The steps to watch for in the coming Australian housing correction

Again, I'm no expert, but I was listening to an interesting piece by Paul Clitheroe on the ABC the other day.  He made the comment that (in his opinion) house prices will slow, but on the other hand, they won't.  It depends on HOW you look at it.

The example he gave was of a $500,000 house.

Assume that the market goes nowhere for the next 5 years.  If that happens, then the house will still be worth $500,000 in 5 years.  The question he had for the presenter was this: Has the house lost value?

He then went on to say that most people would say no.  They still have a house worth $500K and they've lost no money whatsoever.

But – to an economist, if CPI is running at 4%, the house *should* be worth around $610,000.  So, houses have actually lost 20% of their value in the 5 year period.  It just depends on how you look at it.

Personally, I think house prices will stagnate or come back and slow for a while.  But, capital growth will come back over the long term – if you buy decent properties in good locations.

In Canberra when I first bought my PPOR, I paid $130K.  Two years later, it was worth around $105K, maybe $110K if I was LUCKY.  For 2 or 3 years after that, I hardly saw any growth.  It was about 6 years before the house got back to what it was worth when I originally purchased it. But then we got a sudden growth spurt and 20 years after purchasing it, it's worth around $500K.

Annual compound growth of 7%.  If I'd chosen NOT to buy, I could have saved money – but had I waited until the "bottom" two years later, I would not only have risked missing buying at the bottom, I might not have been in a position to buy it.

Anyway, that's just my 2c.

I tend to think the main point is that really most investors who buy a $500k property would do so as negatively geared, which can quickly add up to a lot of money with no capital gains to offset in that 5 years.

I consider myself "in the market" at the moment, but I'm in no rush, and looking for something that can be either neutrally geared or close (I expect rents to grow at a fair rate the next few years, even if values don't). The last thing I'd want to do is commit to something pulling $5-10k p/a out of my pocket if its going to sit stagnant for a few years. I can think of better ways to use money.

The market is not crashing. It will be fine. End of story.

I am intrigued. Please compare and contrast these debt levels. I would like to see the quantification of "high debt" levels in this comparison so I can make an objective analysis. I am keen to see if the following feature in your comparison for the Australian market;
1) Proportion of low-doc, no-doc loans with a large proportion of lending to people that were never able to service the debt at any interest rate.
2) Non-recourse loans. How much did these feature in the markets you mention? Particularly the largest, the U.S. How much did they feature in Australia?
3) The "catalyst" for turning a moderate market correction into a full-blown catastrophe: Unregulated sales of extremely complex financial engineering instruments to individuals, corporations, 401k's, and entire sovereign nation funds. All of which were underpinned by the "fundamentals" created by (1) and (2).
4) Which one of these comparison countries was experiencing an economic boom (driven by resources, manufacturing or otherwise) at the time they collapsed?

We all desperately want to look at all economies and see commonalities that can be applied as rules and trends for other economies. This is what very intelligent expert economists think about all day everyday. The problem is, with all this knowledge, almost all their predictions are plain wrong. Most didn't see the collapse coming. Those that did, most had been proclaiming it for so long that it tells us more about their negative view of the world than it does about objective. Most didn't see the upswing that came in the stock market after, despite the fact that it has happened after every single collapse. In this case they ignored their own trending of history.

Wrong. I don't "need" to do anything. It wasn't an opinion, it was meant as an absolute. Now, we could get all existential, but what would be the point? (Get it?)

That said, I do understand completely what you are saying. And do agree with you.

Tired of the D&G and trying to put an end to it. Just gets tired and boring. More interested in how we can help each other create wealth. Even though sometimes I get swayed by the negativity more than I would normally like.

Nothing good can come from being negative. Nothing.

'Perception' usually lags behind 'reality' when it comes to reading market cycles. That is, we could perceive the market to be 'rising' when it has already 'peaked' or is in the process of 'correcting'. Or we could perceive that the market is 'crashing' when it has already 'bottomed' or beginning to 'recover'.

In retrospect this would all become crystal clear. But at the time itself things are always a bit more murky. And when large sums of money are involved and the asset being discussed is considered an 'essential', things do get heated indeed.

Interesting theory. Are you able to elaborate in more detail how you came to this conclusion?

What exactly is considered 'affordable' in the year 2011?

Consider the following:

1. Distance to CBD (eg. Melbourne or Sydney, NOT a major regional center)
2. Distance to schools, shops such as food, cafes, shopping strip or shopping centers, transport, employment (ie. walking, cycling, driving distance and if so, how many minutes)
3. Distance to parks, beach/ water's edge or other open space
4. Distance from busy main roads, commercial or industrial establishments and train lines (but NOT train station)
5. Size of the house (ie. single/ double storey, detached, townhouse, terrace, unit or apartment, number of bedrooms, bathrooms, living areas both inside and outdoors, study, type and size of kitchen, garage or carport, swimming pool, tennis court)
6. General state of repair of the house (ie. well-maintained, in need of renovation or in need of detonation)
7. Size of the land on which house resides (ie. land size in square meters)
8. Crime rate (ie. in terms of crime statistics as listed on RACV. For example, crime rate of 35 means one in every 35 houses is burgled each year, and crime rate of 75 means one in every 75 houses is burgled each year)
9. Street aspect (ie. tree-lined, quality of neighbours, general state of maintenance of houses)
10. Price range (include an explanation of why this price range is considered 'affordable')

Not a 'complete' list by any stretch, but consider the above for a start.

Oopsy, the block of land was sold in 1970 not 1990.

//The common theme between all of these countries is high levels of debt financing the property bubble, just like in Australia.//

I heard the same – like I mentioned earlier, from a recent Think and Grow Rich seminar – but they didn’t give figures for those who DO own their own homes, or at least those who have nearly paid their debt. I hear we have a greater proportion of home owners in Australia then a lot of the other countries who have gone bust?