SMH are stirring the house price debate

[monsta]

Hey guys,

A Sydney news paper is trying to stirr the pot as such. They are suggesting that house prices in Sydney may be less insane in years to come..

http://m.smh.com.au/business/the-economy/sydney-property-prices-faltering-as-new-home-tsunami-hits-20150920-gjr39u.html

Edited September 21, 2015 by monsta

[RYLC]

Yes but cheaper compared to what? Last year? Ten years ago? The way I see it there is a supply issue in Australia because we all live along the coast mainly. Comparisons made with American for instance make me laugh because nobody here "lives in the middle" of the country. Some of the supply issue is to do with the local government policies on release of land. They don't want urban sprawl so this keeps prices up. Whatever happens will be interesting. We have been here for 15 years and read almost every year that "prices are set to fall". Hasn't happened in capital cities yet... Mining towns yes. Most other places no.

The only thing I can see coming that may bring a drop in prices is if/when baby boomers decide en masse to offload properties they have been holding for many years to liquidate their assets (and "flooding" the market).

[RedPanda]

Well, we're one couple for whom this would be good news, if it turns out true. We are probably looking at building a house 2017-2018. But I've also read that economists have been predicting the pop of the property bubble every year for many years now.

[ottg]

.... that economists have been predicting the pop of the property bubble every year for many years now.

That is exactly the issue - they have to say something and newspapers need to carry a story. The prices of property has fluctuated over many, many years and will for many more years. However the overall trend is upwards over the longer term (LT). If you care to do a root mean square fit over the growth curve you can easily see (with hindsight) when properties were over-valued and under-valued. The economic clock is an good indicator for a better time to buy or to wait. Match that to the LT trend for specific areas and you'll be ok. Obviously if this is a PPOR then none of this really matters.

The sad part is while we allow newspapers to influence our decisions the markets just moves on.

[monsta]

@RedPanda. Look at it this way. The Reserve Bank lowered interest rates to record lows after the mining boom ended. The banking regulator chipped in and said they would sort tighten the rules if people took out too much credit.

So, people had an attitude of, "lets get in while we can!". That was especially true for investors.

So, people have been saying that once interest rates go back to normal levels, many investors will be forced to sell up or go bankrupt.

The other school of thought (as in the SMH article, the barefoot investor, etc..) Is that the housing boom lead to a lot of properties bought off plan. When those are finally built there will be too many. Add to that the economy isn't doing well, so there will be fewer migrants to buy them.

At the end of the day, people were correct in expecting the housing bubble to burst a year ago. But the government intervened to stop it.

There will be many years of almost no growth in house prices at some point. That's what always happens here. Salaries are not increasing fast enough to support massive increases in house prices. It will have to correct itself.

Edited September 21, 2015 by monsta

[AFreshStart]

Firstly, I'd not really trust an article that can't get the basic facts right.

Green Square is NOT a suburb, but rather a collective comprising of the suburbs of Waterloo, Beaconsfield, Alexandria & Zetland, with two new suburbs joining the mix by 2030. So it's NOT the densest 'suburb' in the country, because it isn't a 'suburb', what it does get right it is that combined it is over 278-hectares of Sydney.

We live in this area and there is currently NO SHORTAGE of buyers, in 6-months we've seen properties in our block (completed 2-years ago) go for $12,000 and then $40,000 more than what we paid just 6-months ago.

Properties in the area are selling off plan in droves. The most recent is the launch of Crown Infinity, they sold 100 apartments in the first hour of sales 2-weeks ago and by 3pm had sold $350 millions worth. This is not the exception, this is the new norm. Rentals? The same, as I shared in another post, 2 units have been let within hours in our block and one of them had 40 people come through for the inspection. It's crazy.

Is it sustainable? Maybe not for local buyers, but for foreigners, yes. I'm not sure many people grasp the size and wealth of China, the fact that there are over a BILLION people and over 3.6 million US Dollar Millionaires, and they have experienced 50% growth in these millionaires in the past 2-years alone. Australia by comparison currently only has +- 1.1 million millionaires. I think too often people thing of the Chinese as poor slave laborers, while I'm sure that is true for many, there are also incredibly RICH people to.

Many Chinese millionaires are choosing to divest and move their capital out of China. They were putting much of it into Canada but their impending bubble, growing concerns with social dislocation and the closure of their investor VISA program, they have effectively been cut off $32 billion worth of investment capital, so Sydney seemed like a good bet and the Australian government was/is more than happy to accept it.

In theory this money can only be used for purchasing new properties, but until the second phase of Australia's AML program is enforced there is bound to be some laundering happening and a lot of 'blurred lines'. Right now, conservatively 20-25% of the new properties in Sydney are being bought by Chinese investors, though since 'ownership' isn't always clear and transparent, some say it could be as high as 50%.

These investors are also looking for long term investments and are comfortable losing 20-30% on these investments as their concern is parking money in a 'secure' offshore investment rather than driving huge returns.

The byproduct of this is though is that locals are being locked out of the market, but this is not unique to Australia, you only have to look at Singapore and Hong Kong to see it in action, New Zealand is following suit.

These purchasers are CASH purchasers, they don't need loans, so while I see their point on interest rates increases, these have little to no barring on these CASH buyers.

These cash buyers are driving the property prices up and 'inflating' them and this has potentially devastating effects on local buyers who are taking on HUGE mortgages at these astronomically low interest rates to "get into the market".

But if 'getting in' means paying a $6,000 mortage on a property that would only generate around $3,000 in rental, well, you are going to get burnt when the interest rates rise...

Also there seems to be a sense of 'entitlement' from some buyers I've spoken to who are wanting 3-4 bedrooms houses in the Inner West, when they could in reality barely cover the payments on a 2-bedroom apartment in cheaper neighbourhoods, but they are willing to push themselves well out of their comfort zones to make this happen. These kind of buyers will be the hardest hit, as they 'think' they are going to see these huge returns over a short period with an artificially inflated market and that they could always sell at a profit and recoup, but if the market crashes, they'll loose, badly.

These are the articles the papers should be writing about, warning buyers and sharing a little bit of financial planning advice, instead they are telling buyer not to buy and that there is boom looming (saying that for 10-years right?) and instead of making calculated risks they are frozen by indecision and as ottg shared, the market will pass them by.

Cheers

Matt

Edited September 22, 2015 by AFreshStart

[monsta]

I agree Mat. The housing market is a bit like a share with an insane price/earnings ratio.

But I do think there is some truth to the argument that there could be an oversupply in the next few years. Sure, it may not be properties near the Sydney CBD. But look at how many properties are sold to investors. Just because a Chinese businessman buys it off plan, doesn't mean it will be people to rent them in 4 years.

But I am hopefull there might eventually be a few resonably priced neighbourhoods with decent travel times to the city to choose from.

Edited September 22, 2015 by monsta

[AFreshStart]

Monsta,

I hear you, and I think that in some places it will tapper off, but as long as Australia is still willing to accept migrants there will be a need for accommodation, and if you can't buy, you'll have to rent.

It's a MULTI-BILLION dollar industry for the government. Out of interest I pulled this report from Parliament looking at migration patterns over the years. In the mid 90's Aus was only letting in 70,000+ thousand migrants a year across Family, Skilled & Special Eligibility VISA's, fast forward to 2002-2003 we see a rise to 100,000+ and in 2008-2009, 171,381+

It's said that this year it's set to be 185,000, which is the highest intake Australia has seen since 1969.

It's estimated that NSW alone will get 1 million migrants, these are SKILLED migrants over the next 10+ years. If you look at the job listings on Seek, across a broad section of industries, where are the jobs? NSW.

So while one can be hopeful, unless Australia tightens their belt, which those WANTING to immigrate DON'T want to hear, we will see more and more people coming in.

Those figures don't even include Student VISA's, of which, closing year end 2013 (the most recent stats I could find) the Australian Government had issued 299,540 of them, up 2% from the year before.

Education is Australia's 4th largest export industry, and all these students need to be housed.

Cheers

Matt

[monsta]

More of the same from SMH. Apparently Morgan Stanley says the pop is comming:

http://www.smh.com.au/business/markets/house-price-growth-in-sydney-and-melbourne-continues-apace-20150922-gjrzpq.html

[RedPanda]

Monsta, if I read that article right then it basically says that other cities are taking the housing slack while Sydney and Melbourne push on with relatively high demand remaining.

Personally, I'll just keep an eye on the whole thing.

[monsta]

@RedPanda. I look at the articles because that's the same place that "Mom and Pop" investors will be looking at.

I posted that last article because it was an American bank weighing in. As Matt pointed out there are a lot of foreign investors buying up property. Perhaps two international banks recommending they be carefull about Aussie, might cause them to change their minds until prices are more in line with local incomes.

Sure foreign investors can deal with a loss on their property, but most locals can't

[rozellem]

We bought in Sydney two years ago, 4 years after we landed. We lived in the Inner West initially, but we could not comfortably afford a house with a garden that would accommodate two active boys. Lots of people do settle for smaller, but we wanted the "jump on your bike/climb a tree/go bos" kind of lifestyle we had as kids. In our experience, most of our Aussie friends our age, got some sort of financial help from their parents, in the form of a gift towards the deposit or some other arrangement. We also found that they really extended themselves financially, because their parents had fully paid up homes (sometimes multiple) that they were going to inherit one day. So in short, they have a windfall coming one day. Some friends have their parents who insist on paying for private school fees or would buy them a car, or appiance if they thought it necessary. Most of the middle class Aussie retirees that invested well, are sitting very comfortably. Its so difficult for us to put ourselves in comparison with our friends and age group here, if we do not have anybody who will act as a financial safety net for us. We bought an ugly house (a RSA lady told me a while ago it looks like a "myn huis") in a neighbourhood I knew little about and frankly did not want to move to, because we could comfortably afford it. We will never inherit a cent from anybody and our families will probably cost us money as they get older. We wanted to be in control of our outgoings, so opted for 5 year fixed rate. I am not stressed about a crash in the market, because its our forever home not just a gamble on the property market, and I look to a long future here. In the big picture, it makes sense for us.

[monsta]

I agree rozellem. House prices are 5.5x the average household income. It's beyond the point of "I will skip movies this month to pay my bond". The money has to come from somewhere.

I agree about parents. I am sure that many parents feel guilty when they have an investment property, but their kids can't even afford a home to live in.

At the end of the day, house prices in Sydney are artificially high. If they had done things like joined up the M4 and M5 twenty years ago, mom and dad would be living in their own home out west and gradma and grandpa wouldn't be property millionaires.

It's great that Aussies care about the refugees from Syria. But, there is definitely a look out for me first when it comes to Aussie migrants, families, etc.. People think day care shouldn't be subsidised as it was your choice to have a child. And " I will lend my kids money if properties become to expensive..".

[Tiermelk]

Sydney grew 18.9% over the year (9 months) where you get 3% interest on cash in the bank...

the pop is comming

[AFreshStart]

Monsta,

Sydney property prices are over inflated, no doubt, but investment banks are saying 20%-30%, which brings a $1.2 million house down to 'conservative' $1 million, even still that makes it unattainable for many if not most people, certainly the middle class earning the median wage.

I think the average Joe is hoping the bottom will bow out and that savvy investors are going to snap up properties for 50% of their value, I doubt that, I suspect it will tapper off, as it has, from 90% to 75% clearances over the past few months (something I've watched weekly for months), and yes, there may well be a 'recession' in a year, 2, or 5, but my educated guess is that these properties are still over valued at 20%+, but good luck getting financing in this speculative recessive period when banks halt loans, and do so at steep interest rates. It might be even HARDER to "get into the market" then.

I'm a lot like Rozellem on this, and I've shared so in my previous posts. If you are making a calculated long term investment, these speculative claims have little baring on things. It's more a warning for "Mom & Pop" investors that are looking to make a quick buck, over extending themselves, sometimes across multiple properties. We've taken the approach of slow and steady wins the race.

We hadn't planned on buy a property, we had taken a 16-month lease, and breaking it cost us $1,000, but the right property, at the right time and right price came up, and not magically, I looked at over 30 of them I'd earmarked of maybe 100 I investigated over months, inspected 10, put in an offer on 2, getting the home we now live in.

Even in the market tanks and we are loose 20-30% of the value short term, we still win, like Rozelle, we see it as our 'forever home', we have a super low strata, are in a low rise block of 32-apartments, close to the CBD with good transport links, bus stops outside and a 900m walk to Green Square station and we look forward to all Green Square will bring in the next 5-years - more parks, library, town hall, aquatic center etc. The rental on our property would almost cover our monthly mortgage repayments and we feel very comfortable about our situation. Yes, we obliterated our savings, pretty much throwing every penny we owned into the deposit, but we are paying interest only for 3-years and pocketing the difference and have quickly built a buffer/savings.

As a migrant I have no expectations on the Australian government to take care of my needs or interest first, that's up to me and my family. Moving here our net worth dropped to 1/10th, at least currency wise, while it buys more, it was still a major knock to us, but you pick yourself up and keep you eye on the prize, which in our case is giving our children a future with options, something we didn't believe they had in South Africa.

You dust yourself off and invest accordingly - spending frugally, saving wisely, giving generously.

Cheers

Matt

[Donovan83]

Things people forget about property:

• Just like other investments, it can go down just as fast (and just as much) as it went up. Just because it hasn't happened for many years (due to a mix of luck and deliberate manipulation by the government) doesn't mean it won't happen. Asset values always return to the values that reflect the underlying fundamentals. The government will also run out of fuel to keep prices propped up at some point.
• The cost of buying (stamp duty, possibly LMI, interest, estate agent fees, bank fees), the cost of selling (estate agent fees, bank fees, possibly CGT) are often not factored in by 'astute investors'. And of course, the cost of owning - maintenance, levies, taxes...
• Just like other investments, the value of the asset as an investment should be driven by the return it will provide.
  • Rent to property value is extremely low due to the bubble, even with tax incentives. It's like buying a share that is very expensive but provides a low return, the only hope of making a gain is through capital appreciation - by selling the same share, with an even lower percentage return, to the next biggest sucker who thinks it'll keep appreciating for no reason.
  • Tenant risk.
  • Just because the price of property has increased, doesn't mean rent will increase too. Evidence supports the opposite - rent in australia hasn't increased by much more than inflation. It certainly hasn't increased in line with property value increases.In many areas, Sydney included, rents are dropping and vacancies are rising. At the same time, supply (due to increased construction driven by higher prices) is increasing and will continue to increase, especially of apartments, villas and units.
• Just like every other property bubble, including the 3/4 that have happened before in Australia's history, nobody thinks it's a bubble until after the fact.
  http://portfoliolive.wpengine.netdna-cdn.com/wp-content/uploads/2011/06/bubble-phases-1024x686.jpg
  We're currently around denial/new paradigm mentality. Australia IS NOT somehow exempt or different from the same principles that apply to the rest of the world.
• Just like many other bubbles, this one has been fuelled by:
  • Cheap credit.
  • Banks being too willing to lend to risky borrowers. And also, to lend too much.
  • Decades of first homeowners grants and tax breaks, which have much bigger impacts than people think. Providing someone with a $10,000 FHOG doesn't increase the price of the property, by $10,000, it increases their deposit by $10,000 - impacting prices by around $50,000.
  • A perception of an undersupply. This may have historically been the case but it definitely isn't now, and supply is going to become even less of an issue in future.

On the other hand, housing as a consumer lifestyle purchase is great. The value is in the shelter it provides, a home, security. That is what this asset class is meant to be, but speculators have skewed the market (and so far have profited off this skewing). The shelter aspect is a primal need which means there is a thread of emotion/instinct running through the housing market. If you've bought a place to live in then the value it could realise is not relevant unless you can't pay the mortgage.

I find that people that own property lorde it around as if it's some massive achievement to have shifted money around between asset classes (and incurred costs to do so). I'd far rather sit, for example, with cash and investments in diversified assets and no liabilities while taking advantage of the cheap rent than ONE asset in ONE area that cost me lots of money to buy, cannot be easily sold, is risky, restricts my freedom to move around, etc... no thanks.

I do plan to buy one day, but not with debt and not as an investment. There will be no property "crash" in Australia, but the days of high capital appreciation are over. Best case scenario is that prices will stagnate while economics catch up, or we'll have a correction of no more than 20%. For people like this - http://www.perthnow.com.au/realestate/news/sydney-couple-in-their-20s-go-on-home-buying-spree-picking-up-19-properties-in-a-single-year/story-fnhlgrkx-1227533445956 - it'll be devastating.

[ottg]

Ok...so what must I do? Give me a 5 year plan!

[Donovan83]

Ok...so what must I do? Give me a 5 year plan!

Well... nobody knows. I could be completely wrong and I might be sitting here in a year kicking myself because I have been forever priced out of ever owning a property due to a huge increase that doesn't reverse.

People who are adamant that it won't drop could be sitting in a year kicking themselves for not selling just in time to escape a bubble.

Make the best decision you can using the information you have available today, and don't congratulate or berate yourself too much if you're proven right or wrong...

Personally, I have no interest in owning again soon, but for reasons that aren't financial - I like my freedom, I like to be able to move soon. Inevitably this will eventually change when I return to Perth and I want to settle down into my forever city.

[ottg]

It's pretty straight forward. Your graph says it all. Go where the smart money is. But how do you find it?

Just draw a similar graph over the longer term for:

a. The state that shows the most potential growth (slope of the curve) and extrapolate forward

b. Then inside that state, draw the graphs for each postal code area. Group the postal code areas selectively.

c. Select the 3-5 postal code areas that shows the most potential growth (slope of the curve) and extrapolate forward.

d. Read everything you can get on those focused areas eg city development plans, rezoning areas etc Now you will start to get a better idea where the next thing will happen before it passes you by!

Now back to your graph - wait till the trend is below the mean line and take action! You wont know when/where the turning point is but you will do better than others, as most people purchase during the hype.

Are there risks involved - many and you will need a stomach to ride it out...but trust your analysis and maths!!

Edited September 23, 2015 by ottg

[AFreshStart]

Donovan83,

I'm with OTTG, sadly I'm not sure there is ever a 'good time' to get into the market, it is always going to be a calculated risk, you just have to make an informed decision with the information at your disposal.

I don't have a university degree, am not a trust fund kid, but use my hands as the son of a contractor. When I got into the property market 10-years ago in Cape Town I did exactly what OTTG shared and bought an apartment and remodeled it, project managing it, and living in it, 4-years later sold it for DOUBLE what we paid for it, we then invested that in buying I small 3-bedroom house, and again, I got stuck in, landscaping, building, renovating, which is the home we sold before moving here, we sold it again, 4-years later, for almost DOUBLE our purchase price.

Now at the time we bought both homes with the idea that it's value would be in the fact that it was our home, we needed somewhere to stay, but there is no denying that taking these calculated risks were a large part of realizing that kind of growth, growth we are happy to say allowed us to purchase our home here.

Do I expect they same kind of returns here? No, but I knew that being in the market would be a more attractive option than leaving the money in savings earning a paltry 3.98% PA. People were saying, don't buy, the area isn't great, it's a bubble etc. But I did my due diligence on it and as shared in 6-months a mirror image apartment has gone for $40,000 more than we paid 6-months ago, off plan apartments in the area are now going for over a million. I'm glad we got in when we did and even if we lose 20% in a 'crash' we have a home and it provides us shelter and is a long term asset for our retirement, if for no other reason than having a place to live, mortgage free in years to come.

I know right now that you enjoy being upwardly mobile, and that's great, we just wanted to put down roots, see ourselves being here for years to come and it made sense to buy, as your shared, it's not for everyone, but if someone is reading this, thinking about buying, I hope the information provided by all will allow them to make an informed, calculated decision.

Cheers

Matt

[RedPanda]

My mother in law always says, provided you are buying to live(not as speculation/investment), you just need to get into the market because once you're in you'll be trading houses for houses and money is much of a muchness. They'll all go up and down together, with small local variations.

I also think a lot of the advice is very dependent on how large a deposit you can pay on your house, because the sums work out a lot different for maximum mortgage vs cash purchase, with a gradient of results for the in between ratios, and somewhere there is a tipping point for whether renting or buying works out 'cheaper' in the long run.

[monsta]

@RedPanda. The issue for me is house prices went up by 30% in my area. So, it would have been great if we could have bought 3 years ago. But sadly, day care fees put a stop to that.

But the good news from the ABC. They calculate there was an oversupply of houses. Then the population increased sharply due to more migrants arriving around the GFC. But now, the experts predict a slow down in migrants and its already started. Their graphs also show that housing construction has been relatively stable.

I am not saying it will be easy for first time home buyers. But in the next few years, there may be less competition for houses and rental properties...

http://www.abc.net.au/news/2015-04-15/housing-shortage-not-as-certain-as-we-think/6395326

Edited September 24, 2015 by monsta

[AFreshStart]

Finally, it is also worth remembering that housing demand is not totally inelastic, to use a piece of economic jargon. That means that people can and do adjust their housing consumption patterns based on the price of housing.

Household sizes shrank for all of the 20th century in Australia, but that trend has begun to very gradually unwind early in the 21st as unaffordable housing sees younger people stay at home longer and share houses come back into vogue, even for 20 or 30-something professionals.

So, even if we didn't have quite enough homes at one price point, as prices keep climbing higher we may eventually find we have too many for an Australian population seeing low, or no, income growth and becoming more frugal with the space they need.

This is one of the most interesting observations in that article and one I've used to base our own decisions from/off.

It's not a new thing, I first read about it in a book called "Rethink The Way You Live" by Australian author, Amanda Talbot, and this was one of her summations as well - children here stay home well into their 20-30's.

We have many friends who are in this situation, likewise many in their 30's that live in shared homes or have bought their properties with friends, affluent people - marketing managers, architects and accountants.

We have one set of friends who are married who bought a house in Newtown and now rent rooms out in it to offset their mortage and another, a property agent who bought his first home in the Inner West with his mate and both their families lived together in one house for over 6-years.

A new thing I see now is that older homes in our area are being demolished and a main dwelling is being built, with free standing granny flats being built to rent, again, offset these costs. People are being very inventive.

This is something we will see more of in time, it's been an upward trend from the 80's, which seems strange to us coming from South Africa, but similar situations occur in London as well, also knowing several friends doing the same.

It was all part of our reframe, asking what's essential? What is minimum we need to live a comfortable life? Do we NEED a house, a garden, a yard, two cars, and what would we be willing to sacrifice to NOT need those? I guess this so often why I'm coming at property from a left-field/obtuse angle, challenging those looking to move or invest and trying to give an Australian, or rather a NSW, Inner Sydney perspective.

These are decisions that many will face, I think the idea of a 3-4 bedroom home with a garden in the inner city suburbs is out of reach of all but a few, and as was mentioned before, these are often reserved for those that have parents that have saved for this for their children, to give them a leg up by putting down their deposit, or those having a large inheritance awaiting them, or a home etc, things us migrants don't.

Personally I don't think a house in the city is on the cards for us, but we have a beautiful 2-bedroom apartment, with loft, that could be used as 3rd bedroom as the kids get older, so room to grow, and a roof over our heads that isn't going to be sold our from under us, that allows us to hang pictures and remodel at will that meets all our our needs.

The alternative is finding a similar priced house, but with the added space, 2-hours away and having to commute, which many do, it's all about what's important to you and re-framing your 'enough'.

Cheers

Matt

[monsta]

More stirring from the ABC. Macquarie Bank are predicting a fall in house prices...

Sydney housing prices falling because of greater supply: RBA http://ab.co/1VP7oOf#abcnews

[ottg]

That is why the wealthy starts to buy into cattle farming - portfolio diversification.