Renters brace for pain as housing construction falls

This should help keep the housing bubble inflated for awhile.

 

Chris

What housing bubble?

Oz housing in general is not overpriced.
Some people think it is because they are listening to the media or are looking at expensive suburbs.

Prices are not going up by themselves, it's supply and demand.
A property is only worth what people are willing to pay for it and at the end of the day we already had price adjustments in some areas so it's no longer a bubble.

cheers

 

What bubble?

I suspect Chris C was just being facetious.

 

Firstly I just want to apologise - this got a little bit ranty...

I wasn't kidding... I think Australian property prices are at least 10% overvalued and the next two years will see falls in property prices, but higher rental yield will help to sustain the bubble a little longer - the ideal situation is they will help provide a softer landing for property price correction.

Though there is the underlying threat that these reports of increasing rental yields is just temporary phase before more significant declines in yields are realised as higher unemployment and recession forces renters and home owners alike to consolidate spending.

The one that has sustained the excessive growth of the Australian property market for the last 5+ years. You will often hear the media call it something different, like a "housing affordability crisis" this is a nice way of saying "housing bubble".

That said, I think I should point out that I don't think it is a BIG bubble, especially when you consider the rest of the world's property prospects, but Australian housing is still significantly overpriced.

You only need to look at property growth over the last 12 months to realise that even we here in Australia have had our blinkers on in that we are refusing to admit that we are paying exhorbident prices for property and now that the tide is turning, people are still refusing to acknowledge that even with unprecedented interest rate cuts, which are forecasted to continue, and the doubling/tripling of the FHOG the market has at best "flatlined". The thing is that interest rates can only go so low, and with unemployment starting to really build it is only a matter of time before housing prices find themselves under some pressure.

In my opinion, it doesn't matter what rents do in the short term, the writing would seem to be on the wall for Australian property, declines, and most economist have changed their tune about Australia of late, a recession is on the cards, and many property economists are pointing to AT LEAST a 5 - 10% decline in Australian housing prices, and I still think they are being conservative. The only silver lining being that we are better placed than the rest of the western world.



Australia is not immune to the problems of the world, and before people start going on about how we don't have the same problems, I'd like to point out the problem is not with sub prime loans or over zealous bankers. It is a systemic problem that is ****** in the fabric of all western societies. This idea that we can make money from nothing, or as most people think/thought "just park your money in the property or the stock market, you can't lose in the long run."

We create things like super funds to plan for our "retirement", where we think that if we put aside 9% of a salary each year so that one day in our 50's we can all retire and kick up our heels or start playing more golf, and the money we have saved will earn us an income at 10% - 12%pa until we are 70, 80, 90 or even 100!

Call me delusional, but I don't think it is too far of a stretch to question the average Australian dream of retiring at around 55 having spent about 30 years saving only 9% of their income with the expectation that they can live the next 30 - 40 years off the 9% they saved. I don't know about you guys but the maths seems fundamentally flawed if you take out the assumed 10 - 12% growth per year.

My simple mind concludes that money doesn't grow on trees, and money itself doesn't make more money, and productivity and growth that justify capital gains in assets like property only occur if there are individuals/firms striving to increase efficiency and innovate, which isn't going to happen when the average joe's goal is to be sitting on a nice beach at 53 sipping champagne doing sweet FA for the rest of their life.

Western culture is base on frivolous household consumption, not constructive investment. The Rudd government gives handouts of a $1000 and tells people to go spend, spend, spend to save Australia from a recession. Yet a significant proportion will no doubt have gone towards worthless items that add nothing to individuals lives (or the Australian economy) and if anything reduce their capacity to contribute only exacerbating the underlying problem. Things like TVs, iPods, fashionable clothes, throw away christmas gifts.

I mean come on, which of those things have the intrinsic value that is going to help promote innovation, efficiency, education and growth? Western societies need to wake up to the realisation that for us to be able to compete against the upcoming BRIC economies, we need to make sure we are spending less of our disposable incomes on things we don't need, and more on things that improve our ability to generate growth within our own economies.

Um... what figures are you looking at. Australian housing compared to median income is amongst the worst in the world and its yields are definitely low. That said, yields are not ridiculously low, but still that is saying something given the stagnant price growth of the last 12 months and strong rental growth of the last two years.

Obviously continued rental price growth will help ease pressure of inflated housing prices, but I still think that Australian housing prices could comfortably fall 10 - 15% over the next two years. Once again, that may seem dramatic, but in comparison to the majority of other western countries of the world those falls would still be light.

Quite to the contrary, the media is part of the problem, the media reports the news of today, not of tomorrow. Also the vast majority of mas media is produced by people with degrees in journalism not economic or finance who have vested interests in selling newspapers and appeasing their advertisers, rather than being accurate and informed, but hey, you get what you pay for.

I personally don't read newspapers or watch the news on TV - I think 95% of it is rubbish, has been for well over a decade.

You're right it is supply and demand, but if people thought high interest rates were tough to deal with wait until our unemployment rate nearly doubles!

With high interest rates people can cut back on household costs to pay the mortgage, but if they lose their job the mortgage doesn't get paid no matter what they do to save money.

The rising unemployment of 2009 and 2010 will hurt property prices more than high interest rates of 2008 did.



I should probably note that whilst I don't think property is a strong investment at the moment, I still personally hold an IP, and I'm not planning to put it on the market at this stage, given the high transaction costs and the tax that would be payable if I sold it. That said I envision that I definitely won't be looking to put anymore money into the property market until at least 2011.

 

Bravo Chris, nicely put.

Although a mere a 10-15% decline would be a stunningly good outcome imo.

As you've stated, rents will be pressured in the near term but will turn down by the 2nd half of 2009.

 

I agree that there is probably room for a housing price correction of a larger magnitude than 15%, but I can't help but feel that the RBA will be very wary of Australian property prices and the implications declines can have on an economy, they only need to look abroad to see just how destructive property price crashes can be to an economy.

So my view is that we will see continued strong action from the RBA to prevent property price drops along with traditionally sticky housing prices should help prop housing prices up such that they don't over correct.

With this said, if things take a turn for the worse in the global economy, ie US and Europe don't come out of recession in mid 2009 or the USD really starts to collapse then it will be a whole different ball game.

So I'm optimistic that house prices won't fall much further than 10% from their peaks, but I'm not ruling out that things in the global economy have the potential to take a serious turn for the worse.