Property bubble 'set to burst'
Natalie Craig
May 1, 2009
html,body { border: 0px; }
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.
With PETER MARTIN
Yawn
The other Yooni Professor Keens prediction is 40%.
Such foresight.
My thoughts??? Ha ha ha…
I still cant beleive how much greed can blind people-I cant beleive peopel still think property is goign to keep going up when everything is pointing to the fact its going to come down??
Melbourne's median property prices are down 15%!!! Toorak is down 33%, Albert Park 26%, KEW 45%…. and this is with still very strong employment, record low interest rates and low unemployment. The bottom end is being held up by a home owners grant which is going.
So we have had huge reductions already on basically nothing, tell me….what effect do you think there will be when unemplyment doubles, interest rates and inflation go up, and sentiment hits rock bottom??? Crazzzzzy people out there…
I read the news today that KRudd Co.. might revise the limit of negative gearing during May budget… sound interesting!!!
Also watch taxes go through the roof so that KRUDD can pay for his mega vote buying fenzy….ohhh and the fatc they have a $100billion hole thatthey didnt budget for lol, geniuses…..and scary!!!! Our country is in for soooo much trouble. Gee Im glad we decided to vote some experianced professionals like Krudd and co in on the verge of the GFC…..some smart voters out there…
"Credit crunch has left $100bn hole in Federal Government budget"
http://www.news.com.au/heraldsun/story/0,21985,25421795-5005961,00.html
every single recession we have had, property prices have come out strong each time, why is this any different.,
sorry, we will experience some drops, but not of 40+% pfft. ridiculous analysis.
Ummmm becasue this 'recession' is unlike any we have ever had before and the property price bubble is far far bigger than anytime before. Property has increased (inflated) at a faster rate than ever before, and will equally deflate or pop by more than ever before.
Why is it that people can accept gains far outside the realms of 'normal' but cant accept coenciding losses…..?
Tell me-why do you think 40% is rediculous? What have you based this 'educated' opinion on? Toorak is already 33% down-you think once the full recession hits, interest rates go up, unemployment up inflation up they couldnt possibly drop another 7%?
god_of_money wrote:I read the news today that KRudd Co.. might revise the limit of negative gearing during May budget… sound interesting!!!
Do you mean hobby farms ?
if you mean residential property investment then the Law of Unintended Cosequences would apply same as it did when Keating tinkered with it.
blogs wrote:Ummmm becasue this 'recession' is unlike any we have ever had before and the property price bubble is far far bigger than anytime before. Property has increased (inflated) at a faster rate than ever before, and will equally deflate or pop by more than ever before.
Why is it that people can accept gains far outside the realms of 'normal' but cant accept coenciding losses…..?
Tell me-why do you think 40% is rediculous? What have you based this 'educated' opinion on? Toorak is already 33% down-you think once the full recession hits, interest rates go up, unemployment up inflation up they couldnt possibly drop another 7%?
The last I looked it was back on or very near its long term average.
What is really scary is the guy featured in the article teaches our future economic academics, I guess they never knew anyway in the past , so why change now.
At least we know that the economic models all got it so badly wrong recently, so we have a pretty good correlation that their accuracy will remain consistent in the future.
blogs wrote:I still cant beleive how much greed can blind people-I cant beleive peopel still think property is goign to keep going up when everything is pointing to the fact its going to come down??.
Thinking that property is not going to drop 20-40% is completely different from thinking it is going to go up.
What are the current limits on negative gearing and what changes could they make to make it better than it is today?
Reality is that most economists never get their forecasts right. Remember in November 2008 – every economist from leading retail and investment banks (with the exception of Morgan Stanley) were predicting +0.1% GDP growth in 2009. Even the RBA Governor was forecasting Australia would avoid a recession, and only have a mild softening. So i would pay little credence to economic forecasts and would pay more attention to whats happening in international markets as a potential lead indicator for Australia.
Remember house prices are down 19% and 17% in the US and UK respectively so far (not 40%) – and both of these countries have failed banking systems. So to say a 40% collapse in Australian property prices is ahead is a very pessimistic call.
bardon wrote:The last I looked it was back on or very near its long term average.The last you looked what was back on its long term average?
Sooo you are saying you dont think property prices will fall any further?
Im not going to argue with anyone-you can all think what you like. Obviously the people who bought and lost 33% in Toorak for example thought prices were going to keep going up, and so do you. Seems simple to me-things are only going to get worse before they get better. With this in mind if you beleive despite all this property will some how miraculously fight the tide and actualy go up in value you have rocks in your head….
rayd wrote:Remember house prices are down 19% and 17% in the US and UK respectively so far (not 40%) – and both of these countries have failed banking systems. So to say a 40% collapse in Australian property prices is ahead is a very pessimistic call.Remember we still have a lot of this recession to flow through. Deloittes are predicting a further 33% fall in U.K property prices by 2010. They are very respectoible and dont have vested interests….
Not sure where you are getting you figures from either-the USA is currently 30% down..
http://www.dailymarkets.com/economy/2009/03/31/us-home-prices-drop-record-19-in-january/
"Average home prices across the U. S. are now at levels not seen since late 2003. As of January 2009, the 20-city composite is down 29.1%, from its peak in the second quarter of 2006. A measure of the 10 largest cities is down 30.2%."
Either way, sure it may not drop 40%, but it sure as heck aint going to be going up….
blogs wrote:bardon wrote:The last I looked it was back on or very near its long term average.Obviously the people who bought and lost 33% in Toorak for example thought prices were going to keep going up, and so do you. Seems simple to me-things are only going to get worse before they get better. With this in mind if you beleive despite all this property will some how miraculously fight the tide and actualy go up in value you have rocks in your head….
Wrong on both accounts about me, but thats okay, you dont have to get it right its only internet chatter aftter all..
Sorry-Bardon-my comment wasnt necessarily directed at you, it was supposed to be a general comment to the 'property bulls' only realised later (but cant edit) that it would sound that way…
Only out of curiosity, I would like to know why some people think that the swing from surplus to deficit from government to government occurs.
It seems to me that the people that do this, are ignorant of the fact that a good thing only lasts so long, and that it must be paid for somewhere. I don't vote personally, so looking at it from an outsiders perspective, I can see that the biased views or perhaps even ignorance believes that in 24 hours, a countriess financial state can be changed, as soon as a new government is elected.
You can present all the stats you want but, it seems that as soon as a labour government is elected, peopel want to blame IT immediately for some bullshit debt, that was already there. How can you go for a 20 billion dollar surplus to debt, in the change of government or even the publics perception that this is what happens is beyond me. Any takers that wish to explain, by all means respond to what might be my ignorance.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
