No Housing Bubble in Australia…is there?

People cant compare Japan to us, their crash was different. And the US crash is caused by a severe problem exacerbated by the 'housing affordability mob'.

With Japan there were loans organised that were 90 year loans, deferring risk of actual final payment of the loans to your grandchildren or worse. This allowed people to borrow amounts that even they couldnt fathom on the basis that by paying a minimal amount they wouldnt even have to pay it off within their lifetime. There was also construction mobs that would leech money off pre-purchase building sites that would mysteriously go bust. If you have ever heard of the Japanese Mob, they have as much influence over japanese construction, as the italian mob has over the US.

In the US the sheer rush towards a 'housing affordablity scheme' regardless of the ability of owners to pay has let a large amount of housing get built with concession in places where they just wouldnt dream of building. Near deserts .. in the middle of cornfields, old toxic industrial estates. They built for the concessions, they built for the money, and they built big. Thats what led to the whole toxic loans crisis. People who couldnt afford their rent were buying two or three houses, lying about their ability to support the loans and walking away from them when they couldnt pay. This wasnt one or two people, it was thousands. And the worst part about the current crisis is that the same people who wrote the bad loans are continuing with the same procedures. There is a lot to clean up there.

In Australia, we have a situation where we just didnt do anything for 20 years on housing. No proper planning, no guidelines, no centralised transportation extensions, no infrastructure improvements when required (eastlink, citilink, brislink are all public organisation partnerships with government). Now, and only since 1993 .. we have been developing high density residential, and even then, not matching it with facilities or demands. People have seen a large growth in the value of their properties. But its not everywhere. I can verify that inner CBD property has been on a slow 8 year drag on its knees to do anything. Banks for a while would want extended guarantees or better ratios on inner city property. To make an assumption that its all been going up, its just wrong. All this long term dawdling has put immense pressure on city suburban property and development. The developers are busy now soaking up this demand, but developers usually only do residential, not infrastructure. We will reach a saturation point eventually. And this in itself will suppress house and land prices. But at the moment, we've really just got started on this.

Fword, we have had that correction. Being a mug punter, I look at very simple stats & focus on my local area. Analysis of resales of properties bought in 2007 (pre-gfc) reveal about 6-7% growth over the 3 years excluding CPI, so we have gone backwards. However 10 year average growth is over 8%. What’s worse, the median price (my stat & official stat analysis both give $1.5m). Prices are maintained by restriction of supply as distressed sellers are uncommon & monthly stats are variable.

The stats lie & analysis is a crock.

It’s clear from other countries that property booms can and do end in busts. I would need a good explanation of why that’s not possible in Australia. Otherwise, I’m going to assume that we’re no different. 

That’s not true – I’m very interested in how bubbles burst in other countries and have read a lot about them.  What I’ve learnt is that bubbles blow up and they burst. Fundamentals have little or nothing to do with it. In fact, in many cases, the bubble bursting is so powerful, that it affects the fundamentals, rather than the other way around. I’m working on a post to explain how I think bubbles work. Keep an eye out over the next couple of weeks, and feel free to share your thoughts over there. http://aussiehouseprices.blogspot.com/  

 You’re right – that is saying the obvious.  I though there must have been more to what you were trying to say. 

I think it’s still worthwhile investigating the risk of a property crash, and not just believing everything you read in the media.  That way, you can take what you think to be appropriate action.  You can’t predict with any certainty if and when you are going to have a car accident, but you still take out insurance – just in case. 

It’s not rocket science – paying eachother ever increasing amounts for the same thing is in no-one’s best interests.  It’s not good for individuals and it’s not good for the economy.  Yes, the crash will be painful.  But the soon we get it over with the better. 

There will always be bubbles.  But I doubt the next one will be in housing.  It will probably take a generation to forget the lessons learnt from this bubble.

We have INFACT HAD A correction… Sydney property price has been stagnant for the last 6-7 years…. and started to climb last year…but 40% drop.. ?????

My two cents worth… whenever there is talk about whether Australian property prices are in a bubble, those with vested interests always say we are not in a bubble, so prices will just stagnate at worst (best?).  If we are in a bubble though, a bubble by definition has to pop at some stage.  The bubble should have burst years ago, and would have burst years ago if the government had not interfered and propped up the bubble, sending it ever higher.  Whenever I talk to friends about the housing bubble here, they look at me as though I'm talking gibberish, or come up with all the usual reasons why prices will stay high e.g. increasing population, foreign buyers, increased demand, higher wages etc.  The thing is, that anyone who bought in the last ten years or before, has done very well, better than they could ever have dreamed!  However, for anyone wanting to get into the property market, if properties continue to double every seven to ten years, then the average price will be $1million dollars soon.  That means that if someone can save a deposit of say, $100,000 then they would have to take out a mortgage of $900,000, plus costs!  Are wages going to go that high in the next few years?  OK, if you already have a property and sell it, then you could buy, with a much smaller mortgage.  But what about the investors – to make it a worthwhile investment, rents would have to increase to levels which are unaffordable.  But, if real estate doesn't go up, then what will be the incentive to buy once investors work out that they could get a much greater return elsewhere?   So, it makes sense that this bubble has to burst.  The government, of course will never touch on this.  They may mouth about making housing affordable, but in order to do so, prices have to come down.  If prices do come down, then perceived wealth falls, and then jobs have to be lost, leading us into recession, and of course no government wants to be one to cause or lead us into recession, and no home-owner wants to see the price of their real estate fall either.  So it is in their interest to push up the bubble, whether it means opening the floodgates wider to foreign buyers, more immigrants, more grants etc.  I might sound as though I'm contradicting myself somewhat, but what I'm saying is that we are obviously in a bubble, the bubble has to burst but the government will certainly try to do what they can to keep the bubble afloat for as long as possible.

Of course asset booms of any sort can end in a bust, and of course it's possible in Australia. What I was hinting at was: what do you think are the reasons for the predicted property market bust in Australia? And no, 'unaffordability' is NOT a reason. Let's look at the Singapore example again. IMHO, house prices there are obscenely high. But I've never heard of a crash where property prices fell 40% or so. People don't sit around moping about unaffordable housing. They simply live in with their parents for an extended period, rent, or otherwise buy government subsidised housing, which remember, is leasehold for only 99 years.

The way I see it, there's a lot of seriously loaded people out there. If these people are always buying into the hip and trendy suburbs, prices are going to get higher as each of them tries to outbid other parties for a chance to live in these areas. But the regular Australia bloke or sheila does not need to live in these areas and can always look for cheaper housing in areas further out. It's not as though prices are so ridiculous that the vast majority of wage earners need to drive like 2 hours one-way to get to work!

Glad we're finally on the same page. This would have been evident long time ago if not for simply speed-reading through those paragraphs. After all, there's nothing 'between the lines', so to speak. I don't know at what stage did my words seem to imply that prices in 'good' areas cannot drop. It would have been very foolish for me to even dare to make such a claim. I'm not a property perma-bull.

Yes it is a worthwhile practice. It is in keeping with the famous Scout's motto: 'Be Prepared'. If that's the case, are the people who are predicting the property crash actually prepared to buy in when it does occur? Are they prepared for what they need to do if the crash never occurs during their lifetime? Are they hence, adequately 'insured' if things don't quite go the way they think it will?

The media is a funny thing. I have stopped reading the papers for the most part because I am no longer interested in what it says. Firstly, a lot of the news is old. And secondly, as you say, we can't even trust everything that we read these days.

This is precisely the nature of business, unless we're talking about a charitable business. That's how coffee beans worth a few cents end up in a cup of our coffee that eventually costs us $2.50 to buy. Is human greed a part of the equation? Of course. But would you rather spend your energy fighting the relentless onslaught of human greed or otherwise learn how to be a part of the game and be able to survive?

Don't be so sure about that. Knowing the speed at which the world is moving, the memories we have of the recent GFC would be merely a shadow of what it really was in just a few years time. Just looking at the stock market for example, it appears the market rebounded over a very short period of time, and this was after people were still talking doom and gloom, and when I was still hearing people say, 'Believe me, things will get worse before they get better.'

Well… the problem is
60% of home loan held by only top 20% of income earners

The argument using median house price and median income… does NOT reflect the current market in Australia.

You could NOT stratified using the basic statistic… I think we need some education how to use statistic

Aussie… can you tell me when GFC happen?

I am not comparing to PEAK of ALL ORDS… (i.e. all time high)
GFC did NOT happen when ALL ORDS hit the peak

The way I see it, there's a lot of seriously loaded people out there. If these people are always buying into the hip and trendy suburbs, prices are going to get higher as each of them tries to outbid other parties for a chance to live in these areas.

You keep saying that you’re not implying that good areas won’t fall.  So what is the point of the above sentence?

It’s not rocket science – paying eachother ever increasing amounts for the same thing is in no-one’s best interests.  It’s not good for individuals and it’s not good for the economy.

This is precisely the nature of business, unless we're talking about a charitable business. That's how coffee beans worth a few cents end up in a cup of our coffee that eventually costs us $2.50 to buy.

No it’s not the nature of business to buy and sell the exact same thing from the same place at ever-increasing prices.  Business is involved in producing something or adding value/convenience etc, and selling it for a profit.  

Don't be so sure about that. Knowing the speed at which the world is moving, the memories we have of the recent GFC would be merely a shadow of what it really was in just a few years time. Just looking at the stock market for example, it appears the market rebounded over a very short period of time, and this was after people were still talking doom and gloom, and when I was still hearing people say, 'Believe me, things will get worse before they get better.'

Well, we’ll see.  I think when people find out that they’ve been wrong all along that prices always go up, their confidence will be shattered. More importantly, the financial scars from the popping of the biggest asset bubble we’ve ever seen will take a long time to heal.  

Well, you ain't reading carefully before putting words in my mouth. Let's bring up a fictitious example for the purposes of discussion: there are 10 people out there who want to buy a 15 carat diamond, of which only one exists. And there's 100 people who want to buy a 0.2 carat diamond, of which a million of them exist. Both of these types of diamond exchange hands (in those quantities) once a year. Which is the one that is more likely to rise in value? Of course the one that has greater scarcity and the greatest demand. And say diamonds went out of fashion for a period of 2 years. The prices at which these diamonds changes hands can reduce. But which one will still see the greatest potential to increase in price when diamonds once again become popular? The big diamond of course, with its scarcity and underlying demand.

In a similar fashion, when either the property bubble bursts or property goes out of fashion, prices of all houses are reduced when they change hands. But when things pick up again, the houses in the most desirable locations will have the greatest potential to increase in price (as the graph in that PDF file you told me to read, demonstrates), because of their scarcity and demand for them. Hence the property market cycles.

Really? Property investing is a business. Look at the example on diamonds again. Diamonds routinely change hands for ever increasing prices. Did they improve in value because the previous owner added some desirable colours or lustre to the diamond? Did they bake it in their hands to add some quality to it? No! They are the exact same thing! And it is not entirely correct to assume that NOTHING was done to a house that changes hands for ever-increasing prices. The quality of finishes may have improved, major renovations may have been done etc.

Have a look at the million-dollar mansions of today. Are you trying to tell me that these houses are the same today as they were some 30 years ago, with all the stainless steel kitchen appliances, luxury granite bench tops, massive inground pools, tennis courts, built-in plasma TVs and sound systems? How can we say that value or convenience (or both) has NOT been added to these houses?