Hi All,
I read yesterday (and I'll paraphrase) that as there begin talks for an economic upturn, there's a downside to that economic recovery. One of those several mentioned downsides was the current "property bubble", which has been made worse by the lowest interest rates in 49 years. This would indicate that as the economy starts to recover, interest rates will slowly rise, which will force some owners and investors to sell their properties (as they will no longer be able to afford them). This will then cause property prices to fall as people will be looking to get rid of them as soon as possible.
Just wondering what people's thoughts are on that. Surely prices won't drop to levels seen, say, 10-15 years ago.
Cheers.
I don't think prices will go to where they were 10-15 years ago any time soon, but I think they will probably fall a bit or at least stay flat for quite a while. The fact is that property prices are ultimately restricted by the incomes that people earn. Otherwise home loans become unserviceable. House prices have outpaced the increases in incomes. Therefore prices will have to eventually come back to their mean multiple of the average income. Prices are currently about 7 times the average income. The long term average is about 4 times income. Therefore the worst case scenario is a 40% loss. However house prices move slowly and the supply problem will only be fixed slowly, so this won't happen overnight. As an example, in Japan house prices boomed for 10 years and have since fallen every year for 15 years. Therefore property investors had plenty of time to get out. It's only if they waited 15 years to sell that they would have made the biggest loss.
Average units were costing around $150K-$200K or so only 5-6 years ago, just before the boom ended. Now, even during tough times, the same units go for $80-$100K more. While property prices haven't been increasing at the same rates as several years ago, they have stayed the same for a while. I'd like to think that that's the worst case scenario, as opposed to prices dropping by 40% (good if you're a buyer, though). I think regardless of economic conditions, in the long-term, property prices do go up. Could be a case of just being patient as to when that happens and by how much…
If prices didn't go down as much as they otherwise could, in what is a GFC, could they, even in better times, fall further?
Hi guys
The simple answer is yes. Yes they could fall a lot further.
I saw Harry Dent speak recently. He's an american economist who's world renowned, predicted the bull market of the 2000s, and the subsequent storm we're still in at the moment. Anyway, he predicted that Australian Real Estate would fall around 40% from now down to around the levels it was in 2000. He said that the only way this could be alleviated is if immigration stayed at the same levels we have at the moment. In that unlikely scenario he says we may only drop by 20%.
He backed it up by a number of persuasive arguments, including the fact that Australia has 17 locations in the top 50 most expensive real estate markets in the world (when measured as a multiple of mean earnings). Given that we've got significantly less than one percent of the world's population, this is disturbing stuff.
Other arguments for impending real estate doom… Real estate does not always go up by 8% per annum as people would have you believe. Harry believes that the real cost of real estate has only increased in the last 9 years, hence the anticipated fall to 2000 levels. The other issue with rising prices is whenever you see those graphs that show real estate going up year after year "forever", they only ever go back to around 1940. Before that, there was this thing called the depression, and banks didn't really lend for real estate like they have in the last ten years. Credit is again getting harder to get, and without easy money, there is nothing to drive prices. Back in those days, yields increase and prices didn't. Over 20% yields were common post WW2.
Common sense also tells you that if prices went up 8-10% every year, and wages only go up 3-5%, that this is an unsustainable situation. Then there is the matter of supply and demand that property spruikers continue to talk about. Apparently Australia has a shortage of 144 000 homes or something amazing like that. However, the country has around 4.5 million empty bedrooms – I've got three of them!
If things get worse, unemployment rises, Gen Y moves back in with Mummy and Daddy, or with friends, and the housing shortage is over.You may gather from my diatribe that I am in fact predicting the impending doom of our real estate markets. To be honest, I still haven't made up my mind. I am simply presenting "the dark side" here (Darth Vader breathing optional), as far too many people in my opinion are ignoring the above mentioned points, or just aren't aware of them.
In any case, it makes little difference to me, as my whole business is based on selling houses using vendor finance, so whether or not prices go up or down, I'm still making money.
Good luck with whatever you decide.
Andrew
If things get worse, unemployment rises, Gen Y moves back in with Mummy and Daddy, or with friends, and the housing shortage is over.You must be logged in to reply to this topic. If you don't have an account, you can register here.
