Australian Real Estate Bubble?

Hi Crc,

That may be true, but a house in Blacktown or Campbelltown is still only three years wage. And when they were first settling Sydney, you could buy the whole Northern Beaches for a couple of years earnings. In fact, one early settler did just that if my memory serves. I'm using Sydney as an example as that's the geography I'm familiar with.

Think of property prices like a pyramid, with the peak being the heart of the Sydney CBD and the further out you go the more the price drops. Now, more and more people want to live in Greater Sydney, so that's more space required under that pyramid to accommodate all those extra people. What happens? The peak gets higher as does every single point out along the pyramid as the "ripple" effect plays out. Eventually, somewhere way out West that pyramid touches the ground of entry level affordable housing. But everywhere back along that pyramid prices have gone up.

Next time more people want to move to Sydney, that entry level affordable fringe is pushed further out as the size of the pyramid grows. Sydney is different too in that the Blue Mountains constrain one axis of the pyramid and the coast the other. So, the sides have to bulge up to allow the extra room under it. We can't keep sprawling West or East. There's a bit of room south yet but the infrastructure to get to town isn't keeping up. That's why government is proposing the "city of cities" plan for Sydney with a bunch of regional hubs and not one mega-city. Basically, they don't propose everyone works in the CBD, nor that everyone accesses the beach regularly. If you want to work in the CBD or access the beach then move to that "sub-city" of the "mega-city". The hub for the Northern Beaches where I live is actually Dee Why/Brookvale and not the CBD. Infrastructure investment is designed around that assumption.

Probaby all just whaffle, but I hope you'll forgive an old investor his indulgent thinking out loud...

Cheers,
Michael.

 

Yeah, but St Kilda today is hardly what St Kilda of yesterday was. Population growth means what is considered the outer suburbs 30 years ago is inner city now.
Edit: As MW said!

 

yes this is true.. plus people who like say 5km from the city want to remain 5k from the city.. so by the time they pay off their houses, and want to 'upgrade' they now have their whole house as a deposit, plus their borrowing capacity.. and these days there are now 2 incomes her house hold also increasing what people can spend.

 

Hi Michael,

You summed it up nicely with the opening paragraph -

'Put simply, property is not a CF+ game its a growth game. If there's no projected growth (ever) then it becomes a cash flow game as that's your only return. Maybe short term growth will be constrained on property, though I disagree with that projection too for a myriad of reasons, but medium to long term property will definately outperform cash.'

_________________

Right after that, there was little use in providing numbers. The steadfast belief in 7% compounded growth in real estate is the key or perhaps the sword that you hang on. In my view this is simply not realistic.

All the best ...also no time now.

 

CRC
Pitty for them as some will be out of a job after the elections
Cheers

 

Being in Perth you should be especially cautious.

________________

The ASX will continue to lose as the AUD/JPY carry trade unwinds forcing large sums invested in to be sold off and repatriated to Yen. This in turn will also sink the AUD.

Why should this bother you?

Because those cheap yen also flooded Australian Banks with cheap credit. With those funds disappearing banks will have to increase rates to attract new deposits and/or reduce available credit. This credit contraction (which is global but slow to start) will gather pace and will ultimately remove a whole swath of potential real estate purchasers (or those in need of refinancing) from the real estate pyramid. This will of course mean less money entering the market. This ultimately results in a change in sentiment and a circling-of-the-wagons mentality which leads to lower prices. ,...and so the correction cycle begins.

 

Aaah Hahhh! I see now - and so you put money in the bank and get a higher rate of return, which then in turn can be used to fund rents as they increase due to housing stock shortages. Excellent strategy!! I like it.

 

Perhaps you don't see.

I said I would put the money saved by having my lifestyle sudsidised by a property owner into an account and by that measure alone would out perform a real estate investment.

Personally, I have an ultra short position against real estate, the QQQQ's, the DOW 30. I've exited alternate energy (for now) and I'm long yen and euro.

 

Yeah going by the last 30 years or so history isnt really a good indication of the future.
In 10 years everyone will be living in space, and there will be no demand for housing either.
The earth may or may not explode, which is not covered under your landlords insurance policy.
We will all lose everything we have, and you will simply chuckle at the imbeciles who didnt heed your timely warning.

Of course, it could be that you are completely wrong, and in 20 years your excellent bank interest will have you sitting pretty on a few thousand dollars, and all us suckers who invested in property will thank the gods we got into property when we did, because strangely enough what happened for the last 30 years is now what happened for the last 50 years, property has quintupled in value since 2007, and your kids are ****** off because not only can they not afford to buy a property within a 100km radius of the city, they also have to kick in to support you because you spent the last 20 years predicting the end of the world.
The beauty of the whole thing is that if we are wrong, we just go bankrupt and arent that far behind you. If we are right, we will be paying your pension through taxes.

 

Well, it was never my intention to devulge my personal circumstances but I currently have two houses just not in Australia for the myriad of reasons given.

Furthermore, now is a time to be nimble and deft. If your one trick pony is bricks and motar then its time to start thinking outside the box.

 

so if all you do is buy residential property in 20 years you will be worse off than you are now?
You present a good clairvoyant case (and this is all it is) for 1 part of a market cycle.
Perhaps you will be right, but after winter ALWAYS comes spring, it has been that way forever, and will be that way forever.
People who have held through the winter long enough to gain the benefit of the following spring have historically always done well, most of the time better than the market timers.
There is nothing surer than there will be another market cycle, predicting that is as pointless as it is obvious.

 

If you have the funds to feed the negative cash flow real estate alligator through an extended period of 10+ % interest rates and falling prices then you may see your original purchase price again in 2020.

The fact that every Australian I know has the same retirement plan should be enough warning.

(this is not your grandfathers market).

 

Wonder if people said this in the 70s. And 80s. And 90s. Yeah pretty sure they did.

Seeing as you are so good with numbers, how many Australians own more than 1 property? Then go further and tell me how many Australians own more than 2 properties?
When you get those figures, please come back and try and argue that every Australian has the same retirement plan.

 

17% of australians own investment property. Its the highest percentage in the world.

 

Not convinced mate. According to the ABS 6% of Australians over 18 have purchased 1 rental property. 22% of those purchased more than 1. So less than 2% of australians purchase more than 1 rental property. Hardly agrees with your claims of every australian having the same retirment plan (unless you are going to claim that maths is also going to crash and 1.3% = 100%).
Australia has the highest HOME OWNERSHIP rate in the world.
Home ownership is not exactly a retirement plan, I am sure you will agree.

 

Yes but only about 0.5% own more than 3

 

I got my figure from the IMF study done about a year ago. I think you'll find that the ABS is probably basing its number largely on commercial mortgage numbers ...and as well all know, there is a significant number of people who take out owner resident motgages when they are infact not resident (ie fraud).

When I find time I'll dig it out.

 

I've been trying to tell my contacts in Copenhagen for over two years to dump and get out of the way.

They would simply say 'no, prices always go up, Copenhagen is now the center of trade for the Scandinavian/Baltic region'.

You see, its always different ...here.


________________________________________________________

Some news from Denmark:

Göteborgs-Posten - Ekonomi & Politik-Artiklar - Bopriser störtdyker i Köpenhamn

Housing prices take a nosedive in Copenhagen

One fourth of the equity has vanished for anyone who bought a 1 bedroom apartment in the center of Copenhagen a year ago. The slide of the Danish housing market continues.

There are not a lot of customers in the offices of “Home”, a broker, in central Copenhagen. Michael Hammerbak, a veteran broker, has never seen such a steep fall in prices before. He estimates that prices have fallen 16% in Copenhagen county the last year. It’s even worse in the central parts of Copenhagen.

- The fall is 25% in the worst-hit areas.

…

Signs inside Home’s offices tell us that many Copenhageners are trying to get rid of their apartments. There’s a 1 bedroom apartment in a neighbouring building going for DKK 2.8 million ($550k).

- The supply has exploded, says Michael Hammerbak. 63 000 Danish apartments are currently for sale, and this number has doubled in two years.

…

- Some of our customers are technically bankrupt, says Michael Hammerbak.

…

Göteborgs-Posten - Ekonomi & Politik-Artiklar - Lyxdrömmen blev en mardröm

Luxury dream turned into a nightmare

SEK 35 million ($5.7 million) for a penthouse with a view of the sea. NCCs project in the high-status suburb Tuborg of Copenhagen is empty and nervosity is spreading among Danes who bought homes at high prices.

…

The idea that someone would pay SEK 35 million for a 140 m^2 (1500 ft^2) apartment at the top of the building seems rather ridiculous today. But it was different when the Swedish construction giant NCC started building. As late as last year, Danish housing prices just kept going up. Luring Danish nouveau riche to Tuborg and other high-status areas wasn’t difficult. If you wanted an apartment, you had to be prepared to wait in line. Speculators flocked to the showings. There are plenty of stories about young gamblers who drove to the showings in their BMWs and bought dozens of apartments.

…

Lars Munktvaed and his family moved to a new house outside Copenhagen last year. He still hasn’t been able to sell his old home. He gives us a tour of the 200 m^2 (2100 ft^2) brick house in the northeastern parts of town. There’s a 16th century fireplace in the living room. There are ethernet connections in all rooms and Bang&Olufsen speakers in the kitchen. … He had the asking price fixed at DKK 8 million ($1.5 million) for a year. He then decided to lower the price by a hundred thousand ($20k) a week, but he gave up after he’d lowered the price by a million ($190k).

…

- Ordinary people are getting dragged into this. There are many, many people who’ve been left sitting with two apartments, says Katarina Hullert, a Swedish architect who lives in Copenhagen.

The Danish housing bubble has burst but all of the damage is not yet visible. The large construction companies enticed customers by agreeing to pay the customers’ cost of having two homes, for up to 18 months. Many of those who bought at the top have been able to push the problems before them. They will have to pay the piper eventually.

…

Nervosity has spread among the construction companies who are trying to slow down. New projects have either been cancelled completely or postponed to unspecified later dates. The last houses in NCCs grand project in Tuborg are part of the ones who have been cancelled. One wonders if they’ll ever be finished.

 

Really?? I thought property prices kept running forever and ever, and never went down ever. You have shed a lot of light on the topic for us all, and we will all be better having learned from you that the property market goes in cycles. Just out of interest, how many % did Copenhagen property prices rise since the previous market correction?

Please find below a picture that adequately replaces you:
http://www.24hourwealthcoach.com/small_24hr_economic_clock.jpg

 

No, they don't run in cycles. Yet another misnomer. Like all markets booms or extended periods of appreciation they end with fractures or breakdowns not as you would describe it ...a cycle.

Of course you can call it a cycle, a soft landing, a correction, a buying opp or whatever else you choose but the sense that its gentle and non painful is just wrong.