Best advice : Don’t invest into property : The australian market is CRASHING.

Benny wrote:

Hi LJ, Wow, sounds like you are having two bob each way !!! I thought you were saying it was me doing that. :p

The US and Australian markets are as different as chalk and cheese. To make comparisons and try to cross link causal affects is to not understand either market or its fundamental dynamics.

Isn’t all of your talk about a “property crash in australia” arrived at by comparing to the US crash?

Nope.

And then, there was this

National Consumer Law Center (NCLC), at least 10 states can be generally classified as non-recourse for residential mortgages: Alaska, Arizona, California, Hawaii, Minnesota, Montana, North Dakota, Oklahoma, Oregon, Washington

(The bolding was mine !!) So, if “at least” 10 states are non-recourse, that is way different to “at most” – in fact, it could mean that double that number, or more, are actually non-recourse, couldn’t it? A quick read of the “Overseas Forum” sees some members discussing Altanta and Florida having non-recourse loans – these two didn’t make your list. Could it really be “at least 20″ States after all?

Nope.. Read this

http://www.tampabay.com/news/business/realestate/walking-away-from-florida-mortgage-doesnt-always-clear-debt/1059927

Yes, I am aware the GFC trigger was more about the “AAA rated” junk notes (so-called “backed by Real Estate”) that were peddled all around the world (some Local Councils in Australia lost money over them). Add to those though the “every man in the US should be able to buy a house” message, where banks were encouraged to lend to anyone/everyone at a low honeymoon rate a few years earlier. The kicker came when the rates were due to revert from (say) a 2% loan into a 3.5% loan. That 1.5% increase was really a 75% increase, wasn’t it? With no-one chasing them over a mortgage (non-recourse) many just handed the keys back to the bank, leaving them with truckloads of houses that they didn’t want, and this MUST have had an effect on their RE market, wouldn’t you say? Probably additive to the whole GFC thing, even if not the CAUSE. In Australia, I am not aware of anyone who has a non-recourse loan – thus, if you walk away from a house, and the bank can’t get their mortgage back, the Mortgage Insurers will settle with the banks, then chase YOU down for the rest. A way different scenario. Therefore, the same laissez faire approach to a mortgage doesn’t exist here as does in many areas of the US. In summary then, I still believe the differences in the way US handles RE as a whole is so far removed from the system used here, that such a violent crash is unlikely to occur in our market. But yes, there will be ups and downs over time. Benny

Forget recourse vs non recourse. It wasn’t the cause or reason for the severity. Like I said default rates where only slightly above trend. There where warnings for years prior that the US property market was maxed out that economic conditions could trigger a collapse. That subsequently came true when the GFC hit and liquidity froze overnight. That literally took buyers out of the market overnight. That triggered a collapse that was compounded by economic conditions and still does to this day.

If you don’t think a serious correction can happen in AU your not watching the ball. Will it? Everything I see says yes. When? Can’t tell but I think its much closer than many think. How bad will it be? How long’s a piece of string? What makes me so sure? Human nature. We never learn from the past.

superAndrew wrote:

A property crash is bad for people who have to sell their properties or can no longer afford their debt payments.

For everyone else it is an opportunity to pick up bargains.

My rules are:

1. Don’t borrow more than you can afford to pay the interest on your loans for 2 years using your savings while having no income coming in; and
2. Buy properties that will always be in demand. No matter what happens to the economy or the property market, people will need to live somewhere and pay rent if they can’t afford to buy. e.g. no luxury properties but properties that are affordable by most.

Good advice.

The problem for many though is that ‘serious‘ investors tend to have long acquisition phases in portfolio development. That invariably requires high leverage rates as PI’s try to build as fast as they can. In a high growth market that makes sense as one tries to capitilise on growth spurts before they fall back or collapse. The risk is in being highly leveraged if a correction occurs that can expose you to unsustainable market forces.

Over the past 20 years the risk in this type of fast growth strategy was fairly low but still real. If one had chosen well you could expect to see leverage drop within just a few years before pushing into the next cycle of buying. Today is much different in that credit availability, affordability, wage growth, national and state economics (and to a larger extent international economic conditions) up the risk profile substantially.

All markets correct at some point because abnormal rates of growth throw up distortions which eventually collapse that growth spurt. Distortionary forces are much larger and more powerful than they’ve ever been historically. To that extent one should be prepared for significantly bigger corrections back to norms than in the past.

As Seth Klarman from Baupost Capital recently stated:

“Can we say when it will end? No.

Can we say that it will end? Yes.

And when it ends and the trend reverses, here is what we can say for sure.

Few will be ready. Few will be prepared.“

• This reply was modified 10 years, 6 months ago by  Long John.

Hi all,
As we near the end of 2017, I thought it would be interesting to take a look at this well-worn topic once again. Things have changed – as I am sure we are all aware. Like, Syd and Mel have continued their climb into the Stratosphere. To the point where Syd now shows as needing 12 x Annual wage to afford the median house.

As Steve mentioned just a few weeks back, the super-low Interest Rates have contributed to these abnormally high prices (along with other factors). Meanwhile, wages have NOT kept pace, so the gap continues to grow. Recent signs seem to show that Syd might be settling lower after driving its Median Price into the $1million+ range.

An earlier post (back a page) tried to shine a light on the “Demographia survey” that had so many calling Australia property expensive. This particular quote was an interesting one to me:-

Another key issue with Demographia is that it compares cities in Australia with cities in only six other countries, yet the media proceeds to claim that Australia is the ‘most expensive country in the world’. The survey conveniently ignores all the many cities around the world with much higher house prices than Australian cities. For example Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore, Monaco.

The other link I had added back then, takes us to see many cities around the world with the darker colours (i.e. with affordability figures greater than Syd’s) and, as well as those mentioned above, a host of cities in India and the Middle East ALSO have figures above 12. Why are they not mentioned? What is on their agenda, in stating Australian cities are some of “the most expensive in the world?” And why did they leave out so many others who have figures WAY higher than Aussie?

Let me post the link again here – http://www.numbeo.com/property-investment/gmaps_rankings.jsp

Take a look at any “paddles” that have a colour approaching Red. Syd’s shows as a light brown with a figure of just below 12. But LOOK at all of the Red and Brown paddles that have figures higher than Syd (click on the paddle to show the “Price vs Income ratio”). Many European cities, but also SE Asian cities too, and even the Middle East, have MANY cities that are more unaffordable than Sydney.

To be fair, the Demographia survey for Mid 2017 appears way more sensible than the previous one linked (2014) so they appear to have learned some things over the last few years.

Meanwhile, echoing Steve’s latest Article ( https://www.propertyinvesting.com/australias-sub-prime-debt-shocker/ ), where do YOU see this heading? Is Scamp going to finally be proved right after nearly a decade? Or is this going to become an orderly settling down of values over the next year or four? A 10% drop? More? What do you see for Australia’s house prices?

Benny

Hey guys,Good discussion ,
My take is just keep some good cash buffers and hold strong returning cashflow properties that would hold value ok in a downturn.
Warren Buffetts company is holding from memory 96billion in outright cash atm .This is apparently the highest amount of cash they have ever held.They are thinking that there are some serious possibilities of issues in the world with N Korea,D Trump,Brexit,terrorism etc .This is worth listening to.Then if or when something does happen you can get the deals as most people will be struggling

Well, I missed the Dec 2018 “anniversary” to update this (would have been 10 years). So here we are in Mar 2019, and we are seeing a price correction in play currently. Syd and Mel have had their values settle back somewhat from their recent highs. All to be expected. Pundits right now are stating “We will see a 20% drop before the trend changes back to positive” (Referring to Syd & Mel). Other areas are stagnant or dropping slightly. Recent articles call a 13% drop since last peak for Syd, and about 9% for Mel.

We are in unusual times right now though – with a Federal Election imminent and the Labor Party in the ascendant (according to Polls). Meanwhile, Labor have stated that they will forgo Negative Gearing on all but new properties (1986 anyone?). As well as that, they want to bring in Death Taxes and also remove Franking Credits. With those kinds of policies, I would have thought the Liberals should steam back in again – BUT they are instead imploding with the recent antics of their more left-leaning members. So all bets are off re who will win !! And, depending who does, will (I believe) provide markedly different paths for property investors and investing over the next few years!!

So, will house prices fall further (as Scamp had predicted over 10 years ago)? Like, 40% or even 50%? I see a possible larger fall should Labor win Govt in the next few weeks. But still not 40% nor even close. Perhaps the 20% that others have predicted recently. And if Libs get back in, less likely !

What do YOU think though, friend? Does Scamp have a point? Or is he still licking his wounds from selling off what has been a strongly rising asset over the last 10 years despite his assertions?

Benny

Hi Steven,
Good question – I think Labor’s intent is to only reward those investors who are ADDING to the number of homes available. Buying second-hand doesn’t increase the total number of houses, so no “bonus” for these investors.

But, as Steve had mentioned in an earlier article – “We really need to wait to see just what Labor proposes once they actually hold power” at which time we will be able to answer a heap more questions with some kind of certainty. For now, it is all conjecture,

Benny

Hi Steven,

Technically buying a new house is not “adding” to the number of homes available.

It may be a matter of semantics – but to me, if there are (say) 600,000 rental homes in Australia, a builder builds a house, and I buy it as an investor and make it available to rent, then there are now 600,001 homes available for rent. If someone else bought it as their own home, then there is no nett gain in rental homes available. But you are right – the other aspect is this…. If I buy a second-hand home to make it a rental, then the available rental numbers again go up by 1. But there are no EXTRA homes in Australia – owner occupiers now have -1 and rentals have +1. Is that what they don’t like? I dunno !!

…. nobody will want to buy from them because by then those are considered as second hand housing and whoever buys from them can’t negatively gear.

BINGO !! And therein is where many of us see a major problem with the Labor plan to allow neg gearing only for new homes. For those already owning investment homes, it appears that Labor are thinking to allow neg gearing to continue IF it is already in place.

This will likely lead to more market distortions – i.e. investors might rush to “fill up” on investment properties ahead of the election, perhaps lifting values temporarily – with the fall in value to come after….. As I said, it sounds like 1986 over again – and that hurt investors and renters !!!

Benny

I have been monitoring the market, specifically, North of Melbourne, and i have seen prices drop significantly. For example, peak of 2017, a 4 bedroom house on 448 land was going around 700K, now begging to sell for 600K. So I think the prices will drop a little bit more.

Down Down, the interest rates are down!! (again). But what now ? Time to buy or is there something bigger that’s getting cooked in the background which we don’t know about ?

Any thoughts ?

Hi Sako,
“But what now ? Time to buy or is there something bigger that’s getting cooked in the background which we don’t know about ?”

Sako, the RBA has only the one gun to fire – some actually say it is a “blunt instrument”, so maybe it’s Thor’s hammer, rather than a gun. As was said on the news yesterday – “It is up to a Govt to make other changes that might be needed to stimulate the economy” (read fixing Tax bracket creep – they are voting on this right now).

But let’s look at an overall picture of the recent economy in dot points:-
o Wages growth has been near stagnant for years
o Inflation is through the floor (the RBA tries to keep it in a band between 2% and 3% – we are currently around 1%)
o Power pricing is strangling many – businesses both large and small as well as the “Mums and Dads” in the family homes. So money is tight.
o Thus, employment is less buoyant, so less people with “money to spend”.
o Factions are actively demonstrating against burning coal – which could kill one of Australia’s most important exports (worth around $60b per year?) stone dead.
o Yes, house prices have dropped, but that follows years of gains in Syd and Mel, so they likely would have further to fall than other cities as the economy stumbles along.
o Not too long ago, APRA and Banks were instrumental in tightening lending which forced a drop in house prices (but also further encouraged folks to “keep their hands in their pockets rather than spending”)
o Recent moves from the Govt pushed away overseas investors too, further diminishing the pool of buyers of property.
o A recent election might have led to Capital Gains Tax increases, AND other Tax increases from a Labor Govt (remember franking credits being at risk too?) That certainly had many voters on edge. How UN-stimulating that would have been to the economy had Labor been elected?
o Housing and the associated ancillary trades and retail outlets used to lead Australia out of recessionary times. But if the housing market remains depressed, where does the stimulus come from?

o All of the above promote signs of “wait and see” rather than “spending up large”…. but where are we now since the election? Has it changed that much yet? We are breathing a sigh of relief now, and maybe that has led to a SMALL uplift in auction results. But for mine, we are still walking a tightrope.

Sure, good deals will be out there, especially where some can’t wait for the good times to come and they MUST sell. But then, can YOU get finance? That is the other side of the coin. Maybe check that part out so you may be ready to move. Maybe it is still harder than previous…. but then, that is one for the brokers out there. Check one or two out, Sako, to see what they can do.

In answer to your question about “something bigger”, I guess that remains in the lap of the gods – any major world event will always impact on Aussie. But for me, I think the home situation (above) is far more relevant right now.

Benny