But as you both say its about position.... About 75mins drive from here is the residential heartland of the Sunshine Coast listed atop the table (top of page). Real estate bulls are still laughing there (Ive been told).Just for here and now me no property bull.
Comment by Biker Pete on 8 June 2009:
Thanks for that recount, Lachlan. It helps explain your situation well. Life sometimes deals us a lousy hand and I empathise. Being self-employed you have some great future advantages.
Some might term me a Property Bull, but in fact I probably differ from that herd, somewhat in that:
* I too am _thoroughly sick_ of realty advertising. (We laugh at some of the garbage we view/hear!)
* We don't believe we'll see significant capital growth anytime soon. We're realists;
* We don't have a huge amount of time for realtors, although we have been fortunate in that respect;
* We have covered most other asset classes well;
* Our current thinking is to not sell... perhaps ever... . The more literature we read, the more this
position is reconfirmed... . Are writers simply stressing this because of the downturn? Who knows?
* When we do sell, we sell our own stuff... and much of the time, we sell 'options to buy'... .
While that's done for (legal) tax reasons, it gives potential buyers six months to a year to bail... .
And yes, we've always paid tax on any funds gained through that process.
Having said all that, only super and property have given us assets which should mean we're independent and comfortable. Used together, they've set us up for the rest of our lives.
Saving really only helped when interest was around 18%... and we bought bank bills scoring
18.75% in that period.
Your plan seems sound. Our kids were both raised on an acreage... and one of my sons aspires to that lifestyle in the future. Can't knock that dream! If you have heavy rainfall in your location you could do just about anything. I'm only limited by the lack of flowing water all year round... .
Retirement should mean near self-sufficiency for us. That's a big part of our dream. My dad achieved it (albeit on a property over twenty times the size, with a river and deep stream) but I'm convinced it's possible on our land.
Wish we had more practical horticultural knowledge. Our mixed orchards are pretty hit-and-miss!
More fruit than we can ever consume or give to friends and rellies, but you'd probably be amused by our learning journey..... .
Comment by The Outback Oracle on 8 June 2009:
Property Bulls on the Sunshine Coast?? You ought to talk to a few truthful RE agents here...it is dead...DEAD!!
Comment by Biker Pete on 9 June 2009:
Hey, don't shout, T.O.O! The missus will hear you and drag me over there to buy something beachside!
Comment by Steven on 18 June 2009:
Biker Pete,
While your there why not ask the local Japanese what happened to there housing market???
You may learn a thing or two.
But ohh no thats Japan that could never happen in Australia.
HAHAHA
Comment by nick on 27 June 2009:
If high inflation strikes wouldn't it be nice to owe a huge amount on fixed interest? Your average salary earner would achieve that with a fixed home loan. I am wondering if i should do that. I need a house to live in.
You know I have spent time in Venezuela which has inflation of 30%. Propoerty prices keep up exactly with inflation - in fact every thing does, except salaries.
Comment by Biker Pete on 29 June 2009:
Yes, Nick, that would be OK. But if hyper-inflation hits, owing a huge amount on fixed interest could be even better. Imagine owning a dozen rentals, with your major cost (interest) at 0 - 2% in real terms. As Warren Buffett just warbled: Who's afraid of the Big Bad Wolf?!
Comment by Biker Pete on 29 June 2009:
Uh, sorry, Nick, I meant VARIABLE interest, of course!
Comment by harry on 1 July 2009:
well been doing some research on this topic going on abs stats we have 800 000 empty houses in australia . other places sugest that level is much higher . high end houses still falling and the first thing to be sold off when people need money are luxuries ..ie: holiday homes ,sports cars boats etc .another thing i think is many are in the property mkt for tax breaks, negative gearing . anyone noticed more homes for rent ? the next big problem i see is comercial real estate also when your out start take a note of how many are for lease or signs on the front ..closing down sale ..or many businesses are down sizing and moving out to cheaper areas ..
Comment by Chris on 28 July 2009:
Housing in Australia has got to ridiculous levels in relation to price and availability. I have read 100's of articles on how our houses are overvalued by anything from 25% up to 55%. I have gone to Auctions and watched investors in ther 40's pay 10's of thousands over the reserve because it's a tax write-off "don[t care what i pay'. We have successfully condemned the next few generations to a life time of renting or struggling with absurd mortgages, and in reality everyone who has a property or an investment couldn't really give 2 shits to what impact it is having. The social impacts will affect us all and could in time cripple us, if people feel life is hopeless they will in turn treat it that way,
I am 29 and have little hope of owning a house at this point, compounding the issue is the fact that rent has exploded, i am in a one bedroom shit whole that is now costing me $340 a week. I earn 70k a year but throw in rent, health insurance, food, mobile phone, internet, and petrol and running costs on my old car then i have very little left to show for my 60 jour week.
I am afraid for what the future holds for us all, whether the prices rise or fall it will bring heartache for a lot of people, it should never have been allowed to get so bad!!!!
Comment by Daniel James on 28 July 2009:
If your house is not Freehold, you don't own a house you just renting it from the bank.