Are we through the storm?

Picking the bottom of the property cycle is a difficult task, but in all likelihood the residential property market has now passed through the lowest stage of the cycle. Mix this with the RBA's interest rate cuts and buyers are likely to come out of the wood work.

The recent decision by the Reserve Bank of Australia to cut the official cash rate by 100 basis points was an unexpected but welcome move...

Read whole RPData Pulse report here

 

Jacque

I don't believe that we've seen the bottom of the property cycle in all areas.

However, if interest rates keep falling we might not see any more corrections.

I believe that areas which already had price corrections would be better protected from further falls and when property markets move again those areas would also be the first ones to move.

cheers

 

Oz property storm starts Feb 09.

 

02

Yeah it will be a storm of people rushing out to buy property.

The government has just increased the first home owner's grant
and is taking measures to increase people's spending.

I also expect more interest rate cuts and the credit squeeze should ease well before February so the banks should lower interest rates by themselves.

Something is telling me that property prices will be going North...

 

Bill,

I agree that rarely will all areas, even capital cities, hit bottom at the same time, although this must be close to one of the few instances.

I'm not so sure about areas that have already corrected as other factors, such as employment, come into play. For example, I wouldn't be going near far South-West Sydney (West Parramatta / Baulkam Hills might be OK) or Broadmeadows in Melbourne just yet. Maybe the FHOG will stimulate SW Sydney, wait and see.

Dave

 

I'm still backing a flat year for property in 2009, maybe things will pick up in the second half of 2009, despite the fact the new FHOG oppurtunity will have expired. I expect that rates will continue to drop as the US recession plays out and as the subsequent effects are pass through to Asia then Australia.

Though with all that said it would appear that with the strengthening of the US$ of late, in combination of the weakening of the AU$ we might not be as significantly affected as many thought we would be 1 - 2 months ago. It all comes down to how much of a reduction in growth will Australia see, and if we head towards recession, there definitely won't be any property growth in 2009.

 

I used to be of the opinion that we'd see a sharp drop in prices like what happened to Japan in the early 90's and now the US and the UK.

But after some reflection I'm now of the opinion that we'll see stagnant property growth for 3-6 years (which is just as bad as a 30% drop) in most metro area's. At best growth inline with inflation, which is a 0% real return, but I doubt most property buyers would see it that way.

The reasoning behind this, is that we've just about reached the limit of what we as Australian's are prepared to borrow to purchase a house. Incomes need to rise to fuel further growth and if our economy is slowing this is unlikely to be in the near term.

the era of 1 income becoming 2, cheap easy credit are over. No amount of government grants, mining activity and interest rate cuts will bring on a boom in the short term.

The government is propping up the building sector with the FHOG just like the state govt's do with the auto industry. And we all know how good the auto industry is.....

On the auto industry, if you've been told northern Adelaide is a good place to invest (Salisbury, Elizabeth) forget about it, when Holden collapses there will be a lot of unskilled labor with mortgages and houses ready to be repossessed.

 

I think this is a reasonable assessment, though I lean more towards the 2 - 3 year time frame of property prices not growing by more than 5% pa.

Though I do tend to disagree with you on the point of interest rates not effecting housing price growth in the short term. I think there may well be an exodus of renters from the rental market if interest rates drop another 0.5% - 1%, let alone if they fall any further.

 

I agree, rents are already quite high and many tenants will grab the opportunity to buy their first home at a one off discount.
Maybe we should help them make up their mind by putting our rents up..

 

I well remember in 2000 when the FHOG first was introduced, along with a booming economy and low interest rates, property skyrocketed and overpriced in the peak of 03/04.
I do believe that we've now been in a correction phase since then and 08/09 may well be the beginning of new growth. That being said, however, the FHOG is usually more obvious at the lower end of the market so I would anticipate growth here, rather than at the top end. After all, some high income individuals in the higher priced properties are having cashflow troubles at the moment, with the stockmarket woes

Second your opinions about the rental market too- it may well provide less tenants as they take the $14K handout and buy in the current environment that is still a buyers market (at least here in Sydney anyway).
Time will tell.... hard to predict when the govt keeps throwing spanners in the works!!

 

I'm with Jacque on this one. I think that the property market will continue to go up and that we are at the bottom of the market. You will need to buy smart though, but will be rewarded.

My IP I purchased in Feb this year has already seen a 8% gain in price and continues to grow month to month.

With interest rates dropping like a lead balloon and Kevin 747 handing out $$$ for first home owners to buy, I'm sure this will support the market over the next two years.

Plus with the stock market shakey, it will encourage people back into property.

We may not see 20% gains, but I'm sure we will see steady growth.

 

I have to chuckle at this FHOG thing. What was it 7K now 14K ...and thats a big deal?

I bought a house in Germany and the very nice German state loaned me 180K (AUD) at 3.5% , the rest was financed through a traditional bank.
(this is available to everyone ....not just 1st home buyers)

Such an incentive must lead to higher and higher real estate prices right? wrong. This incentive has been around for decades and prices continue to fall....mainly in the east.

So lets some up,

-credit contracting
-migrating people bringing a smaller equity egg ..if any
-commodity prices dumping
-AUD weaker and likely to continue ..anyone considering bringing in cash will wait now. Carrying trade dead.
-unemployment rising
-tourism crushed in 2009

But somehow with all of this you that conclude real estate prices (2nd highest in the world currently after Ireland) will rise. Its just incredulous.

 

02

Who told you that our property prices are the 2nd highest in the world?
They are not.

Ok our wages as a percentage of house pricing are a little low but we are managing ok and our loans are well secured.

btw, if we were earning German wages you wouldn't be saying that our properties are overpriced because by world standards they are about right.

I also don't see why a property in New york, London, Frankfurt, copenhagen etc should be more expensive than Sydney.

cheers

 

02
Answers in blue

 

02 what makes you say Feb 09 as the turning point?

I personally hope you are VERY wrong as a mate and I are settling on our first investment property in two weeks. Though having read a lot of your previous posts I got a lot of respect for your view points and you obviously are a very seasoned campaigner even if you don't like letting on too much about yourself... so I'd love to hear what makes you think Australia will finally slip into the property crash that it to date has managed to avoid?



Also what makes you think we are in for a sudden crash/correction rather than the more traditional stagnation of property prices over a few years?

 

Chris, I'm just one more anonymous opinion. I've reached my conclusions by reading the spots of everything (over a long period of time) , collecting anecdotals (from many places) and by being brutally honest with myself regardless of what my emotions want to believe. I suggest you do the same.

imo, if your numbers add up and you've also factored in a largish buffer in terms of rental yield (they may go down when inventory can't be sold and their owners start seeking renters) and your purchase is predicated on income yield and not capital gain, then you should survive....but I expect it to be many years before you see any capital gain.

My Feb09 time frame is because now that the markets have basically swallowed and absorbed the appalling Q3 company reports things will calm down for a period. This relative calm will once again crumble when Q4 results and the all important guidance is issued in Jan/Feb 09.

This will likely trigger a string of events, markets drops, further credit tightening , lower commodity prices, lower AUD, higher unemployment, high profile bankruptcies (GE, GM etc) more pressure on real estate globally. Basically, we've entered a downward spiral.

This all sounds like doom and gloom but it is simply a pragmatic view of the global situation.

The great debate is the inflation vs deflation argument thats still being thrashed out. Clearly anyone invested with leverage (ie large mortgage) in real estate desperately wants inflation and lots of it.

Personally, I've swung backwards and forwards on this but ultimately I'm falling on the side of asset deflation because regardless what central banks do too much capital has found it way into real estate (and I specifically mean Oz) and so no amount of inflationary policy will rescue the situation.

Have a listen to this interview for a better understanding of what to expect

hhttp://commoditywatch.podbean.com/2008/09/01/inflation-or-deflation-part-2

(part 1 was also good, but I especially found part 2 interesting)

When you realise the history of bubbles such as the current one (credit bubble) you begin to see through all the shallow arguments put forward by msm journalists to promote and justify crazy asset pricing.

Anyway, I could go on and on and on...

Always follow this rule when buying real estate -

If you're not embarrassed by your offer price, then you've offered too much.

If I were you, I'd ask for a futher 10% off the asking price, tell the agent that its clear the market is dropping and you no longer feel the price reflects the market.

Oh, and I think we need to define 'crash'. Clearly property doesn't simply devalue overnight (well thats not stricktly true, it basically did in Denmark in the 80's when tax rules governing real estate interest deductions were dramatically reduced from one day to the next) but a clear 15/20% over a 12 month period is likely in my view. Then the same again in 2010.

 

02bsure

I know your position on property but if you've got time Iwould be interested to know your position on shares.

So far we've had a large price correction and the US is about to get a new president, Is now the time to buy?

http://www.invested.com.au/79/stocks-wont-shock-now-time-buy-35717/

cheers

 

Hi Bill,

I think there will be a continued rally until January although the biggest gains have already been made. I could imagine prices going higher for a week or so then down again to retrace a good chuck of the gains, then go higher again until January where it will top out.

So basically, if you buy now it can only be for a trade not a hold.

I expect to go short in January. At that point I expect markets to embark on another decline that will give back all of the gains and then a further 20-30%.

That would take the ASX to around the 3000 level.

 

02

thanks, btw I've listened to the commoditywatch pod-cast
It was hard to concentrate but found some of the comments very interesting.

The point I wanted to make about those speakers and others thinking along the same lines (eg our own Steve Keen) is that when they want to make their story believable they often go back in time and refer to very early years and sometimes even to the 1800's.

We've got to be careful what we take from such speeches because today (unlike those early times) we live in a globalised society depending on each other more than ever before and technology and news are readily available so trends CAN and WILL change as governments and people adapt to the times.

cheers

 

Bill, I think its a very common mistake to think that markets since since 1900 are markedly different from markets during earlier times. Its simply wrong to think this way.

Rome collapsed because of run away inflation.

Fall of Rome - Economic Reasons for the Fall of Rome

...and the Roman empire covered half the world at the time ...globalisation.

We tend to think globalisation is new. I tend to think of it as simply being more efficient than in older times. The Portuguese established colonial trading routes in the 1300's...then the Spanish 1400-1700...then the English
1700-1900.

There were large numbers of sailing ships following set routes and timetables with specific cargoes even 400 hundred years ago. We tend to forget the level of globalised trade even back then. The various trading countries all competed with each other just as they do today.

All of this activity led to rising/slumping economies and dependence on certain commodities just as today.

The physics involved in the push/pull of trade and the standards of living that result are not a modern phenomena.