Majority of Australians Believe House Prices Will Rise in Next Twelve Months

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Fresh back from a whirlwind trip to Adelaide to see Victoria smash South Australia in cricket and watch the Tour Down Under up close, your editor finds the financial markets in a state of acute anxiety, while investors, according to a survey, are keeping on the sunny side of life. Reality is keeping a low profile these days. But let’s see if we can find some clues about where he’s hiding out.

He (Mr. Reality) left a calling card in New York on Friday, that’s for sure. Stocks in New York fell 2.09% on the Dow. Wall Street has realised that it’s become the political whipping boy for a President who needs a popular enemy. It’s all probably a bunch of bluster to get the President some political momentum.

But if anything has momentum, it’s the volatility index. It’s up 55% in the last three days (see chart) The VIX measures implied volatility on the S&P 500. It’s nominally a measure of the cost of options on the U.S. exchange. It goes up when uncertainty increases. It does that because options are a way of hedging against future outcomes (positive and negative). When the future becomes more uncertain, the cost of insuring against it (at least in the stock market) goes up.

Vix rearing its nervous head

Vix

It’s all basic supply and demand really. But in this case, demand for uncertainty insurance is rising because the supply of uncertainty is soaring. The U.S. economy, the Japanese economy, the European currency, the Chinese bubble, the Australia resource super cycle…these are all part of the complex adaptive system that is the global economy. Hmm.

84% of Australians think house prices will rise in the next twelve months, according to the January Westpac-Melbourne Institute Consumer Sentiment Survey. Mr. Reality is clearly giving these Australians a wide berth. Twenty one percent of those surveyed believe house prices will rise by 10% or more in the next twelve months.

Doing a little back of the envelope math, and if our calculations are correct, a $450k property compounding at 10% a year for 10 years would turn into a $1.16 million dollar property. It would be a gain of 160%. And one million dollars would be the new median house price in Australia.

Now you have to assume a lot of income growth from here for affordability to remain the same with house prices at those levels. Or you’d have to assume much lower interest rates. That would be a stupid assumption, though, given that interest rates are headed up at the moment, and that we are likely at the low end of the interest rate cycle.

Perhaps the 21% of people believe house prices will go up by 10% a year are all real estate agents and bankers. Or perhaps they are functionally illiterate in the financial sense. Either way, it’s a large percentage of people surveyed to believe such clap trap. It’s this kind of belief that is the rocket fuel for the blow off stage of a bubble.

But we’re not going to win that debate this week. We’d just like to point out that this is whole point of the Daily Reckoning really, to scrutinise received thinking and conventional wisdom. Whether it’s the housing bubble, the economy, or global warming, your best defence against a world full of bogus thinking is to question it.

Of course that doesn’t mean you’ll always be right. For example, we’re obviously not a climatologist. The mail bag was full of some choice words for the comments we published last week (Burn More Coal). The polite synopsis is that we were told to stick to our knitting.

But calling out mainstream thought IS our knitting. And climate change is fair game because the financial stakes are extremely high. Indeed, all the stakes are high (political too). We’re not going to rehash the argument here. However, if you don’t like uncomfortable ideas, don’t read them!

Don’t worry though. We will say, yes, most of the time our beat here is investing. And there is plenty to think and write about on that score. So we’ll get back to the main game this week. Until tomorrow!

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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293 Comments on "Majority of Australians Believe House Prices Will Rise in Next Twelve Months"

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john
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Dan, looking at the longterm world temperature graphs for the past couple of million years, it would appear that the entire scope of human civilisation sits on the top of the latest warm peak. Those peaks seem to last between 10K and 20K years, and this one is already about 10k years old. I would think that global warming is not the biggest climate problem in the long term. It would be much more difficult growing crops under a kilometre of ice. Moreover, our ancesters adapted to constant climate change without resorting to world blab fests. And anyone who thinks… Read more »
Matty
Guest
It is after all a survey for which we have no means of auditing the validty and accuracy of the respondents. In fact, you could argue if the survey has in fact be done at all. The results were never certified by an independent body as true. Given the rosy house price expectation, perhaps Westpac should do a U-turn and not run away from the Australia mortgage market. In other words, the may as well have said 99% of all Aussie believe house prices will rise and the 50% of those believe house prices will rise 20% in 2010. But… Read more »
Dan
Guest

Demand is still outstripping supply. Money is being printed and will float around until it finds a home… literally. That’s at least what the majority appears to be thinking, and it’s not unreasonable (though it may be completely wrong).

Roy
Guest
Well someone should tell the BANKS, perhaps they need reminding house prices only ever go up, just look around the world, not a single house market crash ever.? I bet these same people would have also said the world was flat a few hundred years ago. Just because the majority think something it true doesnt make it so. Like I’ve said for the past 3 years the BANKS themselves will be to blame for the bursting of the bubble through restriction of credit and higher interest rates. So far they are on track. I think this survey just points out… Read more »
Bertie
Guest

People who own houses are hopeful prices will rise, and in Australia I think that is most of us.

Also some words on China’s bubble and the resources fueling it
http://www.cnbc.com/id/35056774

Brian
Guest
Dan said it perfectly. Money is being printed and will float around until it finds a HOME. (I like it). If a company with 1 million shares on issue gives its employees share bonuses etc and over time increases the shares on issue to 2 million then the share price should be half. Right? So when governments around the world dug their way out of the GFC by printing money (which will make the value of that money drop in proportion), house prices will rise by nothing more than the fact that it is an asset and not cash. We… Read more »
Dan
Guest
Oh, I still don’t write off a house price correction (up to 30%). The current house pricing trend is hard to sustain domestically (by the middle and lower classes), purely because people are so heavily indebted. So there either needs to be: 1. Wage increases 2. A fall in the CPI (excluding housing) resulting in increased disposable income 3. Influx of money from abroad (eg: some kind of corporatization of non-commercial real estate … either directly or by stealth) 4. Continuing, significant increases in the first home buyer’s grant 5. Other kinds of blatant government intervention And for a housing… Read more »
Pete
Guest
Thirty percent crash? Good luck with that, Dan! Yes, the following are likely: 1. Wage increases 3. Influx of money from abroad 5. All kinds of blatant government intervention to support construction and provide shelter. Some states will see rents rise as never before. I’d modify Brian’s post to read: “….set yourself for a long wait whilst others with less total wealth than you (and possibly a lot younger) who did get aboard buying assets ‘own rentals while you kindly pay them off for them’… ” We all have choices. We live with those choices, wise and foolish. Anyone who… Read more »
Dan
Guest

Yes, right you are Pete. The 30% is just based on long term trends for Australia (ie: since 1920’s).

But do you think rents can rise so rapidly? Who has the money for it? From the public service agreements I’ve read about and seen, wage rises are incremental at best.

Bargeass
Guest

The world’s most prolific gamblers are always keen to bet on a bubble.
They just can’t help themselves. A medical person would probably classify the condition as addiction.
When the bubble bursts they will all look to the government to bail them out of their own foolishness same as always.

Pete
Guest

Dan: “…wage rises are incremental at best… ” Well, we’re advised that a massive skills shortage will hit WA within months. As with accommodation, demand will drive prices.

Bargearse: “The world’s most prolific gamblers are always keen to bet on a bubble.” Some of us suspect gold is a bubble right now, BA. Valued at $350 per oz more than it costs to produce. A medical person would probably classify the condition as terminal. ;)

Steven
Guest

Pete, What price do you think average house prices in Australia will have to reach before you think they are in a bubble?

Pete
Guest

How long is a piece of string? We’ll only know what is, or isn’t a bubble, if/when it bursts.

Where is your money placed, Steven?

Bertie
Guest

If Aussie housing is in a bubble it’s not a very big bubble and once it pops prices will be back up quick smart

Cameron Clawhammer
Guest
Don’t worry Dan, As a geologist with a more realistic long term view of climate change, I can tell you people are just as unhappy to listen to my views on the historical facts about the con of man-made climate change as they are listening to historical facts about housing bubbles. It’s dogma that’s been drummed into them since they were in their cots! Facts and past events have no place in Dogma and Religion. This bubble situation is like when your father overinflated a balloon at a party to entertain the kids, there comes a point where people start… Read more »
Pete
Guest

“They say ignorance is bliss, but even more true is that bliss is ignorance.”

Actually, bliss is getting the tax mix _exactly_ right. By July 2010, we should be there.
(Go for it, Stars-n-Thumbs Boys! ;) As Ned has noted, that must be all you’ve got.)

Ned S
Guest

I’ve been doing some calcs Biker – Unfinished as yet but will try to say more about them over the next few days. In the interim, about all I’d suggest is that betting long term against Oz house prices doesn’t seem to have a strong track record for producing lots of new multi-millionaires.

Ned S
Guest

I gave you a “5” Cameron – Whether I agree or disgaree is irrelevant – You wrote in a somewhat entertaining fashion about Oz’s most tired old topic! :)

Pete
Guest

I’ve just thought of something! With all of this supposed immigration, where are our wage increases going to come from? Not really sure, but it won’t be from a labour shortage!! :) :)

Time to dig Ned’s soakwell :)

Bertie
Guest

Nothing like a post on housing to get a bit of interest

Freddie
Guest
If my wages go up even $5 a week this year so I can leverage more debt to keep the debt-driven economy afloat I’ll eat my hat. “How much more debt can I get with $5 a week paying back over 5 years at 15% interest?” That is the question many will ask. However I will not hold my breath until the June performace reviews. 24 months on the same income, with 24 months’ worth of CPI which was a long way off being 0 or negative. Can we make it 36? You know you can! But Australians are resilient,… Read more »
Andy
Guest
Up here at the northern Gold Coast (the former boom capital of Oz) the property market has been flat to slightly decreasing for the last year. There are less houses for sale, and less buyers looking at them, according to rpt data. I interpret this situation like this: -many heavily mortgaged owners cant afford to sell (or their banks wont let them), they want to hang on -others like to believe that Santa will increase their property value this year, so they hang on -many of the sales that actually go through (after the buyers contracts collapse a few times)… Read more »
No interest
Guest

Sorry Bertie, this is as interesting as a rental agreement. The same people Biker and Ned S make comments and rebuttals to show everyone how superior they are. They are the investment GODS who can’t be touched in good or bad times and the scoff at any fool who isn’t in the market right now and with minimal exposure.

Revelling in the misery their generation has caused others is so revolting it makes me want to vomit all over my keyboard

Don
Guest

Interesting times afoot. Keep an eye on the metal prices to see what will happen in Oz – I know I am!

http://www.metalprices.com

Steven
Guest

my money is placed in the bank obviously

fred
Guest

deep article!!!
hi Dan,can you have a point of Chinese property?

fred
Guest

and according to what that Chinese property is a big bubble?.

Ned S
Guest
What exactly is your “misery” No interest – Living at home on the cheap? Having to pay some landord 3.5% rent rather than 6% to a bank? With the landlord paying the rates and insurance – Rather than you! I don’t love the system one little bit either – And I sent Tanya Plibersek (the Commonwealth government Housing minister) a letter about 18 months ago suggesting one way that they could take a lot of pressure off housing prices. Have you done as much? Or are you just one more of the whingers who makes me want to vomit all… Read more »
Steven
Guest

They are the investment GODS who can’t be touched in good or bad times

I would go one step further No Interest they think they are invincible!

Ned S
Guest

And by saying that you’ve just proved yourself wrong again Steven. :)

Pete
Guest

Sorry Ned mate, I’ve changed my mind on the whole Reel Estate machine.

This video did it for me, it’s compelling.

http://www.youtube.com/watch?v=1PLr2pKkzEs

Ned S
Guest

I just scored you a “5” too No interest – As I reckon Steven needs (as opposed to “deserves”) all the help he can get. :) :) :)

Lordy, you are such silly children. Wonder if we can swap you blokes for a chinaman or two? Probably not – The chinks plan to rule the world in another decade or three. And figure they have an uphill enough battle as it is I guess.

“Aussies really are battlers” … Take ya blinkers off Biker!

Ned S
Guest

Don’t watch vids mate – My Oz “battler” cheapy home dial up connection doesn’t support same? But yeh, I can understand you folding and rushing to offload all your Oz property risk – The We wanna, we wanna, we wanna wee arguments being offered by all my fellow bears of late, really are QUITE compelling I must say!!! :)

Pete
Guest

Ned mate, not offloading mi-land just yet. Far too much debt! A millionaire on paper (but don’t mention the banks share! :) )

I am becoming sympathetic to these first home BYEr’s though. Sort of. If things keep going like this my grandkids will need to be real estate agents, pollies or even worse, renters!

Maybe we should both rethink our position. Bah, i’m too old for this :)

Ned S
Guest

I’ve seen mentally tough people in my life. Few if any of them being Aussies who would now be under 55. Which at 51 still makes me a bit of a sooky squealer like lots of the other “girls” on this site. But at least having seen the competition, I’m under no illusions as to the fact that it exists. And will mince thee up and spit thee out – Barring a bit of gonad growth!

Ned S
Guest

Yeh, yeh sure mate … Whatever “you” say! :)
As I’ve done the affordability calcs and these kids are in the sweetest smelling clover!!! Which is why so many of them bought recently of course.
Except for the odd We wanna, we wanna, we wanna wee bearlings what want Great Depression II and WWIII and a cheapy … :)

Pete
Guest
The boogeys are taking my name in vain again, Ned*. :) They come in four handy handkerchief sizes: 1.) the fellas who used to say you couldn’t make a buck in realty… and now realise they’ve blown it; 2.) the blokes who predicted a major crash and blew it; 3.) angry tenants who realise where rents are going, but can’t face putting _that_ into print… and talk about the next generation rather than their own mess; 4.) those who just don’t understand how investment and taxation work. ‘Cash Obviously’ is in the latter group. * My last blog ended: Go… Read more »
Ned S
Guest
Or rather than “grow gonads” one can rely on good ole Uncle Kev and Co (aka the tax payer) ta carry you as always of course. Hey, ya know people are mentally strong when you are offering the usual Oz type commisserations to a pretty poor family that has just lost its principal bread winner – And the response is to show a bit of concern for your expressed thoughts and say something like Gee, don’t take it TOO hard mate – People DO die yunno! :) And that’s without even BEGINNING to chat about some of the mentally “hard”… Read more »
Ned S
Guest

OS family stuff incoming mate – And I said I’d call today. Will pop back online before snooze time maybe? :)

Steve
Guest

And Oh yeh, Aussie house prices are a bit high and some of us are really sad about it … Sniff, sniff … Cry, cry …

“Adjusted for inflation, the average house price in Australia is now more than twice what it was 20 years ago.” SMH 26/01/10.

Ned you would be crying too if you had to pay twice as much for a house than what it should be.

Ned S
Guest

No OS connection right now so just popped back for a quick chat – Have you ever pulled one of your own adult teeth No interest? Or burnt off a skin cancer yourself with HCl? And thought of such things as quite normal and reasonable things to do? I must admit that I see “misery” as a somewhat relative term in the great global experience of life! :)

Must pop off and see if international comms are available again … Toodle pip! :)

Steve
Guest

Wtf are you on about?

Pete
Guest

First Home CRYers, haha I am a genius!

I’m like you Ned, I don’t care for the younger generations. Boo, hoo, hoo …

SO much for the Aussie “battler” … the youth of today wouldn’t know a battle. Our generation are the real battlers Ned (we fight a few battles in here eh?)

Generation WHY deserve to pay DEARly for their homes: we never had dem iPods! :)

Steve
Guest

You talk rubbish Ned are u on the Pis tonight or what???

Ned S
Guest

Piss orf retard!

Steve
Guest

Wouldnt know how to battle???
You talk rubbish too

“Adjusted for inflation, the average house price in Australia is now more than twice what it was 20 years ago.” SMH 26/01/10.

and you are the battlers??? give yourself an uppercut Pete

Pete
Guest

Snorts are at it agin mate. Last post wasn’t mine.

Speaking of the ole hydrige chlor, we used to add a nip to our spirits to liven things up a bit! Imagine these duffers tryin that one on eh?

Unlike these GRASShoppers we’ve been through the rough Ned. It’s about time they felt it too.

Mind those ICs mate, right costly

Ned S
Guest

The PO comment was meant to the dill pretending to be “Pete” Steven. And no, I do NOT talk rubbish … Although I DO know that many younger Aussies have little awareness of what the broader world is like.

Steve
Guest

What???
I state a fact to you, and then you start dribbling crap about have I ever pulled one of my teeth out or cut a cancer off, and expect me to draw some kind of relevance as to WTF you are on about!!!

Ned S
Guest

The more HCl “you” glug, the better place the world will be “Pete”! :)
But I really must run now …

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