Just watched quite an interesting video that I thought you guys might want to take a look at as well:

http://dailycapitalist.com/2011/07/16/weekend-fun-part-4-overdose-the-next-financial-crisis

Oh wow, dredging this up from the depths of the abyss. Coincidentally I have a book from the library that talks about this issue. Here's an excerpt again from John Lindeman's book, Mastering the Australian Housing Market:

"The issue of affordability has risen many times since then, but in each case the reason that pressure on housing prices eased was a restriction on housing finance, not an easing of demand…During each period, however, rents rose as the supply of finance diminished, leaving investors with the same net result: an average long-term return of about 14 per cent per annum on their investments."

If John is right, this excerpt demonstrates two points:

1. The current dips in house prices or slowing of house price growth at this time have little to do with weakening demand. Previously I argued this heatedly with another member who stated that in today's housing market, demand has slackened and therefore there is no housing shortage. There is a housing shortage. Go out there and sell your house for cheap and you'll see how many first home buyers and investors will rock up. There's plenty of people out there who want to buy a house. However the stricter lending criteria at this time, combined with higher interest rates and the previous increase in house prices have served to delay people from purchasing a house, NOT destroy their dreams of ever wanting to own a house. Of course, there are some people who want to be continually mobile and not want to be tied down to a mortgage. I know of a few such friends. Even if a large number of people suddenly take on this mentality, they will still need somewhere to rent. The demand for housing is NOT reduced.

2. It is simplistic to assume that rental returns have seemingly increased because of a drop in house prices. In reality, nominal rent itself has also increased to compensate for reduced growth in house prices. Otherwise how would we explain the final statement in that excerpt above?

Additionally, consider another excerpt from the same book:

"…the only option for potential first-home buyers is to rent or to buy. The real measure of affordability for first-home buyers is the cost of renting compared with the cost of repayments, not the cost of repayments per se."

The importance of this statement is realising that in today's housing market climate where repayments for a house vastly exceed the rent of a similar house, first-home buyers will choose NOT to buy because it makes much more sense to rent. However as house price growth slows or stagnates, nominal rents will continue to increase. And at some point, the cost of repayments and rent would be quite close, and that causes first-home buyers to stop renting, flood into the market to buy their first home, and house prices grow again. So you see, it really is all a cycle.

What does this mean for potential first-home buyers? Rent. Save for your deposit and wait till repayments start to parallel that of rent of a similar house, then buy. Alternatively if owning the roof over your head is very important to you, buy when you can reasonably afford to do so. What does this mean for investors? Hold on to what you have or clear 'laggard' properties and save in preparation to get into the next cycle. Growth in house prices is slowing or prices could even be falling, however expect rents to increase, until such point that the cycle begins again. Looking at how potential first-home buyers and investors are likely to behave in the current market, it also becomes easier to appreciate why retail is doing so badly. Saving has suddenly become very 'cool', for one reason or another. Unfortunately, such an injurious insult to the retail sector can lead to job losses and rising unemployment, which compounds the issue further.

To conclude, I'll say what many others have said before: the housing market is not simply going to crash or implode without the influence of larger forces from Australia's economy and that of the rest of the world, or the effects of natural disaster or war.

John Lindeman's book is a great read by the way, it makes things very easy to understand.

Thanks FWord, was thinking of John when I wrote that, can't recall if I mentioned him or not – I did in a post back or three though. I only heard of his data and statistics when I came across a free internet property course. It has taken them about 8 months to "sell" something, and a few good tips along the way, so some free advice which was nice.  Only 1/4 of houses are owned by investors –  that piece of information is comforting.

Interesting article here and it shows there are two sides of the coin when it comes to issues like these. To be honest I have wondered from time to time if we're going to see GFC Part Two, considering the fallout from GFC seemed very mild compared to what the media was leading us to believe. In essence, I sometimes wonder if the 'real' GFC has yet to hit. That is a very real risk I took to still have money in investments but really, I'd rather be 'in the game' than be waiting on the sidelines for something that may or may not occur. It is definitely wise to consider the risks, but it can go a bit too far sometimes and fear will cripple us from ever doing anything.

Case in point is the purchase of a first home. IMO it is crucial to know I actually have a place I can move into after my parents boot me from the nest. The market could rise or fall, but importantly I have a roof over my head.

When I spoke about a company in Perth, yes, they were commenting on here, in our Perth cycle. Not just a sweeping statement of all Perth suburbs (just like you indicated) as there are markets within a market and this company usually promotes certain areas as their research has found that these areas have proven over time to have growth even in the down markets, etc.

Our tenants used to live in Sydney. Apparently they only paid a flat rate for 5 years, so I guess that is why they preached doom and gloom, and hell fire to us and our property agent! Calling us capitalist! Haha. We do have a good relationship otherwise. Looking after their lawn and giving gift vouchers, flowers and movie tickets as a reward for such prompt payment helps with the extra rent, I think. Nice to chat and find someone who is similar age to me around these parts.

Matt, the points in that article are generally fair. However with my limited knowledge of Melbourne (in which I live and invest), there's two points I still wish to raise for discussion.

1. The 10% vacancy rates of "many of the suburbs in Wyndham City".

This is going to sound like a sweeping statement, but to those who live in Wyndham, I apologise. Even in the infancy of my research to buying my first home, I would not have touched anything in Wyndham, not even with a 10 foot pole. This was over two years ago and a friend in my church was thinking about investing in there (Point Cook) and recommended me to have a look. I on the other hand, thought it wasn't a good idea. And there's a good reason why. When there are house-and-land packages going off left right and center, and hundreds of similarly-clad dwellings sprouting up on small blocks of land, it should ring alarm bells for most buyers. It is not surprising that there is an oversupply in this area.

They are simply building too many dwellings in an area where people are not prepared to live, or otherwise having little distinction between properties or other characteristics that would attract people to buy there. Compare this with Croydon where I bought my first home. It's obviously not a blue-chip area, but current vacancy rates are sitting at 1.2%. At one point they were sitting at 0.9%. This is light years better than a vacancy rate of 10% that Terry's article preferred to quote to the media.

As I write this, I am also reminded of a time where I spoke to a real estate agent regarding investment property. Back then I told him about the property in North Geelong I was considering. He told me his investment property in Wyndam Vale was better in terms of yield and proximity to Melbourne CBD. He is right on both counts, assuming the ability to secure tenants and keep them. I didn't want to argue specifics with him. Today, vacancy rates at Wyndham Vale are nudging 13% and vacancy rates at North Geelong (where I eventually bought) sit at 2%. So, which property was a better buy? Let the figures do the talking!

Look, I'm not boasting to 'know it all', but If anything, it just shows the importance of doing your research and buying right. At some stage, the excess supply of property in Wyndham will be taken up and the 'growth area' will be pushed further to the West and South West. And at this time, suburbs in Wyndham will become a good buy. However as it stands in July 2011, now is NOT a good time to invest in Wyndham, in my opinion.

2. The "looming oversupply of apartments in inner-city Melbourne".

Now I have a limited understanding of the way developers work. However I suspect the following to be true:

– developers do not set out to lose money, hence they will not build something that is not going to sell
– developers have the option of 'pre-selling' their property and only to start construction when they have achieved a sufficient amount of sales to make the project viable

If these two points are true, then we can safely assume that a large amount of these apartments have already been bought, either by investors or owner-occupiers, even before construction begins. Yes it doesn't prove a shortage of housing, but it proves the demand for housing.

Those of us who have read at least one book on investment property however, would certainly note that once again, we are dealing with a large number of dwellings in the same area that have little to no distinction between them. This is when the whole thing can fall flat on its face. Ill-informed investors or speculators buy up these properties in the hope of taking advantage of things such as depreciation benefits and 'guaranteed rental returns', but when all this runs out, they simply have apartments sitting vacant for yonks.

Why is this so? Part of the reason is the lack of demand for this type of property. As Terry himself notes in his article, "two-thirds of Australians continue to buy a detached dwelling". Apartment living is not for everyone. Those who do rent such apartments may be a transient population, staying there for short periods either as a student or perhaps while getting a feel for the city as a new migrant before buying their own home or even young singles who eventually outgrow this when they start a family and move to the suburbs. On the surface of it, the apartments are in a supreme location, close to work, transport and shops. But not everyone wants to live in the 'big smoke'. People may prefer the privacy of a townhouse, unit or detached house in the suburbs.

This hence explains why there can be stratospheric vacancy rates in some places in Melbourne, while the supply of rental properties can be very restrictive in other suburbs in the same city.

The bottom line as such, I think, is this:

"There is a shortage of housing in places where people want to live, and in the type of housing people would prefer to buy or rent. Constrained supply and unrelenting demand are contributing factors to the shortage."

And a corollary of this discussion is this:

"Buy detached 2-3 bedroom houses on sizable blocks of land in well-established suburbs with low vacancy rates."

The above-mentioned points are very simple to understand. If we had 100 houses in the middle of a desert, and 100 houses near the beach, you will likely find that vacancy rates near the beach are much lower than those in the desert. There is simply more demand in one area compared to another, hence leading to the shortage, assuming the supply is constrained in both areas to just 100 dwellings each.

We can argue till blue in the face that heaps of houses in the desert are sitting vacant and hence there is no housing shortage. But in doing so we are missing the point. It is little use having housing in places where people do not want to live! If I told a Melbournian FHB that he/ she could buy a house in Coober Peedy (SA) for $60-150K and there were heaps to choose from, would this FHB necessarily move there? In order to experience the shortage of housing, we should look at what is happening to supply and demand in long-established suburbs, not in 'growth suburbs' at the outskirts of a city, or in the middle of the desert.

 //It is little use having housing in places where people do not want to live!//

Gulp. I hope someone will buy mine when it's up for sale.

If you can't sell at that price, then it obviously hasn't increased by $135k in two years. Judging capital growth by median house price statistics can be misleading.

Cheers,
Luke

Hopefully it sells soon, good luck with the sale!

Luke.

Nobody takes Today Tonight seriously.

I haven't watched the video link, but I am sure it is classic sensationalist journalism. Remember, the majority of the media gets paid to attract viewers and sell advertising. NOT to report anything in the best interests of the viewing public.