Property Prices Explode

Well, there goes my plans for an investment property…

My suspicion however is that the median prices in Melbourne have jumped because more expensive properties went under the hammer in the final quarter of 2009 while the number of first home buyers (and the kinds of under $500K houses they're after) actually dropped in that same time. Thus we have a skewed median price that appears to indicate massive price jumps when in reality, the under $500K market has softened and gone quieter.

When buying my first home I was despairing that I didn't have $600-700K, because if I did, that segment of the market offered much better value and I wouldn't need to compete with FHB who were willing to pay just about any price for a weatherboard shack!

Hi,

I think parts of  the market have deflated already. I've been watching pretty much from Croydon outwards for awhile now and that market has definitely had a price drop. About a week after the FHBG stopped the prices went down. Lucky we got rejected on an offer actually because the price rises there were not sustainable. Silly us!

The problem I see is that land blocks and shack and land which seem to be all the rage (what is EVERYONE a developer?) are still going for ridiculous prices no matter where you look. Put this with contsruction costs being pretty high, the time it takes to get approvals through (holding costs) then hassles getting finance, I think these issues will still put pressure on prices. There is also pressure in some areas that is coming from overseas buyers. Camberwell has had a huge price jump and anything remotely close to a mil is considered cheap. There is a scarcity in that area which will still drive price.

The next part to watch will be all of the Western suburbs of Melbourne. Where are a lot of immigrants going to live or buy? Where it is either cheap or where there is community and services they need such as Mosques, and specific clubs. You can still get 'cheap' houses withing very easy commuting distance to the city which even though people immigrating to Australia may not work there they still will need the feel of the city.

A friend of mine came back from Peru and brought her new husband with her. She decided to settle about half an hour drive out of Melbourne as she thought it would be "country" or kind of "rural".

 I think a lot of the inner city suburb population comes from people needing to be close to lights and populated areas as a comfort thing.  Think about what the population is like in other countries. I am sure that Australia seems very underpopulated when you first get here. And I am quite sure that when most of the shops shut at 6pm and the lights go out by 9 that it would seem very quiet.

It will be interesting to watch the prices as people funnel into Sunshine and the surrounding suburbs. The people who have been well and truley priced out of cmberwell and Brighton and Williamstown will be taking a drive thuogh Yarraville and Seddon to see where they can afford a cafe strip and a character cottage. The Western suburbs have had a big jump a couple of years ago and can probably go again since you can still get a very nice house for very little money (compared to other suburbs).

I will stop now my little note has turned into a huge rant

D

The proviso being these statistics are valid, so my thoughts are that continued price rises are unsustainable.
Firstly I wonder how many properties are being bought by overseas residents, given that Rudd relaxed the rules for marketing to, & purchases by OS residents.
Secondly, I don't see incomes growing at the same rate. In fact wages in some industries have barely kept pace with inflation, & some have even gone backwards .  Sure, the flip side is some industries are flying, like mining.
Thirdly, if banks are tightening credit rules, it should now be harder to get loans, & therefore harder to push up prices.
Fourth, the First Home Vendor's Grant is no longer helping to prop up prices.
Ok, lets consider migration & new dwellings not keeping up with demand. This will put upwards pressure on rents, but there comes a point where people can't pay any more for rent, unless they choose to starve or sell a kidney. Because for many, wages just aren't keeping up.
From a residential property investor perspective, as deposit interest rates increase & share market prices / returns improve, property will need to compete with these & other investment options, especially if you are investing using borrowed funds.
Finally, I can't but help paste part of a recent interesting commentary by PIMCO's Bill Gross. While it's a general observation on the causes of the GFC, I contend that some of it can be related to where we are with property today:

' To begin with, let’s get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today: (1) Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end. There was a willingness to keep on consuming, there just wasn’t the wallet. Vigilantes – bond market or otherwise – took away the credit card like parents do with a mall-crazed teenager. (2) The cancellation of credit cards led to the Great Recession and private sector deleveraging, the beginning of government policy reregulation, and gradual deglobalization – a reversal of over 20 years of trade policies and free market orthodoxy.'

Food for thought.

If you read the second Wolf of Wall street book, Jordan Belfort was in at the bottom of this use your home equity to buy junk craze.

Do you think that in that case then rents will stay the same for years at a time? Will people live in trailers and tents? I think many Australians would do without something else rather than the roof over their head. You have to keep your kids out of the rain and the cold. But your kids don't need that new WII console. This is why retail sales dropped off after boxing day. People went and bought houses instead.

I think there are fundamental differences between Australia and America. Good health care, a housing system set up to house the poor, mentally ill, and in need. Various housing charities which hold emergency accommodation (houses) for people to walk in off the street and sleep with a roof over their heads rather than in their car or a box.

Many Americans would simply walk away from their houses (refugees of Hurricane Katrina) if the worst happened as the government allows many of the basic neccessities to be paid for by the individual. You really would starve if you tried to keep your house. Whereas in Australia we have a very well set up support system with money that (via taxpayers) the government will give you. Rent assistance, bond money there are things that prop up the bottom end of the property market allowing the majority of people to be able to buy a house or rent privately at an affordable price.

We may be in a bubble now but I don't think that the housing market as a whole is unsustainable the way it works.

Just some thoughts……………

D

We have some very insightful analysis here!

I don't know much about other states, but Sydney is definitely going crazy! The houses in the area we are looking at are being sold at lightning speed. There were 6 new houses listed on realestate.com.au on this Monday, by Wednesday they were all under contract already! We didn't even get a chance to look at them,coz they won't last until Saturday! As a result the realestate agents dramatically increase the asking price on all the new listings.

Also around where we live (St George area, Southern Sydney) it seems even the most crappy house get snapped up at high price within 3 weeks. Even the unit price are going all the way up to sky, a 3 bedroom unit in Hurstville can be sold around $550k.1 year ago, the same unit was listed at 480k for 4 weeks and no one wants it.

There is definitely a bubble forming, but I wouldn't say it will burst, the price will be more likely to slow down and drop slightly when people notice that they have trouble servicing the loans coz they paid too much in the first place. Especially the FHB who rushed into market last year, plenty of them didn't do planning or budgeting and pretty soon with the higher interest rate they will have trouble servicing the loans.

As for investors, the smart ones will always make money regardless of market timing. There are good deals and bad deals around all the time, when the market is down, it just means it is much easier to find bargains.

I can't see a 'bursting' of the bubble, but can see a deflation over the next year or two. A burst probably won't happen for a because of unique cultural and legal reasons. Australia has one of the highest home ownership percentages in the western world (about 70%), and one of the lowest rates of mortgage defaults. This isn't the USA, where you can post your house keys back to the bank, without repercussions.

Also, Tomori talks about the relaxation of Foreign ownership rules. I don't know the numbers, but I doubt this has had much of an effect at all. What may have made more of an effect is foreign based Australians returning to Australia, because of poor job opportunities in US / UK. There seems to be some political capital in blaming foreigners, but I doubt it's based on any hard evidence.

Personally, I think the FHOG influence was overblown, as less than 10% of home buyers at any one time are first home buyers. In the first three months of the reduced grant, prices have continued to rise.

We live in interesting times!