Property bust not here yet … worse to come

The authors of these blogs and websites who advocate the property bubble is about to burst see themselves as guerrilla cells working to detonate Australians' warped obsession with property, which they see as fuelled by low-rent property spruikers and a hopelessly conflicted media empire that makes money out of selling property advertising.

Somewhat undermining their argument, it is the media that periodically causes a spasm of alarm about potential property price falls by reporting the results of international surveys suggesting Australia is home to the most overvalued housing in the world.

The Economist magazine recently published yet another of its surveys estimating Australian houses are ''overvalued'' by 56 per cent – the highest in the world – on a historical ratio of rents to house prices. (The so-called Economist Intelligence Unit manages to routinely overlook the different tax treatment of investment housing in Australia, which encourages landlords to chase capital gains and treat rental returns as secondary.)

Less sophisticated bubblers simply compare the rise in house prices over the past few decades to the rise in wages to make the ''overvalued'' claim, pointing out that the former vastly outperforms the latter.

But this overlooks the historic boost to household borrowing capacity that occurred in the 1990s with the halving of nominal interest rates. This, in effect, doubled the amount households were able to borrow against a certain income. The relaxation of lending standards by banks in response to financial deregulation also increased the amount banks were willing to lend against that income. These two factors are largely responsible for the increase in household debt between the mid-1990s and 2000s.

Sophisticated bubblers acknowledge this, but are convinced that debt levels are unsustainable. Some shock will happen, they say, such as high unemployment that will lead to forced sales and falling prices. The bubble, by definition, must pop.

You see, house prices only fall when people are forced to sell their homes. Otherwise, households choose to simply remain in their home and wait things out. Property investors are loath to realise their capital loss.

A true collapse in house prices would indeed require some large external shock – a doubling of unemployment or interest rates – to trigger the wave of forced home sales that it would take to provoke house price falls.

With low joblessness in Australia and the big surge in national income created by the mining boom, it is hard to see the trigger for such an event.

That does not mean, however, that housing in Australia is not expensive compared to other countries. Economists such as HSBC's Paul Bloxham have pointed out that there may be good reasons for Australian houses being expensive. Compared to the rest of the world, we have high quality housing stock, with a high proportion of solidly constructed houses on big blocks. Most of the population is concentrated in a few capital cities with often marvellous water views. The dire state of public transport in big cities such as Sydney only increases the premium on properties located close to the CBD.

The Reserve Bank has also sought to dispel fears of a bursting property bubble by pointing out that the rise in debt levels has been concentrated in the hands of those who can most afford it. In a Bulletin article last week, RBA staff analysed data from the Melbourne Institute's household, income and labour dynamics in Australia survey to show how by the end of the noughties, 73 per cent of the value of home loans were in the hands of the top 40 per cent of households by income, up from 69 per cent at the turn of the century. The article also found that about half of households are ahead of schedule on their loan repayments, giving them something of a buffer should they lose their income temporarily.

Finally, those predicting big house price falls should also recall the recent experience during the global financial crisis when policy makers, confronted by an external shock capable of puncturing house prices, acted quickly to cushion the economy with interest rate rises and fiscal stimulus.

The Reserve Bank governor was asked recently whether the prospect of house prices falling kept him awake at night. ''I worry about a lot of things at night,'' the governor confided before admitting that falling house prices were not among them.

Because here is the surprising thing: house prices, in Sydney at least, have been falling relative to incomes for some years. The great house price deflation is already happening, just very slowly and in an exceedingly calm manner. That's the slowly deflating hiss of an over pumped air mattress you can hear, not a bubble bursting.

Yeah, whatever.

and you felt the need to brag about it because ? ……….

insecure much ?

harb wrote:

What would you say will likely cause the average punter/investor to panic , rising rental returns ?

I believe that your average punter/investor would be unlikely to have purchase a property post GFC for a quick CG so as long as rents continue to go up they would have little reason to panic.  Anyway, that is assuming wages and inflation remains under control which up to now was helped by a rising AUD. What do you suppose would happen to inflation if the AUD starts falling back towards $0.75 over the next 2-3 years ?

Rents aren't going up – they are stagnant and going down in some places.

The dollar likely will drop back to 0.75 over the next few years. I missed my chance to short it (only hit 1.10 for a single night of trading).

Likely outcome will be fiat inflation, verging on hyperinflation, like America.

In the fifties we said the price of property could never go up because we’d lost half the

male population due to World War II and a recession, yet prices doubled. In the sixties

they said property prices would never rise again because of affordability and wages

couldn’t keep up, but prices doubled. In the seventies they said prices couldn’t increase

due to the oil crisis… yet prices doubled again. In the eighties they said prices couldn’t

increase due to the introduction of capital gains tax and high interest rates which

reached 22 per cent at one stage, but prices doubled. In the nineties they said prices

wouldn’t increase anymore due to low inflation and wages not keeping up, but prices

doubled. In the noughties they said prices couldn’t increase due to the introduction of

GST, but they doubled.

“In 2003 when the property boom was full-on and the stock market had bottomed and

was losing lots of money, I had clients coming to see me in a panic and wanting to sell

out. I told them the same thing I’m telling everyone now: just hang tight.

“All I can say when people make claims of gloom and doom is ‘yeah, yeah, yeah I’ve

heard it all before’. So why am I so calm when everyone panics?   “One must understand

the fundamentals first before you can make a sensible analysis of what is happening.

“We’ve experienced world wars and depressions and recessions and high interest rates

and low inflation and high unemployment etc. but we’ve managed every time to move

through this and come out the other side stronger and wealthier.

“As long as the human race is wanting to ‘improve their lot’ then we’ll ride through the

economic ups and downs. A simple way of explaining this is if you’re uncomfortable in

your seat, you’ll move around until you’re comfortable again. This may happen straight

away or it may take some time but you will get comfortable again. This is the same as

economic conditions.

“As we bring more people into our country to maintain our standard of living we have to

provide more housing. In New South Wales alone there is a high building shortage and

the demand will continue to push the prices of properties upwards like it has done since

1901.

I tend to agree with ALF1.

There seem to have always been reasons why property is about to crash in value, yet this has never really happened across the board in Australia. It certainly hasn't happened after such a considerable period of sideways movement.

If you're going to buy a property, the number one consideration is that the property you buy is not costing you an unsustainable amount of money NOW. Property is for the long term! Make sure the rent you get NOW is enough to manage the debt costs you have NOW. Of all of my investment properties, none have reduced in rent in the past two or three years. Some people may have had reductions but this is surely the exception rather than the rule, so as long as you can sustain your properties right now you should be fine.

In the long run, I can't see how property will decrease in value over time, in real terms. Put simply, population increases over time and available land doesn't. This causes demand to increase and with it price does as well. This, coupled with the fact that the average person now has more disposable income than ever before (and this trend of increasing amount of disposable income over time doesn't look like abating), means that people have more money to spend on property, underpinning its value. Furthermore, most current reports suggest that the projection for numbers of new properties is below the number required – further increasing demand. As long as demand is strong it is unlikely that prices will drop significantly.

So basically what I'm saying is that property might be moving sideways now and it might not be the best investment for a quick buck. But in 2011 what is?

In the long term, however, I still reckon property is a worthwhile investment. Just make sure you can sustain it's sideways movements now and it'll repay you in the long term.

And good luck!<br /:)” title=”>:)” class=”bbcode_smiley” />

I assume someone pays you for this garbage opinion? Because as someone who invests across most markets .. I sure wouldnt.

The core reasons for the dollar boost is because at this stage the collapsing factors that the rest of the world has arent present here. America is STUFFED now. The call came for it to do something in March .. and it … extended to resetting its debt line which it did this may. The dollar in America is going to inflate .. and inflate badly. I'd be expecting anything from 30%-50% inflation for a period of up to two years. Anyone investing in America is going to feel their dollar value just collapse under them. And for your knowledge .. i've been riding the dollar upwards since it was 92 cents.

As far as the Australian market goes .. we have more money being generated in key exports to China and Vietnam than any value in our dealings with the US. Since the great Keating (barf) we havent been tied to the US or UK in any major way. Our major dealing are with East Asia and the Middle East.

With the boost to our economy with an unnecessary stimulus, we've gone and plumbed ourself for inflation whether we like it or not. We inflate normally with regular increases … we shelve a downturn of major proportions. We dont inflate … we risk devaluation of our dollar because of its buying power loss. For anyone who earns in AUS dollars .. that would be bad new indeed.

The rental scenario? Across the board in my area (dont know where you are) rents are tight .. approaching less than 1% all over again. This places significant pressure and eventually will boost rents again to even out that pressure. Leading …. to greater housing prices. I'm dealing with whats being presented to me .. not stats sheets .. not presentations of doom.

The average punter will panic when the ideal low interest climate we are now in .. lets face it .. anything under 9 is still historically low, becomes a higher interest level. Leading to the NEED .. (read that word NEED) for the property to be sold. THAT IS PRESSURE. Until then .. as long as rents are being placed under pressure … property will .. again .. go up. Sad for the doomsayers .. huh?

And as far as fiat .. dont abuse the word. Currency has been fiat either since 1929 when we left the gold standard or .. 1966 when we abandoned silver in our currency. Its a word thats been floated around alot .. but basically means that people lose trust in the currency. I dont think anyone is running for the banks in this country … and people arent tossing their dollars into the street. So stop using the word fiat for what everyone KNOWS is a fiat currency. It induces unnecessary panic and its just crap anyway.

Free bump!

In 2006 this thread was started as a early warning. We discussed unbalances what where believed to cause RE prices to decline. Time frames where guessed by few, and manipulated by government interventions.

Overall this thread was on the money, nice and early to. Scale and time frames are not possible to guess accurately, getting the trend right and early is an gift by itself.

As to the actual % of the median prices drops, well let's wait few more years. I am not in the hurry anywhere, this thread was around for 5 years and can wait few more

Some thought: the Australian property prices did started to loose value significantly since 2006 if measured in oz of GOLD not fiat
my 2c

An chance to buy house with 50% discount anyone?

Better than gold, can be only SILVER
Problem is you need a trailer to move it around, bloody heavy in significant QTY's.