Hi All,
An interesting topic indeed. Without getting into the "us Vs USA" debate, there are some fundamental structural differences between the two countries that will ensure some ongoing points of difference in how the two respective real estate markets function. Consider that in the USA there are non recourse loans – just walk away without consequence if you have negative equity. No such luck here, meaning that fire sales such as the type they have over there rarely occur here. Then there are the 80 million baby boomers that are weighing on the US economy as they retire. Here we have neatly sidestepped the issue through record migration in recent years and acceptance of older workers. My father is 71 and still works full time. They have a bubble in US health care that is slowly but surely bursting and they have had chronic housing oversupply to our chronic housing undersupply. Unsold inventory overhang of new homes is regularly quoted at 11 – 12 months worth of supply over the last couple of years (ie there is enough supply to satisfy demand for 11 months if no new homes are built). Finally, there is the disincentive to reduce debt over there because home mortgages are tax deductible, whereas here there is a clear incentive to reduce non- deductible debt. Lastly, in Australia, most people are not interested in living away from the seaboard for obvious reasons, which really keeps the squeeze on coastal property where 90% of our local population reside. Oh, and lets not forget that we have the attraction of negative gearing with one in seven taxpayers supposedly enjoying the benefits of a negatively geared investment property.The other major point is difference is in the structures of the respective economies. Here there is a resources boom which places us somewhere in the same position as places like Saudi Arabia were back in the 1950s and 60s as they began to discover that they had something that the rest of the world wanted. For any doubters out there, China is building the equivalent of a Brisbane every month, and India/China combined have something in the order of 650 million aspiring middle class citizens. It will take a couple of decades for that wave of people to achieve their goals, but it will continue to happen. When you think about it this represents the combined value in population terms of Europe and the USA combined. Then we are talking domestic unemployment of under 5% compared to double that in the US. It really is a case of apples versus oranges talking about the two economies and hence the two real estate markets.
On the flipside however (and to keep the argument balanced) sentiment is the most powerful driver in any market, and one would be incredibly naive to think it could not happen. We could still see major defaults by sovereign governments that could damage sentiment sufficiently to cause a crash. The idea of the US defaulting on it's liabilities(a small but very real prospect) is one such example(any doubters please google debt clock in New York!). Locally, the banks are starting to talk about the domestic housing market in softer terms for the first time in many moons. We are seeing a rising rate environment globally as the world economy turns the corner in the post GFC era, meaning that higher rates are here to stay so get used to them. (China has food price inflation of +10%)
However, on balance, with so many factors underpinning the domestic market it is hard to see it crashing per se, but rather, we may see long term underperformance if household disposable income falters or rates get too hefty. I think the exception to this premise is the prospect of a major catalyst such as war or major sovereign default that sufficiently damages sentiment so as to cause a loss of confidence. The old saying "cash is king" and "always keep some powder dry" comes to mind.
In my view, I believe 'Financing' is one of the most important aspects that guide the prices of properties. The easier it is to get finance, the more likely the value of properties in a certain area will increase. Conversely, the harder it is to get finance, the less likely they are to increase. Banks tend to lend based on an individual's income and ability to repay a loan. Ideally loan repayments should not be greater than 30% of one's income, and of great concern right now in Australia, is that some properties have been bid up so high that families are paying over 50% of their income towards mortgage repayments, and in the event that this increases to +70% we could very well see a collapse in the prices of some of these properties.
I also thought I'd point out that many properties in Australia have barely been able to keep up with inflation during the past few years – If your property increases by 7% each year and the money supply increases by 7% each year, will you really be better off 7 years from now?
I have been hearing self-appointed experts say for a couple of years now that there is a housing bubble, and that property values are going to fall from the sky. We are all doomed, and everybody should sell their property now, or risk facing massive losses.
If you say something for long enough, eventually, that fact will become true. However over a period of a year or more, then these “experts” should admit they got it wrong, and the media should pay scant attention to them.
Of course that won’t happen. Headlines like “Housing prices to remains stable” won’t sell newspapers now will they?
The fact is that housing prices (let’s take Melbourne for example), will not drop appreciably. And there is a simple, basic reason underwriting that. Supply and demand.
So maybe let’s see who controls supply, and who controls demand.
Supply variables are:
(a) Physical barriers such as water, cliffs, freeways, etc (which we can do little about)
(b) Labor and materials cost (which are set by the market)
(c) Financiers – by way of access to funding for developers and builders
(d) By for the biggest controller of supply are zoning and planning restrictions. Daylight second.
These of course are controlled through the local councils (through zoning ordinances) and the State Government, through their Melbourne 2020 vision and their masterplan.
The adage “they are not making any more land” is irrelevant. Smaller lot sizes creates more lots, and higher densities creates more living accommodation, albeit airspace. And the sole controller of this is local and State governments.
And then of course, don’t forget that the Victorian government (via VicUrban) are by far the largest holder of residential land around Melbourne.
So they almost completely control the supply or vacant land, and by extension control land prices through controlled land releases. They are understandably, increasing lot prices with each stage to maximise their asset sales.
The State government also encourage interstate and international migration, thereby increasing demand for housing in a market where rental vacancies are still quite low. So they are the largest controller of demand as well.
I can’t see VicUrban decreasing land prices. Nor can I see the State government discouraging new investment or migration to the State. So there will be no change to this balance.
We are not in an asset bubble. There will be no bursting, as there is no bubble to burst. Unless the State Government goes bankrupt and has to liquidate its assets, at best there will be a stagnation of pricing.
If you still don’t believe me, consider what will happen if prices drop:
* If prices do drop by the 20% or more that doomsdayers are saying, people who are renting now will see that owning is now suddenly so affordable compared to the price of rent, that demand will spike and prices will rise again.
* If prices do drop by 20%, then the first home buyer in the suburbs who has just purchased their first house and land package for $400K (which cost $220K to purchase the land and $180K to build), will now own a property that is worth $320K. The land is still worth the same amount – the State government (nor privately owned developers for that matter), are not going to drop land prices.
The impact of this is that builders will need to build new houses now for $100K which was formerly being built for $180K. Let’s say the average builder margin is 18%, the raw cost of materials and labor alone is about $152K. Builders will be out of business in a hurry, as they would be losing $52K on the contract for the above example. The result – no new housing built.
So when we see an ever increasing population, in a market where rental vacancies are already low, and no new stock being built, what will happen to demand? It will increase rapidly, and again support housing value.
The only other single controller of property prices are banks. They can control a false market by creating demand from buyers by way of how easy it is to obtain credit, and how cheap it is. Which is exactly what happened in the US.
Getting credit in Australia is not easy for a buyer. It really never has been. It is hard. And it is certainly not cheap. The brakes have been applied in full for nearly 3 years. So there has been no false market lifting property prices over this period. Yet, prices still increased. And strongly. Which suggests that the banks carry little weight in determining current housing prices.
Over the past 6 months, it has loosening slightly which should further increase demand slightly.
Forget about statistics. Statistics are just numbers. They explain nothing. Anyone that claims that prices must decrease just because the numbers are unsustainable is not thinking.
It is ridiculous to compare the “affordability” of housing (an inappropriately named measure in and of itself in its current format) from one country to another. Not all countries have the same lending policy, the same interest rates, the same deposit requirements, the same loan term, the same control measures, the same population changes in percentage terms, or the same taxation (impacting on after tax income which can be contributed towards debt servicing; as well as attracting investors or not).
As a buyer, what would you rather buy?
A house for $300K with 20% deposit and 20% interest rate?
or
A house for $500K with 0% deposit and 0% interest rate?
The former naturally. Because the actual property price is not how much you pay to purchase the property – the actual price is how much is costs to get into the property (the deposit) and how much it costs you on a regular basis (your mortgage payments).
And when mortgage payments are comparable to rent, people will be attracted to ownership almost every time.
Prior to GFC, there are fundamental differencse between the US banking system and the Australian banking system and these are some but not limited:
- The US banking system could finance a mortgage to borrowers evenif the borrowers don't have employment ( Is this possible in Australia ? Will the BIG FOUR banks allow you take a mortgage without a primary source of income such as employment? What do the banks here lend you? Not a house but your capacity to service the loan? The answer simply NO) Again, it goes back to the risk factor…the culture of their corporation primarily seek short term profit by taking too much risk hence higher return by maximising their ROI. The higher the return the higher the risk (e.g., the US banking system charged higher interest to unemployment applicants believing these applicants can get employment in few months…boy how they were wrong).
- The US banking system, assesed their applicants based on their capacity to service the loan regardless the credit history of these applicants (e.i., finance credit history). They taken on even applicants that have bad credit history. Here, if you have a BAD credit history which could stay in your credit file for years, there is no way you can get a credit either credit cards or mortgage or personal loan, car loan etc…..
Those were I saw the biggest FUNDAMENTAL difference between the US banking system and Our banking system. The US corporations have a culture primarily driven by short term profit by taking HUGE risk…high return…hence higher risk.
Buffet got it right: Being a valued investor, buy shares under market value, hold them for long term for profit. He does the opposite of most of the US corporations by being conservative in investing approach. These US big corporations should learned from him.
There is a possibility of house prices declining in Australia, however to compare our situation with the US is a mistake. In order to believe a crash will happen here you'd have to see a way around some key differences.
First, rental vacancy rates in the US at the time were as high as 10% in various areas, they had been building far more housing than required in order to boost the economy. We have the reverse situation in many of the 'expensive' areas in Australia. On that basis there is some sort of justification for prices here.
Secondly, planning in our major cities has been atrocious for two decades, in Melbourne the outer wedges, poor rail infrastructure and public transport, and slow to catch up road infrastructure, and a planning department that lets local residents dictate to the needs of the city, all means that people have had to pay through the nose to buy housing within a 30 minute drive to work. This adds up to justification for prices, and it wont reverse quickly.
Thirdly, in the U.S. it took two events to knock over the housing market, first unemployment went up a bit and banks tightened their lending practices. Second, tens of thousands of simultaneous mortgage resets, when the 'honeymoon period' of peoples loans ran out an their rates doubled. All these people had planned on refinancing into new honeymoon rates, but tighter lending practices didn't allow it, and they could't afford double the rate. This particular situation can't happen in Australia because the we dont have simultaneous mortgage resets brewing.
Forth, one the of the reasons the US had trouble was because the banking system fell over and was unable to help the country out of the crisis. Largely that was due to the US system of non recourse loans, people were able to walk away from home whos values had fallen, leaving the banks with the repayment obligation. in Australia we have full recourse loans which is strong protection for the banks, it motivates owners to pay the mortgage regardless of price drops, and that is a buffer against deep price drops.
There are other differences but I wont write a book here. Of course this doesn't mean that serious price drops can't happen here, it's just meant to point out the differences between our situation and that in the US.
Hello Steve,
Help me out here. You may be aware of a book, fresh off the press, by John Lindeman, :Mastering the Australian Housing Market" published in January this year.
Could the Australian housing market collapse? (p.34) – Lindeman claims comparisons with the USA and UK are "inherently flawed". The meltdowns in the USA and less so in the UK were precipitated by sub prime loan increases in interest rates (making repayments unaffordable) after the honeymoon period, a gross over supply of houses – I've heard reports of buy one get one free – vacancy rates of 10% (Australia is 1%) etc. According to Lindeman, the exact opposite of the market in Oz.
By contrast, Australia has a rapidly growing population – 450,000 in 2009 (2 imigrants for every newborn), a housing shortage (approx 100,000 homes) – while most western countries have ageing populations, low fertility rates and growing housing surpluses. Couple these trends with a booming Australian economy and you have quite a different picture. A picture that Lindeman claims will continue to support a strong property market in Oz.
Your thoughts please.
Robert I Machin MA (Mgt) FAICD FAIM ICF (CEG) APMPDirector, Machin Management Pty Ltd61 (0) 418 155 550 mailto:[email protected]
There are considerations to be made on both situations. These all depends on the investors budget in relation to their portfolio. Having extra cash would be good in any situations. To bad the system we live in encourages spending not savings. If we can cut excess of all sorts we will be happier, richer and busting with health.
Charles
realestate-qld.comHi all,
I know that the US property market crashes – can the same be said for the rental prices?? Or have rents stayed the same or risen while the crash happened?
Of course a burst / correction is possible but let’s not get spooked by the shadows…
Correct me if I’m off track but all our lives the unforeseen has shaped the future of business and/or our lives.
Investing is a speculative business and it carries its risks.
I’m sure we all remember our first investment decision… there was a element of fear.. a murky shadow over our heads……. To this day this fear/ shadow should never be brushed aside or taken for granted in our investing ………..
In my view Buffett is saying just that …….the herd believed the good times would last forever. Maybe he didn’t. Maybe that’s what makes him a better investor
Such is the speculative cycle.
Michael
Fear casts a large shadow, but he himself is small.
SteveMcKnight wrote:Thanks for the discussion so far.Be careful not to make this an 'Australian vs US' issue. It's not, and that's the point Buffett is making. No one saw it coming because there was no concept that it could happen.
We tell ourselves the same things in Australia and argue how and why we are different. The simple truth is that it could, but that until some event happens (which does not currently exist), in all likelihood it won't. Instead, the expectations of people will mean that property prices will keep going up.
People form their expectations on too recent a slice of history. property does not always go up down under, it just has for a relatively long time.
SteveMcKnight wrote:Let me tell you a story of a situation that proved me awfully wrong. Driving home some years ago, it struck me that the stock market couldn't ever crash again. Why? Because each month there will billions of dollars that had to be placed 'in the market' via superannuation contributions. In other words, there was mandated government supply of new money into financial markets that had to keep flowing in, and so long as more money came in than went out, prices had to increase.Clearly, I was wrong. But why? It's true that more money keeps coming in, but values dipped suddenly. This was not because of economic factors. It was because of psychological factors.
So the same point could be made for the property market. The economics of a housing shortage, strong Asian demand, etc. all point to a continued strong market. But… if people no longer perceive value, then it doesn't matter a cracker about the economics, prices will drop.
In many ways, that's the state of play with the Aussie market now. Without the psychological drivers in full force, values have stagnated.
I guess what I am saying is that the economics are used to justify the outcome, but because people are random rather than predictable, the future is anything but certain. That said, investors still need to piece all the variables together as best as possible in order to make informed decisions.
More food for thought…
Wow, just wow! I can't believe I am reading this. Agree totally.
Sentiment has always been the mouse for the elephant in the room that is our property market.
Prices had some reasonable dips in 2008 but sentiment wasn't lost, because, to use your terminology, the pshycological drivers were in full force. Now, sentiment is far worse but drops have been moderate compared to later 2008. If drops get large now, sentiment will plumit.
Why have the psychological drivers been removed? I think this is the real question here.
I don't know exactly but I'd wager it has to do with a combination of the following and perhaps other things.
Government in deficit.
RBA wanting house prices to stabilize.
Global lenders downgrading our banks ratings.
The verge of mass boomer retirement.So are you going to sell up some stock Steve?
Oh – while we're on Buffet insights, investors should never forget:
Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.
Ask yourselves, are Australian's really being fearful? Is it the right time to be greedy.
G'day again team.
Sell up some stock? I'm always buying and selling, so I guess I'm doing both.
I want to reiterate a point though… it's because we think a property crash can't happen that it actually (a crash) can.
If we said 'okay – a property crash can happen if…', then that would be a much better dialogue than simply shutting our eyes and imagining that Aussies are somehow different.
In regards to the US, rents and prices both dropped. That said, I think rents and prices have firmed over the last six months. Too early to be sure, but we may have seen the bottom (or at least the bottom of this cycle down).
'ave a good weekend.
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
SteveMcKnight wrote:G'day again team.Sell up some stock? I'm always buying and selling, so I guess I'm doing both.
I want to reiterate a point though… it's because we think a property crash can't happen that it actually (a crash) can.
If we said 'okay – a property crash can happen if…', then that would be a much better dialogue than simply shutting our eyes and imagining that Aussies are somehow different.
So if the majority of investors accept that the market can crash and values still drop say 20% in a year, is it still a crash or does it become a forseen correction?
SteveMcKnight wrote:In regards to the US, rents and prices both dropped. That said, I think rents and prices have firmed over the last six months. Too early to be sure, but we may have seen the bottom (or at least the bottom of this cycle down).'ave a good weekend.
– Steve
I don't think the US rental situation was too different to here – rents were caught between real wages and house prices, being pulled both ways. Therefore, if the value of a house decreases it is reasonable to assume the rental value will decrease by a lesser amount and that rents will firm before values when they reach what wages dictate.
I think 50% is a crash. 20% is still in 'serious' correction territory. Not sure if there is a technical definition.
In any event, a 20% fall would have serious consequences for our banking system and household balance sheets.
In Australia, people use lines of credit to tap their home equity like ATMs. That's okay, but only so long as values keep going up.
– Steve
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve,
With regards to your comment "Value is perceived, not intrinsic" you may enjoy reading 'The Value of Nothing: How to Reshape Market Society & Refine Democracy' by Raj Patel.
I personally believe prices are over inflated and would like to see a correction, without a crash. In believing this, I have begun to focus less on the potential market crash, and direct my attention towards ways the government can provide affordable housing solutions in Australia, in both the short and long term.
I believe it would be wise to put an end to the succession of strong market swings our current system may be encouraging, and provide all residents with the opportunity of living with relatively stable house prices (to rent or purchase), that move in line with inflation. Ideally, prices would again come to reflect real value for money, in the most democratically agreeable terms.
I have the hope that the government can work with developers, planners, and investors like yourself and the users of this forum, to create policies that will enable investors to generate wealth, mainly through cash-flow and tax breaks, which will permanently stabilize Australian house prices and eventually bring them back in-line with the measures outlined for "affordability" in the 7th Annual Demographia International Housing Affordability Survey (2011).
http://www.demographia.com/dhi.pdfThese two articles make interesting comparisons between Australia, the UK and Germany, and it seems there is a lot we could learn from Germany:
http://tiny.cc/6m7g8
http://tiny.cc/sh62j
(and the comments are nearly as informative as the articles)I'd be very interested to hear your thoughts on investing in 'affordable housing' in Australia. If it's not something you already do, or recommend to other investors, what further incentives would be required to get you interested in investing in affordable housing? Any thoughts on the NRAS, or how it could be improved?
To take a quote from Oliver Marc Hartwich, http://www.businessspectator.com.au
"Summing it up, the UK and Germany share all the factors that explain housing demand … But the history of British and German house prices also shows something different. Despite the long run house price increases, there were enough ceteris paribus moments in the meantime. They caused strong swings in British house prices because the rigidity of supply sent the market on a roller coaster ride. Booms and busts were programmed into the British market precisely because of its supply constraints.
On the other hand, the flexibility of German housing supply ensured that no such swings could occur. Perhaps it also reduced demand for housing because potential buyers did not expect any future house price increases and thus felt no hurry to rush into the market and buy at all cost. This also explains Germany’s lower home ownership rate. The higher rate of tenants in Germany is a result of market stability, not the cause of it. There are no capital gains to be made in Germany’s boring housing market, so potential owners rather invest their savings elsewhere – and rent.
The British-German housing comparison is instructive in the discussion of Australia’s housing market. It should challenge the religious beliefs in both camps as it shows that rigid supply and strong demand are no guarantee for constant price increases. Though they increase prices over long periods of time, they equally result in strong market swings in either direction"
As far as an Australian advising on Australian matters of affordability, I believe that Julian Disney, Director of the Social Justice Project, University of NSW, has gone some way to provide the government with a plan for the future (http://tiny.cc/by19a). With these two points in mind, Disney's recommendations, and the lessons to be learned from the German market, I would be most interested in your thoughts for re-shaping Australian policy, to make investing in affordable Australian housing a viable way to avoid a market crash now, or in the future.
Yes, it would be better for the country as a whole if there was a long stagnation or slow deflation, rather than an outright correction/crash of either 20 or 50%. Still, stagnation or deflation would hurt the plans of many.
Who knows what will happen – it depends on so much. IRs, credit availabilty, available stock, the rest of the economy and, of course, sentiment or confidence in the sector.
Obviously I still believe Austrlaian houses are signifigantly overvalued but have mellowed over the years enough to accept an outright crash could have dire and far reaching consequenses for all in the country.
Here's the thing though, if confidence dries up and the majority stop buying, how does it lead to anything but a crash or severe correction?
Apologies, I meant to link to this article on German housing "A housing market whodunit" by Oliver Marc Hartwich – it explains the system much more thoroughly: http://www.cis.org.au/media-information/opinion-pieces/article/2358
Perhaps the question shouldn’t be so much “will Australian house prices fall?” but what are we (as individual investors) doing to offset the potential risks, in our portfolios and investing strategies.
Hi Mark, would you care to answer your own question – what are you doing? is anyone you know taking steps yet?
Mark Kelman wrote:Perhaps the question shouldn't be so much "will Australian house prices fall?" but what are we (as individual investors) doing to offset the potential risks, in our portfolios and investing strategies.Smart thinking.
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