Property bubble 'set to burst'
http://business.theage.com.au/business/property-bubble-set-to-burst-20090430-aoyd.html
FIRST home buyers are leaping aboard a sinking ship, with house prices set to fall about 20 per cent in the next two years, an Australian National University economist says.
Professor Quentin Grafton said house prices could not continue to grow at a faster rate than incomes and consumer prices.
This "property bubble" was about to deflate, he said, and first-timers, encouraged through government grants to buy at the top of the market, could be over-committed when hit by job losses and, later, higher interest rates.
"First home buyers who don't have much of a deposit and can barely afford their mortgage payments on the current interest rates, they'll be in trouble," Professor Grafton said.
"I wouldn't be surprised if overall we get a 20 per cent decline in nominal house prices over about the next two years."
This could lead to borrowers owing more than they own, he said.
"Ultimately, house prices have to be related to the ordinary prices that we pay for other goods and services and our incomes.
"In the past decade, house prices have gone up about 50 per cent in terms of that ratio. That is not sustainable, and certainly won't be sustainable as the recession bites."
Professor Grafton's comments coincide with house-price data showing small but steady gains in the first three months of this year.
RP Data-Rismark, which is used by the Australian Stock Exchange, reported that Melbourne values grew 2.4 per cent and national values 1.6 per cent. Rival group Australian Property Monitors said median prices were up 0.1 per cent nationally.
Christopher Joye, of funds manager Rismark, said despite the "unsubstantiated, hyperbolic claims of some renegades", the figures suggested a "slow house price recovery".
While house prices fell about 3 per cent in capital cities last year, most of the damage was done in August, when interest rates were at their highest, he said.
"With home loan rates now falling, we've seen a massive increase in affordability," Mr Joye said. "That (1.6 per cent) growth is a very encouraging outcome. It shows a natural resilience."
He said an increasing number of buyers were investors "positively gearing" — looking to make money from rent rather than declare tax losses, as in the past. He cited the Reserve Bank's latest financial stability report, which suggested that the substantial gap between incomes and house prices was permanent.
The RBA said recent policy changes had brought "an environment of lower inflation and thus lower nominal interest rates" compared to previous decades. That encourages people to borrow and fuels demand for houses.
Professor Grafton said prices at the lower end of the market were artificially inflated by the Federal Government's first home buyers' boost. It doubled grants to $14,000 for existing homes and tripled them to $21,000 for new homes.
But Macquarie Bank economist Rory Robertson said this year's price growth was not primarily because of the grants.
"It's because interest rates have fallen into the 5 to 6 per cent range," he said. "The vast majority of home buyers with variable rate mortgages are suddenly enjoying rates lower than they ever had contemplated."
He said last year's rapid cuts in the RBA cash rate had tilted the buy-rent decision towards buying, as the cost of servicing a mortgage dropped sharply relative to the cost of renting
Be careful out there folks, dont be greedy and use your heads. We need incomes and employment to increase AND have interest rates to stay low for property prices to keep going up following a already over inflated base line. What is going to happen-unemployment, definately no increasing wages, and increasing interest rates following massive inflation. Property is going to burst no matter which way you look at it…..
Build up capital and play the waiting game folks
Of course interest rates aren't going to stay at these lows forever, but I can't see them rising in the near term, because of increasing unemployment and lower consumer confidence. Inflation has been decreasing steadily and is now in "the RBA band".
Maybe I'm getting cynical in my old age, but everytime I hear an economist talking about house prices, they seem to say that prices will drop once X happens, be it FHOG reducing, or whatever else. They seem to be pushing their predictions further and further out. Also, if you are the most pessimistic economist, you get the most TV and press time.
And I notice that Steve Keen seems to hav revised his predictions from a 40% drop to a 20% drop.
I can't see a 'bursting of the property bubble'. Demand is still reasonably high, interest rates are low and if things do get bad, there will be some sort of governemnt intervention to help people somehow. A property crash would be unpalatable for any government.
And let's not forget that property prices are going to drop even more when there is a huge number of houses on the market because 40% of the population has died from Swine Flu ; )
Dan-tell me, what effect do you think another $40 BILLION floating around the economy will have on inflation? The effects of this and the recession are still to hit…give it time, you will see….
Then add in increased taxes (well the government does have to pay for this massive loans somehow..) and a increase in interest rates (to stop a run on the AUD) and we will have a pretty bad situation me thinks……
blogs wrote:Dan-tell me, what effect do you think another $40 BILLION floating around the economy will have on inflation? The effects of this and the recession are still to hit…give it time, you will see….Then add in increased taxes (well the government does have to pay for this massive loans somehow..) and a increase in interest rates (to stop a run on the AUD) and we will have a pretty bad situation me thinks……
I'm no expert, I just can't see it being as bad as everyone thinks. Last year, Steve Keen and his disciples were predicting a crash on Australian property. Median prices went down 3% on average last year in capital cities, and have risen in 1st qtr of 2009.
By the $40b I assume you mean the borrowings and stimulus payments. Well, people aren't spending it. GDP contracted 4th qtr 08 and will surely contract for 1st qtr 09 as well. Inflation has gone from 4.5% to 2.5% in a short time.
Why would there be a run on the AUD? Interest rates in the US, UK, Japan and most of Europe are lower then Australia. Those countries are also in a much worse position than Australia. GDP in the US has contracted by 6.1%, according to today's AFR.
Would I buy property now? Probably not, I'd want to see the effect of the reduction in the FHOG, and what happens on Budget night. I'm not one of these "property doubles every 7 years" guys, but I can't see a 20% reduction either. I guess I'm stuck in the middle somewhere.
Dan42 wrote:I'm no expert, I just can't see it being as bad as everyone thinks. Last year, Steve Keen and his disciples were predicting a crash on Australian property. Median prices went down 3% on average last year in capital cities, and have risen in 1st qtr of 2009.By the $40b I assume you mean the borrowings and stimulus payments. Well, people aren't spending it. GDP contracted 4th qtr 08 and will surely contract for 1st qtr 09 as well. Inflation has gone from 4.5% to 2.5% in a short time.
Why would there be a run on the AUD? Interest rates in the US, UK, Japan and most of Europe are lower then Australia. Those countries are also in a much worse position than Australia. GDP in the US has contracted by 6.1%, according to today's AFR.
Would I buy property now? Probably not, I'd want to see the effect of the reduction in the FHOG, and what happens on Budget night. I'm not one of these "property doubles every 7 years" guys, but I can't see a 20% reduction either. I guess I'm stuck in the middle somewhere.
Dan the $40billion hasent even hit the economy yet, the $900 stimulus payment was just a fraction of this total spend. Either way, if you are arguing a contracting GDP then with that obviously comes a increasing recession?
The run on the AUD-quite simple. With inflation comes a devalueing of the dollar, which in turn increases national debt. In order to create demand for the AUD the RBA will have to increase interest rates. Simple as that….I think….
Lets look at it from another angle-tell me what factors are going to prevent a fall in property prices? We have a global recession and clear cut reasons for inflation and increased interest rates plus the very high liklyhood of increased unemplyment etc all on the back of a massive property bubble that is far and above historical ratio of income to debt.
EVERYTHING is telling me things are going to get a whoooole lot worse…? Its actually good reading posts like this, because I find myself trawling through the paper looking to buy, and then I remember why not!!
Hi Blogs,
I'm not sure about the run on the AUD, just because other countries and currencies are travelling worse than we are, and inflation being the least of our problems, but I understand the logic behind your thoughts.
I think there are competing factors, such as rising unemployment, low consumer confidence, recession on the negative side, and low interest rates, government intervention, still reasonably strong demand for housing on the positive side. Inflation is heading downwards, despite huge reductions in interest rates in the last 8 months and stimulus payments.
It will be interesting to see what happens, that's for sure.
Sure will be interesting.
I think if you like taking calculated risks then the decission would still have to be on the 'hold off' side would it not? There are more negatives, actually I cant really think of any positive reason for property prices to increase. Even the bastion of immigration has been slashed, and with further unemployment will be slashed further.
I think we can count further government intervention out-they are going to be BROKE!! Wont be any money left for grants etc. They are even talking about FORCING all people under 21 to go to school rather than go on the dole (aint a bad idea) but to me is really designed to hide the unemplyment figure and reduce demand on social services..
Really this government has done such a bad job of handling this crisis, the full impact of their incompetance wont be realised for years to come, but watch this space…ohhh boy…..
Also the property market has been propped up by people 'scrambling' to get in before the grants finish. I agree though, there are competing forces, but IMHO the negatives are going to hand the positives their bottom on a platter
Lets see in 24 months I guess I would be interested if anyone has any thoughts or done any work on what will be the impact on house prices from signficantly reduced new security issues in the whole sale funding markets? ie the commercial backed mortgage securities (CBMS) market and residential backed mortgage markets (RBMS)?
I have a couple of observations and would point people out to read ANZ's and NAB's recent 1h09 result presentations issued to the ASX;Here are my observations
– banks increasing mortgage rates are a function of ithe ncreased cost of wholesale funding (typically 40-60% of loan books depending on which bank as the remainder comes from deposits), not banks trying to increase margins on a discretionary basis ie but more so to protect margins. So credit growth will be below trend for sometime, which i think is a good indicator of property prices.
– tighter credit standards (LVR's, savings tests etc) are a function of "credit rationing", because of the reduced available credit as a result of weaker securitisation markets ie CBMS and RMBS. this could mean less loans made potentially untill these markets reopen?
– Australia's dependance on foreign liabilities is a risk (highlighted in the IMF's recent financial stability report), especially given international banks are withdrawing from Ausrtralia's lending markets. This means could mean reduced available funds for corporates, transalating into reduced private investment, and employment propspects.
So from these obsevations, i think this cycle in property prices may differ from 2002-03, despite similar policies ie low rates and increased government stimulus.
blogs wrote:There are more negatives, actually I cant really think of any positive reason for property prices to increase.
…..Also the property market has been propped up by people 'scrambling' to get in before the grants finish. I agree though, there are competing forces, but IMHO the negatives are going to hand the positives their bottom on a platter
Lets see in 24 months I guess Blogs you probably said the same thing 24 months ago, And 24 months before that.
What happened last time the grants were "finished" ? If they cut it completely its because they are replacing it with something that will support property prices even better.
Can you think of any reasons why the government would want lower property prices ?Btw, what do you think of this http://www.abc.net.au/news/stories/2009/05/04/2560129.htm ?
There is a good chance there will be a dramatic decline in certain sectors of the market (although certainly not 40%), such as areas in the outer burbs where there is a greater chance of people losing their jobs as more of them are in the manufacturing sector, single income and other factors that lead to higher unemployment in the current climate. But there will be other areas that will hold, such as certain burbs closer to the cities where you have more professional workers, dual incomes etc.
It is important to review future employment trends in the locale when choosing an areas to invest in. It's not the only factor, but it's a good indicator of where strength will remain). But median prices do not paint a good picture of what's going on out there, for example look at what is happening in Ballarat – 8% growth. I think it's still undervalued. It's an hour from the city, it's starting to become within the commuter-belt (if not already) and you can still buy a period home for under $250k in the centre. I'd buy there right now, but there are other places I would not touch.rayd wrote:I would be interested if anyone has any thoughts or done any work on what will be the impact on house prices from signficantly reduced new security issues in the whole sale funding markets? ie the commercial backed mortgage securities (CBMS) market and residential backed mortgage markets (RBMS)?
I have a couple of observations and would point people out to read ANZ's and NAB's recent 1h09 result presentations issued to the ASX;Here are my observations
– banks increasing mortgage rates are a function of ithe ncreased cost of wholesale funding (typically 40-60% of loan books depending on which bank as the remainder comes from deposits), not banks trying to increase margins on a discretionary basis ie but more so to protect margins. So credit growth will be below trend for sometime, which i think is a good indicator of property prices.
– tighter credit standards (LVR's, savings tests etc) are a function of "credit rationing", because of the reduced available credit as a result of weaker securitisation markets ie CBMS and RMBS. this could mean less loans made potentially untill these markets reopen?
– Australia's dependance on foreign liabilities is a risk (highlighted in the IMF's recent financial stability report), especially given international banks are withdrawing from Ausrtralia's lending markets. This means could mean reduced available funds for corporates, transalating into reduced private investment, and employment propspects.
So from these obsevations, i think this cycle in property prices may differ from 2002-03, despite similar policies ie low rates and increased government stimulus.
Okay ive been trolling through all the house price posts and no one seems to mention anything about lower $$$ coming from securitisation markets. Ie NAB/WBC/ANZ fund c40-45% of their loan books through "whole sale" markets, the rest coming from deposits. With the advent of the GFC, this has seen these markets come to a grinding halt (some signs of thawing are emerging).
So i ask my question again, has anyone got an opinion on what will be the impact on house prices as a result of weaker wholesale markets? i think this is a serious issue, and would be interested in anyone's thoughts.
Lets see in 24 months I guess 
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