I am no property guru, own 2 IPs and about to buy a block of land. However I have lived in London, UK for the past 5 years, a property market which had fast growth and has now ‘peaked’ and here’s some observations.
Over the past 4-5 years prices rose at least 20% per annum. The price rises gave homeowners lots of equity, which they used to buy IPs. The first homebuyers were madly borrowing and buying as the media said ‘get on the ladder, buy now, if you don’t you’ll never own a property’. Parents released equity in their homes to provide their offpsring with deposits. Other first homebuyers got loans of 5-6 times their annual salary. I think the media played a huge part in encouraging people to buy (along with poor stockmarket returns for the investors etc) Price rises were a ripple effect, starting with the good suburbs, bad suburbs closer to catch on, good suburbs then slowed, now bad suburbs are slowing a year later.
Early 2002 the media started saying ‘the property market has peaked, prices will drop’. First home buyers are well and truly priced out of London unless Mum & Dad help a lot. People stopped panicking, sales slowed.
To date the only type of housing which has actually fallen in price is luxury housing in very posh suburbs for 1-2 million plus. (Note this is of course a generalisation, but a reasonable one) Prices being asked for now are up to 10% less of last years prices.
Prices of normal family houses, and 1-2 bed units have not dropped. They have certainly slowed dramatically. Price rises this year will be 5-10% in London max. But they haven’t dropped. Part of this I guess is because interest rates are so low everyone can afford their mortgage comfortably, could be a different situation if interest rates go up.
Prices in other major cities, and desirable holiday type areas though (which had previously not risen to the same extent as London), are now rising more – 15% plus pa. Of course the media *predicted* this. I reckon the media plays a huge part in causing it though.
Anyway no advice, just some observations. To me it looks like London last year = Sydney this year.
hotchocolate – thanks for your comments re London. Can you comment on trends in the north of England – places like Leeds, Birmingham, etc?
Would prices be lower and maybe even CF+ there?
Peter
Hi All
Well it is difficult to discuss all the facts that influence such a complex market as the property market let alone the economy as a whole in such a brief message (i.e. without writing a book).
Firstly, it is not correct to work backwards from today’s prices and use any % increase over time to estimate where prices were. This thinking does not work because these statistics are based on a real base price x number of years ago (you choose 20/100/350 years) on which price increases over the long-term are applied. This causes the trend line to move upwards over time in a consistent manner. In fact the figure of 10% used above is far too liberal and in fact most property markets around the world including Australia return more like 5-7% over the long term. Yes some economies (like ours) perform better than others at certain points in history but they also perform worse at other points. There is no way of refuting the long-term trend. Sure one can look at better snapshot (shorter selected period like 20 years) of the trend to justify or prove a particular point of view. This is very much the tool used by members of the property industry with a vested interest in the industry defying the long-term trend (i.e. Real Estate Agents, Landlords, Investors, etc).
Supply and Demand influence the price of anything. It can certainly be said that there has been a supply shortage in the last few years because of many factors such as the FHOG and the explosion of the share market etc. This probably has evened out now and in fact there is a decided oversupply in certain segments of the market. Only a huge immigration inflow (larger than the current immigration programme) can keep the supply side lower than the demand side. This is probably unlikely with the current government.
The reality of property prices is that they are often inelastic because people who buy at the peak just hold onto their properties if they can rather than sell at a loss in most cases. This causes prices to often not drop off by a large amount but rather to level out and show no increase for a prolonged period (which is price deflation in real terms). However, where the “bubble” becomes ridiculously inflated (as is the case now), then there will be many more people who just cannot hold onto their properties through the tough times. This is where one sees a dramatic decrease and falling in line with the long-term trend. Jobs are the key to the prosperity of the economy and the property market not property values as a lot of people are starting to think. When people start getting pink slips the property market will change quickly.
As far as the London market is concerned. 20% increases over the last 5 years and then 5% increases this year is hardly a price correction and more price levelling is to be expected. I agree that Sydney and probably even Melbourne are reflecting London a year ago. Interest rates will definitely go up as they are effectively at zero in the US and there is nowhere else to go but up. This will have an effect on property prices.
In conclusion, I cannot believe how much people are still talking up the property market, enough is enough already. Get real people.
excellent postings everyone especially nothousesonly [
] whom i tend to agree.i lived in asia during the asian crisis and saw the apartment i was living in drop from 1.2million down to 800 k in the space of 12 mos.
rent dropped inline also.
prices in hk, singapore, bangkok, tokyo, etc etc have been stagnant and regressive for the last 5 years.the trigger especially in japan was huge ‘debt’,
and the idea that assets always appreciate in value. at the same time the asian crisis etc etc etc.in 1990 a golf club memebership in tokyo was 1 million dollars. now its about a tenth of that.
also to dispell another myth. i hear people say that the population keeps getting bigger and land is more scarse so property ‘must’ go up. this may be true in the long term but how do you explain price drops in singapore. a small island nation with no more room to build and a grwoing population – and yet the prcie going backwards.
i dont know what will happen in australia. i prefer to work on probabilities and my propensity for risk.
here another way to look at it
who says the market is ok and we have nothing to worry about
– mums and dads who want you to have security
– your neighbours who have a house and you are still renting
– the caffe latte set
– realestate agents
– developers
– people who own property
– the prime minister
– minimogulwho says be careful
– economists (although bis shrapnel fairly positive)
– governors of reserve banks
– the federal treasurer
– fund managers (moving back into equities)
– financial advisors (vested interest)
– crashychoose your corners. will it be a knock out blow or will it go the full 12 rounds.
cheers
Hi housesonly (not) as aussie says, and all others
Firstly i don’t have a problem with you saying the market is overheated or a bubble or whatever. i’ve thought the same myself and have said so. The point you make about a drop of excess of 20-30%, is what i want to challenge and the logic of why the drop will happen.
You claim “People only have to look back at Melbourne 10 years ago to remember the correction that the property market went through there. It was in the order of 20 to 30% as well”. Once again you quote Crashy without checking the facts.
This is not true i lived in Melbourne during this time and the market didn’t drop anywhere like you said. Now the actual figures from the valuer General on actual sales.
The Median Price in 1988 $138k, 1989 $167K, 1990 $163K, 1991 $154k, 1992 $152, 1993 $153, 1994 $161. Where’s the 20-30% drop?
Secondly, your logic about why prices will drop from your first post, well my previous arguement stands, and mathematically i’m correct. Please quote your base figure unless you have just heard someone say it somewhere.
The figures for Victoria’s growth in population for last year was 68,000. That a new city the size of Ballarat every year, what will this do for housing demands and prices?
i’m not argueing that “now is the time to Buy” just refuting your position that ‘the market will drop by 20-30%+”.
regards westan“People only have to look back at Melbourne 10 years ago to remember the correction that the property market went through there. It was in the order of 20 to 30% as well”. Once again you quote Crashy without checking the facts.
This is not true i lived in Melbourne during this time and the market didn’t drop anywhere like you said.”There was an article in the SMH about a year ago, showing charts of capital city house prices, and it was often mentioned throughout the article that prices in Sydney and melbourne dropped 30% during the recession. Maybe they didnt drop quite that much in your area, or maybe you stuck your head in the sand like everyone else. Hopefully the article is archived and one of us can find it.
Hi crashy
the real figure is availabler from the Valuer generals Office, i have already quoted it. The SMH maybe an outstanding paper but i wouldn’t use them for my financial decisions.
regards westan“Interestingly, the median house price in Sydney dropped by 25% in 1989” (Business Review Weekly 12 July 2002
and this:
source: http://www.portfolio-planners.com.au/RTF/property-gosling.pdf
“And in a recent study UBS Warburg report that in Australia house prices fell by 25% in the two years to the end of 1990. The housing market again looks vulnerable to such a decline at present.
According to the Economist, house prices in Sydney are estimated to require a fall of around one third to get back to historical averages. Melbourne prices would need to decline by even more, and the rest of Australia in total is little different from Sydney.”a report prepared by MLC (Not Methodist Ladies College), perhaps an organization with a vested interest in the stockmarket. Even at the end of the article the article it backs away from the headlines.
By the way i’m impressed with the speed you got back with. But the actual figures from the Victorian Valuer General doesn’t show a 30% drop you have been misinformed or maybe you had your head stuck in that sand. By the way I don’t have a cent in Sydney or Melbourne realestate.
Crashy you are very negative all the time.
how about sharing some of your stock tips. i gave mine on this forum which was IGOO which has performed very well since my post i think it was about 24c (i bought at 21c) today its 36c not bad for afortnight. tomorrow it will be higher (i expect and hope).
westan“But the actual figures from the Victorian Valuer General doesn’t show a 30% drop you have been misinformed or maybe you had your head stuck in that sand.”
Your figures only show one value per year. Would you look at a stock chart with one value per year and guarantee the stock never had a 30% drop? it is entirely possible the 30% drop happened just after the numbers were done, and then climbed back up over the rest of the year.
well done on IGOO, but I dont trade specs, in fact i rarely trade asx stocks, I find european stocks have better volatility and trends.
Lies, Damned Lies and Statistics.
I also lived in Melbourne at this time (still do).
We bought our first house in 1987. There’s no way there was an across the board drop of 20-30% – some isolated sectors maybe.There was however a significant slowing of the market and a retreat from the peaks. This retreat was more in the order of 10 to 15%.
Rod.
I’m with rod on the above statement.
In residential melbourne prices mostly stagnated, and there was some minor decrease in some areas but nowhere near a 30% drop.
The Australian economy is significantly different know than it was in 1988-1990.
Today interest rates are 6% compared with 17%.
The economy is strong against the rest of the world not weak.
USA is emerging from mild rescession not going into one.
COOL yes ! Crash no I don’t think so.
There is no rescession being factored into the Australian economy in the near future from what I can tell.MJK
Hi Guys.
The posts make interesting reading. To me the key issue in property prices is affordability – that is at what point Mr. & Mrs. Average can’t purchase the average house in the average suburb. That’s when prices stall or drop.
I know its a simplification, because issues like international migration to major centres and inter-state migration (especially of greypower) also have an impact.
But when I see first-time home buyers in Sydney paying 500K+ I get concerned. Executive Dinks (double income no kids) are not the norm, so where do Ma & Pa Average live? There is a logistical limit to how far from their work they can live, and there are still plenty of ‘ordinary’ jobs that need to be done in the CBD.
My opinion is that an interest rate rise of 1-2% and some slowing of the economy could have a significant impact on Sydney/Melbourne prices. Brisbane is somewhat different due to inter-state migration of retirees, but would still be affected.
So what about +ve cashflow properties in regional areas? They are better insulated against falls but could turn cashflow negative after interest rises (I’m ignoring wraps). The seemingly mad drive to acquire properties in regional areas by investors does mean that some could come badly short, particularly those with neg. gearing.
I still think there are good deals to be done, but the ‘herd’ mentality is going to see some less astute property investors taking some pain in the next few years.
Where is a good crystal ball when you need one!
Cheers[
]When the prices get too high for mums and dads and first home buyers in Melb and Sydney the interstate migration to Brisbane begins. So Brissy may be more insulated to hypothetical downturn than Melb and Sydney.
MJK
brianc
I agree with you that a 2% increase in interest rates will have a big effect on the Syd/Melb markets. I think there are many inexperienced IP owners who are negatively geared and also many families who have paid too much for their PPOR’s. These people are not going to be able to support a 2% rise in rates and will be forced to bail out. Some say that there is not a recession factored into world economics now or for the next 18 months. I believe that politicians will never admit to a recession even when you are in the midst of a full blown depression! In general the economic prosperity of moms and dads here in Aus. is directly tied to their properties at the moment and if that is removed the economy will not be looking all that good especially considering the record debt levels.Home > National News > Article
Housing, a US perspective
By Tim Colebatch
August 20, 2003Print this article
Email to a friendChip Case has seen it all before: the housing boom that went on and on, lifting his and his neighbours’ wealth beyond their wildest dreams, then the bust, which just as capriciously wiped much of it away.
Now he is seeing it a second time, as his fellow Americans have invested heavily in housing, bidding up home prices to ever higher levels. And, he predicts, this second boom will end in a second bust, causing widespread pain and wealth losses. In the 1980s, Professor Case and his fellow Bostonians saw the boom add $US100 billion ($A150 billion) to their wealth, until the bust left them $US22 billion ($A33 billion) poorer.
Yet despite that experience, his latest survey of home buyers finds them to be “very optimistic people”: even after seven years of very rapid price growth, they expect even more rapid price growth in the 10 years ahead. Buyers have deluded themselves by looking backwards, and assuming that growth will last forever, he warns.
Professor Case, with his co-author and business partner Robert Shiller, of Yale – author of the classic study of the dotcom boom, Irrational Exuberance – pioneered an internet data bank of housing prices for all areas of the US.
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And their surveys show irrational exuberance is driving US home buyers now, as it drove Wall Street investors in the late ’90s, he said in a paper to the Reserve Bank conference.
+++
comments??
Everybody is entitled to their opinion but it is still only an opinion. It would be better to analyse the Australian economic facts. EG low inflation, good GDP, low interest rates , low dollar.
MJK
HousesOnly.
I agree with you. People will do almost anything to avoid losing their PPOR, but if they are maxed out on other consumer credit and interest rates rise or employment drops off they, have little choice.
There is some smoothing as a lot of PPOR purchasers will have locked in at low fixed interest rates for the next couple of years.
Unfortunately, in a globalised world, the matrix affect of so many global variables make it harder to make predictions than ever before. What if there are significant terrorist attacks in Europe/USA – will Australia be seen as a safe-haven? What if there was a terrorist attack on an Australian CBD? These are all new variables.
In the end all we can do is make our own best guesstimate of the future and act accordingly. Of course too much info tends to defer a decision – sometimes its better just to take informed action without trying to factor in all the possibilities!
Cheers[
]well guys
a different approach for me to my last few posts on this. But before i do, crashy i can admit when i’m wrong its no big deal we are all wrong sometimes. You will throw up any feable explaination. Why can’t you admit when you are wrong?
Now in this market if i owned 3 negative geared properties in Melb or Syd. Then i know that i would definately be a seller of 1 but most likely 2. I’d be taking my cash and investing elsewhere. but i would hold on to at least one in case i’m wrong, once you leave the City markets boy it hard and expensive to get back in.
westan
] whom i tend to agree.
]The topic ‘Have we missed the Boat??’ is closed to new replies.
