No Housing Bubble!!!?

Hi,

Just went to a party. Everybody had invested in property and were making lots of money. Nobody would listen to me, regarding a housing bubble. They all said that a shortage of land would keep prices up forever. Even my brother thinks property is better than shares. Australia is the most expensive country to live in. When will this stop!





Johny.

 

Johny

IMO Australia is not the most expensive country to live in and our housing prices are comparable to those of other western countries. However, in comparison to others we have the lowest deficit and we are a resource rich nation so we are unlikely to default on our loans.

When will prices stop going up?
When wages and the cost of living stops rising.
This hasn't hapenned before so it's not likely to happen now so prices IMO won't stop rising. They can pause for a year or 2 until wages and inflation catch up and will start moving again.

My mains worry is unemployment.
Also, there is fear that foreign credit could dry up and those of us with large loans could find it difficult to refinance our loans.
It's not a likely scenario but it could happen......

 

Just in regard to the shortage of land argument doesn't Australia have one of the lower density populations? I mean 20 million people on the continent roughly the size of america? I mean sure we have massive blocks of land but what if for whatever reason that changes or govmnts release more land? the shortage of land argument wouldn't have much punch then?

 

Ranked by Severity of
Housing Unaffordability
___________________

1 Canada Vancouver
2 Australia Sydney
3 Australia Sunshine Coast
4 Australia Gold Coast
5 America Honolulla
6 UK Bournemouth
7 Australia Melbourne
8 Canada Victoria
9 Australia Wollongong
10 Australia Adelaide

And 6 positions in the 11 to 20 for Australia.


Surely housing is in a bubble. I'll bet Americans were suprised with their crash. Could it happen here?




Johny.

 

Hi Johny,

Can you please quote source of the information?

Are you trying to suggest that buying property in Paris, Rome, Stockholm, Amsterdam or Oslo is more afortable?

Please check house prices in Noumea, New Caledonia. Similar to Sydney medium prices, next check the average wages.

 

The data comes from the 6th Annual Demographia International Housing Affordability Survey.
http://www.demographia.com./dhi.pdf

http://www.marketoracle.com.uk/Article16958.html

 

Hi Johny,

Thanks for the link. I stooped reading as soon as I spotted name of prof. Keen.

my problem is:

1) World is not composed form 5 anglo countries.
2) At the end of the day it is a government of the day to dictate policies and that is what matters not some web page published statistics and "oracle" predictions. I think we already saw it in the last 2 years?

We can only talk about bubble in contest of oversupplying. I do agree that Gold Coast is clearly showing signs of oversupply but so what? Monopoly driven Australian business model will always find the ways around. Prices will not go up all the time but some doom&gloom advocates are refusing to admit that property market in Sydney was declining since its heights in 2004 and recent 12% last year can only be seen as a correction not bubble. The glass can be half full if you choose to look that way.

I purchased property in April 2008 when the black clouds were brewing around the property market. I can look at anyone eyes and say "I told you so"

And the last note. You can't put this into the statistics but it looks like after every recession passes, property investors are left with very big smile on their face

 

Fair enough. I hope you are right.






Johny.

 

this source is known to be unreliable

 

In most cases people only want to hear what they want to hear, and most people don't want to think past today.

Just like a fat person doesn't want to hear someone tell them they are fat. The tragedy is that that for many morbidly obese individuals the wake up call is not looking in the mirror and having an honest look at reality, it is a doctor telling them they need to lose weight, and fast, or they will literally die.

The same applies to debt fuelled wealth - a debt junkie won't come to the realisation that money doesn't grow on trees (or through debt fuelled capital appreciation of property) until interest payments on their debts become unserviceable and bank won't continue lending to low deposit mortgagee's, but you can rest assured that living in denial of reality for long periods of time has a way of slapping the delusionals very hard.

It's sort of like financial Darwinism, where the the unfit and unable to apapt to changing conditions don't survive.

Well continuing on from above, it will stop when the laws of financal system say stop. This will most likely come in the form of tighter credit and higher interest rates as a result of under performing of credit.

So take for example the Lehman Brothers collapse, credit markets around the world froze, and overnight loan rates skyrocketted causing ininterest rates all around the world to spike higher, and in many cases making credit unavailable.

This was a direct result of the sub prime mortgage crisis in the US. The fact that the crisis was property based is irrelevant, the important fact is the increased rate of losses on loans. As in, when a bank lends money it expects to get that money back plus a little bit of interest. However, if the original money lent starts to not come back the banks begin to make losses on those loans, and the risk of losses is one of the main variables that goes into calculating interest rates, as in, if you are not sure you will get your money back you are going to ask for a higher interest rate.

Now what will likely cripple the Australian housing expansion will be a combination of higher credit costs (higher interest rates and higher requirements for deposits) as a result of higher risk. The next phase of higher risk entering the market has probably already begun in the form of sovereign debt problems, with Dubai and Greece being the starting point at this stage.

If these sovereign debt problems can't manufacture the political will to be solved, it will likely call into question many other highly indebted nations like Portugal, Spain, etc and of course if these countries were unable to prove to the markets they could handle their debt loads then we'd probably find we'd have a real sovereign debt crisis on our hands that would call even some of the bigger economies of Japan, UK and US into question.

At the end of the day it is difficult to conceive of a future were the risk premium cost on interest rates around the globe aren't higher given the increased risk of sovereign default. These higher interest will also reach out shores, and will put some downward pressure on our property market.

We are already seeing banks raise rates irrespective of the RBA as well as place higher credit conditions on borrowers, like Westpac which to my understanding have now set a deposit requirement to 13%. This of course will have downward pressure on property prices because the vast majoirty of Australian poprety finance their purcahse with borrowed money therefore if a bank deams a potential home buyer as unworthy of credit then that resutls in less demand for housing which forces down prices.

If this effect is dramatic enough this creates a trend would would increase the risk of lending for borrowing to property based purchase which creates a self fulfilling prophecy.

That said it wouldn't be the interest rates and tighter finance alone that would cripple housing prices, but also a slower economy given the struggling global economy, leading to higher unemployment rates and defaults.

The important thing to remember is that at the end of the day all debts must be paid one day, which ultimately will be deflationary for an economy. So it isn't a case of "if" this will happen it's more a case of "when" it will happen as debt loads can't expand relative to income forever.

This is why the laws of finance will eventually decide the fate of the Australian property market.

Firstly I think Steven Keen deserves a lot of respect - he is fighting the overwhelming consensus (which will always get you ridiculed and alienated) because he believes in some reasonably sound economic principles. The fact he may have missed the mark in the short term doesn't make him an idiot, and it doesn't make him wrong over the longer term - and he has DEFINITELY got opinions worth considering.

Secondly the government is representative of the people, and ultimately government policy is all well and good but without the support of the people it will count for nothing. A great example of this problem is obvious in Greece at the moment where their government is struggling to reign in their fiscal debt issue but the government workers have chosen to strike rather than accept policy.

So my point is bad government, will cripple economies, and the laws of finance don't bend for government for long. If you don't agree, feel free to look back over the numerous cases of sovereign defaults in the last 100 years... the next 100 won't be any different.

You're always right until you are wrong.



The toughest thing to do is stand by your convictions when everyone is saying you are wrong, and you're saying but the game hasn't finished yet...

Of course once you hit bottom you can only go up, but the bigger question is "have we already seen the bottom"? but of course that is the essence of the debate...

Don't pray for others to be right, work towards understanding more.

 

"This source is known to be unreliable"

A one line statement saying that a source is specifically unreliable is in my humble opinion a little bit arrogant. I mean this politely. If it is unreliable please let the forum know why you say it is unreliable. Please educate us.

No one has a crystal ball. Private debt levels are astonishing compared to 10 or 20 years ago. Unemployment is rising and house prices have gone up significanly in recent years, however wages I do not believe have. I am not saying that there is a bubble, but the popularity of IP's is high in Australia certainly compared to the UK. We will not know if it is a bubble until we do in hindsight if/when it occurs.

Fact - Demographics show that in the future less people will be working to pay for Government spending in the future. This means more (direct & indirect) taxes and higher interest rates, or increasing Government debt, which probably means slower economic growth ..... or am I messing someting ?

GunnerGuy.

 

Demographia despite the official sounding name is a private enterprice and IMO is not a source we can rely on. Even if the figures were not massaged, the fact that they used the median price of areas which have different dynamics makes the report unreliable.

For example, in recent times we had some Australian property markets run hot
while other overseas markets and in particular those which the report refers to were not moving or even falling.

If you look at the recent median prices of some Sydney suburbs they seem to have doubled in the past 12 months. However, the prices actually didn't double, what happened is that properties of a particular price bracket sold (probably due to a new development) so the median price jumped upwards.

Do your own research and make up your own mind.

The report is co-authored by Wendell Cox, principal of Wendell Cox Consultancy. (Demographia) and Hugh Pavletich, a New Zealand property developer.

Hugh Pavletich is Managing Director of Pavletich Properties Ltd, a commercial property development and investment company, based in Christchurch, New Zealand. He initiated and co authors the Annual Demographia International Housing Affordability Survey.

From Wikipedia, the free encyclopedia
Wendell Cox is an international public policy consultant. He is the principal and sole owner of Wendell Cox Consultancy/Demographia, based in the St. Louis metropolitan region and editor of three web sites, Demographia, The Public Purpose and Urban Tours by Rental Car. Cox is a fellow of numerous conservative think tanks and a frequent op-ed commenter in conservative US and UK newspapers.

Cox opposes prescriptive planning policies in the field of transportation and urban planning (such as 'rationing' of land) which are popular with many authorities worldwide. Instead, he favors responsive planning, wherein the role of public planning is to facilitate the lifestyles as revealed in household preferences (the market). He advocates road transport and criticises what he feels is waste in many public transport schemes, even those considered successful by their proponents.[1][2] He is an expert[citation needed] on rail privatization.

 

Time will tell, leave your options open

Chris C - Great post,
Billv - Thanks for the background information.

Time will tell, who knows what and more important when the market will 'adjust'. As we diversification in our investments is vital both for wealth creation but also wealth retention.

If I was a new young investor who already owned a PP (with a loan attached), I would think twice about buying an IP at the moment if that was their only planned investment. Property has served many well over time, including me over the past 20 years, however there have been ups and downs and one has always to consider ones timeframe and required level of liquidity of ones assets.

I know the fixed savings rates are pretty poor at the moment, however I think I would wait to see what happens over the next 3-6 months. Anyway if one plans to by an IP it should be for the medium to long term, say a minimum of 8 years. I personally would not be worried about missing the first few percentage points of growth in an 8 to 15 year period of ownership of an IP. I would however be pretty distraught if I bought and had a 10%, 20%, or 30% hit in the first 6 months or year. Especially as many would come out of the woodwork and say - did you miss the GFC ? Did you miss the deleveraging others were doing? The souverign debt problems in the PIGGS ?

As is said, do your own research, exchange ideas, learn from each other, and never take anything for granted ......... I would love my investments to have high returns, but they enevitably come with high risk.

Great discussion,

GunnerGuy.

 

Considering that the housing shortage has not been addressed and that interest rates due to the GFC will stay at affordable levels prices IMO property won't fall so we could be in for more increases or for a long price stagnation.

Both are a possibility but I'm suspecting that prices will keep rising above CPI levels fuelled by the housing shortage, (we need somewhere to live) and by expats and rich migrants who want to live here and can afford to buy their own home

 

I think all opinions/reports should be taken with a grain of salt, including demographia's - though I definitely think their reports highlight some interesting perspectives.

At the end of the day almost all opinions and reports are unreliable to a degree in that the data is either poorly collected and makes lots of assumptions or the interpretation of the data is used to sell an agenda. The opinions of banks, RBA, media, real estate, fund managers, financial advisors, government, etc are all equally unreliable because they almost always have vested interests.

So all opinions should be taken with a grain of salt and we should all strive to educate ourselves in being able to read the available data and its discrepancies rather than relying in the opinion of others.

 

Hi Chris,

I have witnessed collapse of communism in Easter Europe and economies defaulting over night. It was not just one country but large number of them. It wasn’t necessarily bad thing and based on my experience certain classes of assets such as land/property hold very well in value. Many people made fortunes at that time. We won’t see such a number of opportunities for very long time to come.
Greece and Portugal is not necessarily economic power house in Europe, similar to Island. News about Dubai, Greece and Portugal is nothing more than economic jitters and waves created manly as a trigger to fluctuate the share market. That may not necessary translate in to the Australian Real Estate market.
Please note that Australia as a “developed” country still has infrastructure of the 3rd world. A lot can be done and will be done to move into the 21st century.
The future in Australia is very bright and glass is always half full

 

I'm never one to advocate that land and houses hold no value - I personally think they hold great intrinsic value.

However when people use debt to purchase land or housing a calculation of ROI needs to be made to justify the debt. However in recent years/decades this calculation of ROI hasn't been based on the underlying "value" that these assets provide rather are dependant on capital appreciation which is inflation dependant and therefore doesn't really qualify as being a "return".

Most people that are advocates of strong property growth are focussed on short term price drivers. I prefer to look at longer term marco realities and don't see as bright a future.

Of course this means that I'd be perfectly willing to accept that property prices could continue to grow quite significantly in the short term, though I thoroughly believe that in the longer term the trend in a real sense will be downwards trending towards their underlying "value" which is today's prices minus the volumes of speculative money that is currently hoarded in Australian property.

But at the end of the day the house is still a house, and land is still land. So in this sense they are great preservation of wealth vehicles - unless you are using debt to finance their purchase in which case these assets need to yield revenues that offset the holding costs - which more don't (negatively geared property).

Dubai's problem was small. Greece's economy is 10 times the size of Dubai (and half the size of Australia) so if Greece defaults expect ramifications much greater than that which occurred as a result of Dubai troubles.

The more important thing that these crisis's do is they call into question other troubled investments. So for example the threat of Dubai defaulting by itself may not be an issue for the world, but it increases the risk of sovereign investments, which then makes other high risk sovereign investments like Greece now questionable investment which then puts pressure on them to the point where they might default which then puts pressure on all the other similarly positions sovereign entities (and there are a large number of heavily indebted, recession gripped sovereign entities around).

Then it's not long before the markets start really calling into question bigger entities like Spain or California, which are both economies that are twice the size of Australia.

It's like a game of dominoes, just like it was with the GFC.

The GFC hit the Australia stock market and real estate markets - there is no reason to think major sovereign debts defaults (if they occur) would have any less impact.

There are ALWAYS opportunities - even in recessions and depressions many individuals make fortunes. It's just a lot harder to do.

 

Hi Johnny,

In comparison to other western countries, housing affordability is actually very good. If you think it is difficult to purchase a property here, have a look at London, Paris, Rome etc and you will soon find that only the affluent are home owners and the remainder of society rents and live on top of one another in flats!

Consider basic supply & demand economics, what does Australia want to do in the next 20-30 years? Immigrate people. This creates demand for housing both owner occupied and rentals. What does this do to demand? It increases it. With a shortage of adequate housing for new immigrants I would be tipping that housing prices continue to increase over the long term.

The current median price in Melbourne is about 570k, in 10 years I wouldn't be surprised if it is close to $1 million.

Cheers,

Mike.

 

A Big Thanks

Thanks for the response and the balance to the replies.






Johny.

 

Hi Chris,

I am not sure how to interpret your statement. Are you suggesting Australian Real Estate market was hit by GFC? If so, it had opposite effects to US.
BTW I was following news from around the Europe during the GFC and compared it with the real data (from my friends and family) living in Europe. Real Estate down turn wasn't nearly as bad as it was projected in the news, once again "smoke and mirrors" of media empire.

On the note of Greece and Portugal. Nothing more than media beat up (again). No one noticed till now that Greece and Portugal had always very weak economies and was always lagging behind the rest of the Europe.
As of the EU assistance, people from these countries always had assistance form rich part of the Europe. They flog in hundred of thousands to work in Germany and Scandinavia. They always will receive some form of assistance. So question for you is what do you think changed?