Be Careful What You Wish For
(You Just Might Get It)
It seems a day doesn’t pass without a headline in the press warning of a pending housing collapse, how house price growth is not sustainable, or that something has to be done about housing affordability.
True, property prices in Melbourne and Sydney look decidedly expensive compared to homes in Adelaide, Brisbane or Perth, but do we really want a housing correction the likes of what the US saw between 2007 and 2012, where prices in some locations dropped by more than 50%?
“Heck Yes!” say those younger than 30 who are frustrated to tears with being unable to buy a reasonable dwelling at a reasonable price.
Oh really? You’d be happy to see property prices get smashed so you can buy something cheap, with the hope that prices will quickly appreciate after you’ve bought so you can make money?
Won’t that just leave the next generation in the same position you are in now? Or are you wanting a situation where everyone gets to own a home but prices cannot increase? If so, welcome to communism.
There is a huge risk that talking down the property market will become a self-fulfilling prophecy. The more doubt is sown, the more uncertain people become, which means they’ll spend less, which means businesses make less profit, which means wages remain flat and/or staff are retrenched. Typically in such times, the RBA would drop interest rates to encourage borrowing and stimulate demand, but there is precious little fuel left in the RBA’s tank in terms of future reductions to its target cash rate.
Before you pray for a market meltdown, consider this:
Annus Horribilis
It will be horrible. It won’t just be property tycoons who will take a forced financial haircut. Normal people – police officers, nurses, teachers, first homeowners, etc. will be caught up too. Mortgage stress will spike. Loan defaults will rise. Jobs will be lost. Marriages will be wrecked. Suicides will increase. Crime will increase. Don’t believe me? Just look at what happened in the US… all this and more.
Don’t throw out the baby with the bath water.
The property market is already soft in Perth and Darwin, and softish in Adelaide and Brisbane. Trying to ‘cool’ the runaway Melbourne and Sydney markets may only cause the other capital cities to catch a cold. Newsflash… Australia is much more than just Melbourne and Sydney!
Who ya gonna call?
Sure, there might be cheap properties if prices correct but that doesn’t mean you’ll be able to buy them. In the event of a market crash, banks will be licking their wounds, and not looking to lend. Only those with cash will be able to snap up bargains. Those seeking to borrow 80% or more will be told ‘thanks but no thanks’.
Decimated Superannuation
Superannuation savings will be decimated. Many superannuation funds own bank stocks, real estate and/or managed funds that are exposed to real estate. If the prices of those assets dropped then superannuation savings would be hard hit just as more and more baby boomers get to retirement age. This would add to future budget deficits because welfare payments would rise sharply.
Inheritance? What inheritance?
The upside of the higher property prices is that some of the profit will eventually drip down to the next generation, albeit that could be some time off due to advances in medicine. Should property prices dive though, any future inheritance that currently sits as unrealised property wealth will be at risk.
Where are you going to live?
If people are kicked out of their homes they are going to have to live somewhere. Homes in foreclosure will be left empty, so there will be pressure on what rental stock is available, and there is a possibility that rents will increase. This could lead to a sharp rise in homelessness.
If I had the choice between a property boom or a property bust then I’d choose a boom every time. Yes, it creates winners and losers, but the alternative scenario is one where the human and financial cost is too horrible for any reasonable minded person to hope for.
Make a comment below and share your thoughts on what you think would happen if a substantial housing correction were to occur.
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Is there an option in between where we see flat prices for a number of years?
Just like the Brexit and Trump vote, telling people who already think it’s sh*t that it could be a whole lot worse won’t change thier opinions.
Aspiring house owners want blood on the streets, even if it ends up being their own
Currently what we are doing is taking money from competent savers who see the silly prices and risks and won’t dive in and we are transferring their money to debtors and speculators via low interest rates. Taking money from competent people and transferring it to incompetent people always leads to trouble. Destroying savers like that has historically lead to societal collapse and revolution. What is going to fail deserves to be pushed in my opinion
Here, here Harry!! Well written!
To quote Warren Buffett, “Only when the tide goes out do you discover who’s been swimming naked”
So all these wanna be property tycoons taking out 105% interest only loans will get caught.
Unfortunately we have come too far for flat house prices to be an option. Flat house prices for a few months would discourage speculative investments and lead to sales of investment properties. Pretty soon flat house prices would give way to falls.
I don’t wish for price falls but can’t realistically see an alternative…
You have made a bunch of assumptions and ignored a few fundamentals. We can’t have record low interest rates, record prices and record borrowings with record debt. The situation is clearly unsustainable by any measure. Markets are cyclical. Now it seems we are coming to the top of a cycle. Now comes the hang over for those that are silly enough to bank on the good times going on forever. Perth is there now. The smart ones made hay while the sun shone. Others are wondering why they are now broke and probably wishing they had saved some of their six figure salaries. People have paid to much and borrowed to much and/or made unwise investments. Thats their silly fault. The smart ones will have enough cash to ride out the correction. (Note its a correction, not a crash. Paying to much, is paying to much). The ones that didn’t do their homework will pay a hefty price. C’est la vie. Caveat emptor. Etc.
You wrote ‘The more doubt is sown, the more uncertain people become, which means they’ll spend less, which means businesses make less profit, which means wages remain flat and/or staff are retrenched.’ Which may be true for doubt on future profitability for business, but not for the future of house prices.
Excessive inflation in house prices decreases the standard of living of the 90% of the population who own one or less properties. The best outcome for 90% of the population is for house prices to rise at 2-3% per annum, not the levels we’ve seen since the early 2000’s.
The cost of housing is a bit more complicated than than we are led to believe.
Cost of materials and wages in construction is a big percentage towards the cost of a house.
Not to mention developer costs incl planning fees, public open space fees, council fees, drainage fees,
constuction of the roads, curbs footpaths etc etc
The cost of doing most things in this country, is expensive and needs to be considered, as we all want to maintain the current
standard of living we all enjoy…….
I also agree that if the housing market collapsed, it would have a domino effect and impact greatly on all parts of the community!
Steve has covered and made some really really good points here! if that was to happen then also us tax payers are likely to cop some increases as governments would need to put some sort of “panic plans” into place to try combat all the negative repercussions of this “burst” the big banks would also independent raise their rates
Independently*
I’m concerned at how serious this could be to the lenders. Do you think savings money in the bank will be secure? A lot of people seem to be investing in gold as they are nervous about banks collapsing.
I think there is no burst coming, the prices will just keep going up , may be slower but there is no big corrections coming. the demand is so high in Sydney & Melbourne.
i have seen this happening over seas, the locals can’t afford and only the rich or the foreigners only can afford to buy. politicians can’t fix it and the banks will not allow a big correction to happen. all about supply and demand . the rich will get richer and the poor will get poorer. till something really big happens like WW 3 or a natural disaster or so…
@fazoluxslx I agree, who’s to say it’s a bubble anyway, even if it is to burst who’s to say it’s gonna be in a short term or mid term range… only way you could say for sure is if you have some sort of history to go buy based on these current figures, which we don’t cause these prices are at a level we have never seen before… look at the gap between Sydney and Melbourne still….. who’s to say we (Melbourne) can’t reach Sydney levels, I have a feeling by 2020 Melbournes median will be pushing the current Sydney median… who agrees? Please put your comments here people… 😊😊😊👍👍👍
Sam we have a lot of historical reference for the current situation. Market fundamentals still apply. As I mentioned above – record prices, record debt in a record low interest rate environment. This is unsustainable. One third of mortgage holders are living week to week with no margin, no buffer and no plan for a change of circumstances. People have paid to much and borrowed to much. One interest rate rise and/or a loss of income will push them over the edge. The numbers are huge. We just don’t know what form the next correction will take. The smarts ones are prepared. The not so smart ones will pay dearly and many will blame everyone but themselves.
And yes I know what goes up must come down… but hey if there’s exception to that rule/law… its property yeah?
Like a major correction in the us stock market perhaps? Rich dad’s prophecy anyone?
Money in Australia is very expensive. I come from Sweden (8 mill people, also borrows from “world” market as Australia). You can borrow money for a house for 2.05% (https://www.handelsbanken.se/shb/INeT/IStartSv.nsf/FrameSet?OpenView&iddef=privat&navid=Z2_Privattjanster&sa=/Shb/Inet/ICentSv.nsf/Default/q2C556E14BE3645DCC1256AAB0040C23B).
This is the advertised rate. Compare to CBA. Standard variable rate 5.36% for owner occupiers 5.7% for investors (why punish investors. Without them renters would have nowhere to live).
Difference 2. 31% to 3.65%.
I suggest we are being ripped off in Australia by the banks. We have the worlds most profitable banks (http://www.news.com.au/finance/economy/australian-economy/australian-banks-top-global-list-as-labor-persists-in-demands-for-a-royal-commission/news-story/aefa72c371555ced47804f9604c25c7c) and guess who pays for that? Swedens banks are 3rd most profitable charging interest that is less than half the aussie banks. Are we being ripped off or what?
So sick and tired of hearing how all the young people can’t afford to enter the property market at the moment…..
poor little ‘darlings of high expectations’ just might have to give up their expensive cars, nights out clubbing, nice new clothes,dinner with friends, overseas holidays and maybe change their ideas of where they want to live and the type of residence…… we can’t all live city central in beautiful multi roomed mansions!
And……… maybe you’ll have to do like a lot of us ‘oldies’ did………. get a second job!
There are plenty of affordable properties out there if you are willing to change your expectations and make a real effort to purchase!
The youth of today are lazy and pathetic!
Totally agree with you Ralph. No stamp duty for first home up to $600,000? What rubbish!! If you’re looking at your 1st home in this price range, then you definitely don’t need any assistance from government. I’m currently looking at properties to invest, and there are plenty of 2bdrm units/townhouses for $400K. It’s suppose to be your 1st home, not your forever home.
@ralph Williams, WELL SAID!!!! Exactly how I think!!! Instead of just looking at the house prices and interest rates etc look at their disgusting attitudes towards work and money… ahh work is work, ahhhh I don’t care about money, exactly their priority is to go clubbing and spend on expensive things… and they just see work as work like a only negative thing, that’s how you build a life and a future if you take work seriously, it all starts from work and having a good attitude, god I hate most of their attitudes, I’m from the same age bracket (28) but not even close to them when it comes to spending etc…. exactly get some more work, they are the kind if they have to do a minute over 38 hours they get a damn headache and will only spend that money anyway not save it consider investing… makes me pretty sick really… EXACTLY LAZY AND PATHETIC!!!!!! I guess I’m an exception haha……
@Sam, It hurts me a little that you feel this way. I am 27 and yes there are a lot of people enjoying life now our age. Just because they don’t have the forethought to enjoy life later doesn’t make our generation “Lazy and Pathetic” as you so elegantly put. Sacrifice is a foreign concept to them but you should not hold it against them. They have lived in times of relative peace and stability, there is no ingrained mentality of wealth survival.
@Ralph Williams I agree with your general assessment, don’t forget that 30 years ago the standard city property was equivalent to twice that of the annual household income. Today it is in excess of 14 times the annual household income. However, using some creative finance and personal drive can still get you in the property game. I started educating myself 15 years ago but only really got involved with property 3 years ago. Since then I now have loans to two properties and own a third outright. I agree with your thoughts, Change your expectations, look elsewhere.
On a standard salary of 50k i am capable of saving 24k/year for investing purposes. The rest i live off. Investing in the now can be done!! As Steve sais “We can do it!”
Gotta make sacrifices if you wanna get somewhere and when they retire they will be heavily reliant on super!!! They just have no idea what it takes to get through a life or provide for a family…. money wise
I’m surprised at both your tone and message here Steve. It seems to be a lot less moderate and balanced than usual…..to me its almost like you’re being the shock jock to shake up the forum. eg: citing the often quoted by Scomo poor Police Officers, nurses and teachers…….all valid and worthy professions but why are they any more entitled than admin retail etc.
Not on the same scale, but living in Qld I remember the early 90’s where SEQ could do no wrong and with the Japanese investment it was going to be one big property boom from Noosa to Coolangatta….development as far as the eye could see…..everyone wins…could never fail. Meanwhile Victoria and particularly Melbourne was on its knees…..
People quickly forget and get burned, this time is a little different due to CGT discount, proliferation of the internet (“lets buy a house in Tassie before MKR starts”) and SMSF……everyone is an expert
FF twenty odd years and repeat cycle
Wishing/praying for a property collapse or recovery is totally irrelevant. What will happen, will happen as the economic factors that are shaping this situation are more powerful than individual actions (and wishes). Therefore the title is irrelevant.
Look at what happened to the US? Well, there has been a lot of suffering. Yes. But they are still there, and will continue to be there. In fact, if I recall well, you found opportunities from that crisis and benefited from it.
No inheritance? Not everyone has parents with a pot of gold to hand down when they kick the bucket. Th upside of that is that some people will be able to afford a house, not with that hope that it will appreciate in price, but to live in it. Capital gains , as you have taught us, is only realisable when you sell. If you buy a home, it doesn’t really matter if price goes up or down.
Whatever argument…. what will be, will be. Cash will be king, and those with cash will see new opportunities to profit.
Haha, well said Brett, exactly they aren’t organized or smart enough, it shouldn’t be that tight for anyone, you need to have room to move with such a large commitment and borrowing large amounts, the people have no plan B and could very well end up defaulting… oh well their problem… if people bothered to research and plan rather than just jumping in they would be much better off…
@z32 I said they are lazy and pathetic based on the general attitudes I see day to day and what older and wiser people have relayed down to me. They see how different I am compared to most I guess… the young generation can’t focus on long term goals I feel, just focus on the now, there’s a lot like that where I work. You seem to be above and better than the rest… how can you own three properties may I ask? and have two loans going at once? I’m curious man
I may have accidentally mislead. 2 properties are mortgaged 1 is unencumbered so three in total. They are cheap properties in thriving regional towns. Each is positive geared and when you put additional $2k per month on the loan it quickly makes a big difference with equity. I freely admit that I can’t afford average price bracket but careful management has seen increases in returns. It is amazing how quickly equity can be built up. Well done to you @sam for seeing the opportunity with life and family