Hi,
As most of Australia holidays, building approvals data just released paints an interesting portrait of the property market.
The Australian newspaper reported today (8th January) that the November residential building approvals figures announced were down 0.3% for the month, or 12.8% on last year and that this represent a three and a half year low.
Building approvals are seen as a broad gauge to test demand in the housing market. When homebuyers are awash with cash, and are optimistic, they will freely spend money on high consumption items that improve their quality of living. Things such as a new house for instance.
Conversely, as money and sentiment starts to dry up consumers defer the decision to build and instead make do with the current situation. As demand weakens then the pressure that causes price to rise begins to ease and capital appreciation becomes less certain.
As investors it is difficult for us to influence the market – instead we must invest as best we can in the circumstances we find at the time. The conclusion that I draw from the figures reported today is that it is a warning sign to avoid taking an aggressive investing position in residential property that is highly-leveraged.
What are your thoughts?
Regards,
Steve McKnight
**********
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**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
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Agreed. The figures are just confirming what I have intimated for a while now.
And there is still room for more price falls. How can a young couple afford a mortgage of $300k to buy an average home in surburban Melbourne?
there’s probably truth in it but as always you have to look at the numbers and see if they are a symptom or a cause… new house prices have gone up so much that established housing is looking very cheap. The large home builders have also been closing display centres to try reduce the back log of orders and this would also deter new orders. I know of one builder that was seriously looking at standing down the majority of its sales staff – why have sales staff if you can’t build what they are selling? This was one reason why one of my contacts just took 6 months holiday – he couldn’t get his orders processed so thought he would come back when things had settled down (looks like he needs to book a new holdiay!). I think a cooling in new home orders is excellent news for creating a balanced market… unfortunately it will take 18 months to clear out what we have. It also means we may escape the doom and gloom forecast of BIS Shrapnel which suggested demand pull inflation from this excessive demand will lead to interst rate hikes and eventually a serious recession – interesting what a few months of actual data can do to a forecast!
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
It’s interesting.
Can anyone define and elaberate on what “highly-leveraged” is and what type of situations this is, and what type of properties they are?
Originally posted by yack:Agreed. The figures are just confirming what I have intimated for a while now.
And there is still room for more price falls. How can a young couple afford a mortgage of $300k to buy an average home in surburban Melbourne?
They can use an interest free loan now.
Jaffa,
Leverage is just how much you have borrowed against the value of an asset. The higher your loan to value ratio, the higher you are leveraged. There is no particular property type as you can be highly leveraged against anything, even your car.
The higher you are leveraged, the less you own.
Robert Bou-Hamdan
Mortgage Adviser
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Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdHi all,
Not an apartment investor myself but thought this little article from today’s ‘Age’ may attract some interest.
http://www.theage.com.au/news/Business/Apartment-market-on-the-way-up/2005/01/09/1105205977323.html
Derek
[email protected]Property Investment Support Available.
Derek, last time I looked newly completed/previously untenanted melbourne inner-city apartment market (CBD, Docklands, St Kilda Rd and Southbank) vacancy rate was 10%+. This has been fluctuating from 7-10%+ for the last 2 years.
The proportion of investors is from memory over 40%. There is still a lot of supply due for release until late 2005. In my opinion prices may not stabilise until after this or may even crater a bit if people who have been holding on start to dump. This may have a flow on effect to substitutes (inner city terraces/houses, middle ring) properties).
As an investor, I think this is great news.
Reduced supply in the future of stock (whether house or apartment), a relatively stable economy and low interest rates with a positive outlook, all in the presence of continuing increased immigration.All underpinning IMO, very solid capital gains in the longer term.
James
Hi Obi,
I have no reason to doubt your stats. I am not interested in the inner city market so I don’t follow it that closely.
From time to time people have come here and said ‘I have bought a Melbourne Apartment – should I sell’. The consensus of most comments in response is along the lines of this article ‘They will have their day and if you can hang in for the long haul they will be good investments’ – it seems the corner may be turned sooner than many people thought if BIS prediction and research is on the mark.
Derek
[email protected]Property Investment Support Available.
Read an article from the Economist magazine, by Pam Woodall, Economics Editor. She likens the current property investment market to the dotcom boom, ie. falling yields, then going back to potential capital gains to justify high prices, then a bursting of the bubble. She suggests 20-30% falls in the next year or so.
I always saw the Economist as a fairly serious and generally well respected publication. But this article seems to me to be highly pessimistic. In fact I am getting a lot of conflicting predictions from various sections of the press and from within the real estate industry.
Has anyone seen compelling evidence to support either an optomistic or pessimistic view?
Regards,
eeshole
I agree esshole, here in WA we are still experiencing reasonable growth, in particular the sourthern coastal corridor.
Eeshole & Marisa,
All you have to do is look back through history. There are always lows in the market at some point after a boom. They usually come due to some sort of event eg. recession, wars, collapsing of economies, natural disasters, maybe this time it will be just properties falling into line with peoples pockets. Some people think that properties cant go down but I clearly remember a time not so long ago when people were locking in interest rates at 15% for 10 years because they were going up so quickly. We probably wouldnt dream about 15% interest rates these days.Overall, I dont think properties will drop too far and if they do it wont be for too long. I think people are much more switched on these days even opposed to say 10 years ago. Just look at sharemarkets when they drop it only usually takes a few days when you get other investors saying to themselves “what an opportunity to buy at the low end of the market” in turn this drives the market back up to where it was very quickly.
Steve McKnight,
In answer to your question, do I think property investors should be watching what is happening in the new homes market. Yes, of course they should and property investors are going to have to rely on other forms of making money rather than just capital growth. Eg. they will have to think different to get their positive geared property and to make capital gains the properties will have to have some sort of transformation. This will make it a little tough hopefully drive out non serious investors leaving more opportunity for the more serious property investors.
Cheers, Rick [drummer]Trying to think different to be successful
In relation to the original post.
Building Approvals are just what has been approved by the responsible authorities. It does not indicate the actual physical take up of the approval or of the current collection of building applications in the system.
There are periods where the number of take up may decrease as finance interest changes or pre-application sale price predictions are different to current predictions.
Councils also have periods of massive delays in processing applications due to all sorts of reasons, thereby creating a backlog of potential approvals.
In summary, one month’s approvals should be viewed as such taking into consideration my concerns about the realibility of the figure.What does a three month sliding scale indicate?
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The most troubling thing about the Australian real estate market is huge gap between median house prices and median household incomes. By international standards the gap is huge. In Sydney for example it requires 8.8 years of median household income to purchase a median priced home, compared with 2.7 years in Houston, Texas.
Source: http://www.demographia.com/dhi-data200502.htmSydney is even less affordable when you consider that mortgage interest is tax deductible in the US, US interest rates are considerably lower, and US personal income tax rates are lower (meaning you have more after tax dollars to meet the mortgage repayments)
Rental yields in Australia are also very low by international standards, and Australia has one of the highest rates of property investment in the world.
Long term demographics are a worry as well. Baby boomers can’t keep selling properties to each other forever, eventually the market will have to meet what people in their 20s can afford (and that certainly isn’t the case now)
None of this really matters in the short term. What really matters now is psychology, and now that expectations of ever increasing prices have evaporated I can’t see the market turning around in a hurry.
I’ll leave you with this thought:
2004 was the 14th consectutive year of declining real estate prices in Tokyo.Median is almost useless in the real estate world. The problem is with sampling, where sample self-selection is common.
i.e. “The median for properties in post code (xxxx) has fallen 40% in the last quarter” is laughable if it wasn’t so sad for those that believe such a statement has any statistical meaning.
“the market will have to meet what people in their 20s can afford (and that certainly isn’t the case now)”
sellers don’t set the market price, it is the combination of buyers and sellers. if buyer’s couldn’t afford it the market would fall. whether the only ones buying are boomers is an interesting question i.e. when they all die will the demand evaporate? depends on immigration and birth rates. I don’t think the govt can afford to let the population just grow old and die so I would expect increasing immigration rates and incentives to start families.
no knowledge of Japan… how has the economy performed over the 14 years that prices declined? what is the underlying reason for the decline and what is the multiple of house prices to earnings? also as someone pointed out in another article – in a very strong market median prices can still be healthily declining… a developer producing an excellent product at below the median price is creating what appears to be on the surface a falling market.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Re: median prices:
I didn’t say median prices were falling, I was simply making the observation that the gap between house prices and incomes is much larger in Australia than in other countries. Does anyone seriously dispute this?Re: market meeting what young people can afford:
Immigration will help sustain demand at the lower end of the market, but who’s going to buy the $1M+ houses that the boomers have been trading between themselves for the past decade? The children of boomers might be lucky enough to inherit some of their parent’s wealth, but that wealth will be diluted as the boomers sell down assets to fund retirement, nursing home care etc.Re: Japan
Correction: Tokyo prices actually rose by 0.4% in 2004 after 17 consecutive years of decline.“Back in the late 1980s, the Japanese felt the same way about real estate investing as people on the Florida coast do now. I checked the results of data on Japanese real estate going back to the 1950s (as far back as data in English exists), and I found that, with the exception of 1975, Japan home prices never had a losing year…Never that is, until the bubble burst and the bust followed. And with it, 17 straight years of pain.
At the height of the bubble, “it was a matter of pride that the land around the Imperial Palace in Tokyo was at one point worth more than California,” the Financial Times said. Those days are long gone…
“When the bubble burst, property prices plummeted more than 80%, undermining company balance sheets, wiping out many families’ wealth and helping plunge the economy into 13 years of stagnation.”
http://www.investmentu.com/IUEL/2005/20050328.html
It happened in Japan, it would be foolish to believe that it cannot happen here.
” Re: median prices:
I didn’t say median prices were falling, I was simply making the observation that the gap between house prices and incomes is much larger in Australia than in other countries. Does anyone seriously dispute this?”I can’t dispute it as I have never really researched it. The Japanese case seems an extreme example. I would say California is probably worth more than the enitre of Australia! If you took say the 15 top OECD countries (and the debate about whether Australia is a developed economy should be left for another day!) I should guess that the affordablity would be much worse in countries such as Germany and Norway… but it would be quite a bit of work compiling all that info and there isn’t enough time in the day as it is.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
Re: California
The population of CA is almost twice that of Australia (35 million) and incomes are much higher esp. in and around San Francisco and LA.Re: German real estate
House prices have been flat or falling in Germany for some years:
http://money.cnn.com/2004/11/11/real_estate/investment_prop/pf_worldhousing/Here’s some information about housing prices in Germany:
http://www.howtogermany.com/pages/housebuying.htmlTake the example of a typical detached, one family house of average size; one with about 125 square meters (ca. 1,167 sq. ft) of living space, including garage. Such a place in the former West Germany costs about €255,000.By comparison, I recently sold my 125sqm semi for the equivalent of €750,000, and I believe West German salaries would at least equal to those in Australia.
Yes Japan is an extreme example, but Australia’s property boom has also been extreme by international standards. American economists who are warning about a bubble in US real estate often cite Australia (and more particularly Sydney) as an example of a real estate bubble.
Yes, interesting that US economists are getting worried about areas that have seen 55% increase in house prices over the same period that Australia on average has seen 100%+ and some individual areas over 300%!
Also of note, 17% of Australian households have more than 1 property compared to only 6.5% of US & Canadian households and 2% of British.(Link)
Now, what was the topic again? Oh yes, building approvals. I think they’ve risen since the original post, though not to previous levels.
Cheers, F.[cowboy2]
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