Housing may be flat, but its future has a solid foundation

before the ridiculous housing boom. Remember there was a time 3 times of your family income can buy a house, now is 8 times - well above the US even before their crash. In US it is now 3.5 times - and it is still crashing. Australia is the LAST major bubble.

Is that the best thing you can think of to help you hide in denial stage? There were predictions in the world didn't come true (soon enough), so this prediction must be wrong as well. .. yes. very convincing and excellent logic.

 

Do not confuse average national wage with family income. Average wage is around 56K p/y average family income can be much higher. With two people working and often adult kids living with parents and contributing to house budget average income it makes around 110K p/y or higher. In worst case scenario with median Sydney price makes it 5 times the income. Never been to US but I would imagine you will not buy anything flashy 20km from New York CBD for 5 times average family income. I just simply say it was never easy to buy your first family house. And this is not a speculation it is a fact.

 

I don't believe that the figures you are mentioning are correct
I can never remember property prices being 3 times the average income
or was it in the 50s/60's when credit was not available?

Even in the 80's we needed to have 2 wages to be able to pay off a mortgage so get used to the idea of having a mortgage.
Private debt is largely due to easy credit, people using equity to buy consumables, shares etc
That's changing though and it's old data you are referring to.

 

Yes, yes and yes… it is like picking the share stocks. What ever you buy you believe it will go up. If it goes down you always hope it will go up one day. The same goes with any asset. After all it is as much about psychology as it is about a right decision. There are always emotions involved when you put so much effort and live savings on the line. You can’t blame me for trying to stay focused and be positive. I do believe that some houses in Australia are much overpriced and at some point people will be forced to sale and lose money. For starters I would never even drive through these suburbs let alone buying property. As I said: poor people – poor decisions.

 

So? What is your logic?
"never easy" doesn't mean the house/income ratio or the private debt level doesn't matter.
It wasn't very easy back then but it is extremely difficult now.

The fact is that affordability and private debt level in Australia are almost the highest in the world. That is why people are talking about Australia being the next Iceland.

Iceland's per family debt is about 370+k (private + public). That is ridiculously high.. 4 times of US which is usually considered a debt-ridden country.
Australia is on the same level as Iceland in this regard.
Wake up!

 

Do you always go by what people on the streets say? You know the difference between rich and poor? Rich people are making news, poor are reading news.

 

you call yourself an expert on property? The figure is quoted everywhere even in mainstream media.

 

On the streets? People on the street would be prevented from knowing this.. you think main stream media will report this kind of analysis or the average joe will have this type of figure off the top of their head?

they are coming from different international experts (usually with a conscience and relatively independent). The arguments are based on hard "figures" ... not on feelings.

The hard figure is that, in terms of per family debt level, Australia is roughly the second highest among developed countries (after Iceland).

 

It’s nothing to do with “denial”

This is the property bear argument that is told over and over on SS lately. Debt this – GDP that. Never any consideration given to supply and demand.

Prices at the bottom of the market are influenced by investors and FHBs. However the overall picture, that is loosely projected by median prices, is dominated by the owner occupier who doesn’t much care for any of the statistics that you pluck. They just buy (or sell) because they want to and because they can.

The balance could change in a number of ways and force prices down or up. Changes to demand (population), supply (development), employment, affordability (interest rates, ease of credit), government intervention, sentiment ALL effect the balance.

Ease of credit has slumped recently but government grants have increased.
Sentiment is way down at the moment but so is supply.
Employment could fall in 2009 but so could interest rates.

To me, the markets that I invest in (outer eastern Melbourne) look to be in a state of relative equilibrium and I expect this to remain so for the time being. I can’t research everywhere but feel that the same could be said for many markets within Australia’s capital cities. Of course, there will be exceptions.

So why do I stay invested in –ve geared property when I’m not expecting anything other than “relative equilibrium” in the short term? The reason is that sentiment is very hard to predict. It seems likely to me that in the coming years the population will increase, supply will plateau, employment and interest rates will fall and government grants will stay. I’m afraid I can’t predict sentiment but when it does turn, the balance will be jolted in an upward direction and prices will rise.

Meanwhile, rents are increasing at over 10% per year and cashflow is fast approaching neutral. Perhaps sentiment towards buying will improve when my tenants get sick of copping rent rises – who knows?

There may be the odd forced property sale here or there but it stands to reason that the ASX is where most of the bargains can be found at present. Unless earnings collapse, the yields there are quite attractive while rents for most properties are still discounted.

Lastly, please feel free to use as much economic theory as you like to discredit my argument. I’m quite comfortable with my portfolio.

 

I don't call myself an expert but I do use common sense when I discuss an issue. You and the doomers here don't seem to realise that black and white are not always black and white.

Do you know what the difference is between the figures of 1984 and today?
Today (unlike the 60's or the 80's) the price difference between expensive properties and cheaper properties is huge so we could say that we can no longer use this chart to measure affordability

If a first home buyer wants to buy a property today, he can but he will have to start from the suburbs as his parents and grandparents have done in the past

 

You'd have to say that some of the increases in property prices vs average adult earnings is due to the movement of more women into the workforce increasing household income. I'm not going to say that this demographic change accounts for a 100% increase over the past two decades but I'm sure it accounts for a good chunk of it.

Secondly if you look at what interest rates were at up until the early 1990's you can appreciate that ahving debt that was many multiples of your income just wasn't feasible. However since 1992, which conincidentally coincides with the RBA move toward infaltionary targetting, interest rates have been very stable between 4% - 7.50%. No doubt this stabilty has greatly encourage investors to enter the market with longer term timeframes for gaining returns.

So in my opinion expecting house prices to fall back to 3.5 of average incomes is not realistic due to the change in household incoem structure and the fact that economic conditions are reasonably different to what they were back in teh 70s and 80s (at least in Australia).

Well said. I completely agree, who cares about history and statistics. People are making decisions based on today's information on things like what are rental yeilds versus interest repayment like.

As I mentioned in my previous post the property market doesn't unwind like the stockmarket due to its lack of liquidity, and I'm backing that it will be FAR more likely that the market is flat for two years than there will be a 10% or 20% correction.

 

yes. but each factor affects price to a " very different" degree. Actual demand/supply of property contributes little. Easy of credit contributes the most. Unemployment rate also contributes heavily.

It is a common fallacy to think supply/demand of properties contributes the most.

During the boom, the only things that changed for a particular booming city/area is lending policies. A relaxation in that can immediately jack up the price 20%. A tightening of credit coupled with rising unemployment rate and shrinking paper wealth can immediately crash the market. Any demand/supply and rental vacancy rate are trivial factors in the process of that.

 

I agree that unemployment plays a big role, though I'd argue that interest rates have a massive influence on people's ability to get credit, and I don't see interest rates staying at 6%.

The reality is the government and RBA are both well positioned (long history of budget surpluses and currently high interest rates) to fend off any potential housing correction, and I think in light of what has happened globally I think both have every intention of averting the depths of a housing correction.

So whilst there is upward pressure on rents, continued drops in interest rates in addition to stimulus packages such as the FHOG, I find it hard to believe that housing prices are going to drop suddenly, rather I expect that like Australian housing price history shows, housing prices will stagnant rather than drop significantly.

 

True

False

I live in Heathmont, VIC. I was able to quickly gather the following medean price growth history for this suburb:
FY05 11.9%
FY06 -3.0%
FY07 19.1%
FY08 18.1%

Appologies that I couldn’t get more data but, over the time shown, the only significant change in lending practices occurred in FY08. There are other significant factors at play.

 

As I've said before I'm a convert from the 30% - 40% loss position to the years of stagnant growth camp.

What I fail to see is a real stimulus to drive property prices higher and higher.


- We've had the shift in demographics from 1 income to 2.

- We've had the period of high interest rates to low rates

- We've had the relaxing of lending standards

- We've had most of the mining boom

- We've had the shift from high inflation to low inflation.

- We've had the tax benefits

- We've had the FHOG


What will drive property prices higher?

Immigration? No...not really I don't see too many sudanese refugees coming to Aust with suitcases full of cash, and those secret higher paying jobs.

so what can drive growth further???

 

Perhaps housing markets hit the bottom in US and will start to show signs of recovery once the stock (new houses) runs out? This may take some years but let not forget we are in housing cycle at the very bottom of it. Perhaps long loosing string on share markets will force investors to move to locate their capitals in houses for rent? Perhaps we can see housing affordability moving beyond anyone’s imagination?
Lets face it… there is no more” save heaven” if it comes to investing. People are loosing money right left and centre so why not to park capital in housing and wait for better times?

 

Young gun,

Here we've been arguing about the foundation of the housing market and you know what? There is no winning argument.

You could argue that there are signs of a price correction, I could say that there will be signs of upwards price movement in some suburbs.
We could both be right.

I don't agree with your comment about a stagnant position of 30 to 40%.
You can't generalise like this because cities & suburbs will behave in different ways.

I think you would be more accurate if you talked about lost opportunity
for people who have cash and could invest (or are willing to invest) in other asset classes.

cheers

 

Can't recall who said it earlier but price increases are driven by supply and demand.

Supply refers to both availability of new properties and the availability of people who can afford to live in them.

Its the latter I see as the constraint to continued and sustained house price escalation. As I said earlier, if income is not rising at the same as that inferred for property capital growth then by definition affordability must continue to be reduced.

Eventually occupancy costs for housing (whether in the form of rent, or interest payments for owner occupiers) will exceed the after tax income of the people who need to live there. This conclusion is both a mathematical certainty and a natural consequence of the underlying assumption that house prices will continue increasing at a rate greater than incomes.

Obviously a flawed assumption. It cannot be sustained. Period.

Notice that this conclusion does not rely on what actual incomes, median prices, or multiples of income apply today or in the past. These numbers only effect precisely when the situation becomes untenable, not whether it will.

 

Ironically I think much of the same will continue to drive up housing prices once we are past what will probably be a slow couple of years.

- I think interest rates will remain low for sometime, in light of the fact the rest of the world won't be bouncing back overnight, which will hinder our growth.

- Lending standards will remain much the same here in Australia, and in light of low interest rates easy access to money shouldn't be a problem in 3 - 6 months.

- I think we are still at the beginning of the resources boom. The developing BRIC economies (Brazil, Russia, India & China) still have an enormous amount of growing to do over the next few decades as their economies converge towards the OECD countries of the world. Demand for resources is only going to climb in future years.

- Inflation once again will be low in 12 months, though I imagine will start being an issue again in the not too distant future.

- And you have to assume that the tax benefits and FHOGs aren't going anywhere.

So all in all I can't help but feel that once we are past this little slow down that housing price growth will return to reasonably strong growth, though maybe not as strong as over the last 5 - 7 years.

 

Fascinating reading, thanks to all involved. There are lots of interesting issues raised in this thread.

What do i think? Well i'm happy to admit that i'm not sure what will happen - on this one i'm a fence sitter. But, this is an investing website and i dont view smart investing as crystal ball gazing. The reality is there are a few likley scenarios that might play out - so i'm trying to position myself so as i dont have to cross my fingers and hope that (for example) property doesnt fall. In general im trying to:

a) not go backwards; and
b) be ready to gain from any of the likely outcomes once we know where things actually are heading.

Anyway you are all keen to think about what might happen in the property market, so perhaps you should all read the literature available from the leading eco thinkers. I'd suggest pouring over RBA and Productivity Commission literature. It's a bit old but the PCs report into housing afordability from a few years ago (available on their website) is excellent. It doesn't give answers to our questions (because, shock horror, even they dont know), but it is a critical piece of analysis and touches on many of the issues raised in this thread (except without the sarcasm!)

By the way, i didnt buy a unit in Paris, but it was interesting to get your thoughts...

shasta