Good news on Canberra house prices

Holden Caulfield said :

Watson said :

futto said :

Good news depending on your point of view.

I feel a little poorer now since reading this news so might not upgrade my 50 inch plasma tv in the spare room to 55 inch this month!

Just kidding…i’m buying a 60 inch.

Yep, count on the house prices going down when I’ve just finally bought my first house (yet to be built) after waiting for years for the bubble to burst.

Though according to the bank valuer my property had gone up 15% in value between in the year before June 2012. And the land had not even been released then. So it must very much depend on where and what, I assume.

As a very broad sweeping statement that may have little basis in fact I tend to think buying off plan is a good way to give yourself a small head start. In effect both you and the builder are speculating.

It stands to reason (to me at least) that the realised bricks and mortar will be worth more than the potential held by a patch of dirt and some lines on a page.

Buying off the plan is fine in a strongly rising market, but any other time you are just paying extra to cover the builders profit.

drfelonious said :

justin heywood said :

With many people so heavily leveraged, everyone better hope that house prices don’t drop by too much.

With so many people so heavily leveraged into multiple investment properties, in my opinion, it is almost inevitable that house prices will drop by “much” and more.

About a third of Australians live in a rental property. Of people who are investors, about 70% own only one IP, and about 28% own 2 IPs. So of all the people who own IPs about 2% of them own 3 or more, so it’s really not correct to say ‘so many people leveraged into multiple investment properties’.

Also, the average LVR of property in Australia is not high (less than 50%), so there’s not much imminent pressure for people to dump their properties.

Yes, the market is soft, and will be soft for some time to come, but it won’t be getting back to 2000 prices. People have more disposable income now, and thus there is a lot more price support.

Building of new homes is slowing, but population is still growing. The real kicker will be to see what happens after the next federal election.

These people wanted to put children out on the streets in the cold by making houses un affordable to make a quick buck without having to work hard for it. I hope prices drop soon.

All I want is a floating pirate raft community in the lake, screw expensive land prices, water is cheap!

Watson said :

futto said :

Good news depending on your point of view.

I feel a little poorer now since reading this news so might not upgrade my 50 inch plasma tv in the spare room to 55 inch this month!

Just kidding…i’m buying a 60 inch.

Yep, count on the house prices going down when I’ve just finally bought my first house (yet to be built) after waiting for years for the bubble to burst.

Though according to the bank valuer my property had gone up 15% in value between in the year before June 2012. And the land had not even been released then. So it must very much depend on where and what, I assume.

As a very broad sweeping statement that may have little basis in fact I tend to think buying off plan is a good way to give yourself a small head start. In effect both you and the builder are speculating.

It stands to reason (to me at least) that the realised bricks and mortar will be worth more than the potential held by a patch of dirt and some lines on a page.

What about about all those overgrown children still living at home in their late 20s because they allegedly can’t afford to buy? There is a lot of pent-up demand in the market which will filter through as prices drop. Although, for some of the waited-on-hand-and-foot brigade, Mum and Dad might have to buy it for them before they move out.

There is also continuing immigration, around 120,000 a year net, to keep propping up demand.

Then there is NIMBYism and planning regulations worthy of Dickens to keep a brake on things.

Property may be flat for a while, but in places where there are jobs, it’s not going to go bust.

jared said :

But just because house prices have gone up, doesn’t mean there is a bubble. Does anyone here understand what a bubble is? It’s when price growth becomes entirely detached from fundamentals.

Well incomes are high, debt is cheap unemployment is low and vacancy rates are low (hence rents are high and growing in excess of CPI). So someone do me favour and point out where the lack of fundamentals are?

You have no idea how glad I am that you brought this up, I love an excuse to show everyone some graphs.

Which fundamentals shall we take a look at? Incomes compared to house prices?
https://dl.dropbox.com/u/3827353/Housing%20Graphs/Quality/ScreenHunter_10-Aug.-17-22.39.gif

Rents and CPI compared to house prices?
https://dl.dropbox.com/u/3827353/Housing%20Graphs/Quality/housepricevsrent.gif

Or even construction costs compared to house prices?
https://dl.dropbox.com/u/3827353/Housing%20Graphs/Quality/ScreenHunter_03-Aug.-17-21.11.gif

If you actually look at the data, it becomes blindingly obvious that prices have been completely detached from the “fundamentals” since the late 1990s, with increasingly levels of absurdity. You’re right in saying that the rises were driven by a huge increase in the amount of debt households were saddling themselves with, however.

jared said :

Australia’s housing market in the 2000s is nothing like the US or Ireland. So yes, Australia is different in that respect and anyone who tells you different, has no idea what they’re talking about. While the US and Ireland, to name two, did indeed have bubbles, they were fed by fraudulent lending practices that simply don’t exist in this country combined with massive over supply. Again there is no chronic over supply in this country (although Melb, Canberra and Adelaide are arguably slightly over supplied at the moment). If anything we have the opposite.

Don’t kid yourself, there was plenty of fraudulent lending going on in this country, and I suspect we’ve only just hit the tip of the iceberg.
http://www.macrobusiness.com.au/2012/08/australias-sub-prime-mortgage-scandal-grows/

As for supply, the one thing I’ll say is that many places in the US that now have a massive oversupply apparently had a massive undersupply before the GFC. Demand for housing is very much determined by household size, and as the US discovered, household size increases considerably when economic conditions deteriorate.

jared said :

The only issue that would see Australian house prices fall dramatically is if unemployment starts heading north in a big way and people simply can’t repay their mortgages (take note Canberra if the feds keep smashing the public service). Again, a fundamental falling over. Barring that, house prices will just keep going sideways until Australian’s decide to start indulging in debt again.

More or less agreed, although a big wildcard as far as I’m concerned is negatively geared investment properties. Investment properties make up roughly 1/3rd of Australia’s housing stock, and roughly 2/3rds of those are negatively geared (IIRC). Negative gearing as a property investment strategy simply doesn’t work if prices are going sideways. The question for me is are all those negative gearers going to be content losing money indefinitely, or will they eventually do the sums, realise that they don’t add up, cut their losses and sell.

jared said :

Does anyone here understand what a bubble is? It’s when price growth becomes entirely detached from fundamentals.

Well incomes are high, debt is cheap unemployment is low and vacancy rates are low (hence rents are high and growing in excess of CPI). So someone do me favour and point out where the lack of fundamentals are?
Australia’s housing market in the 2000s is nothing like the US or Ireland. So yes, Australia is different in that respect and anyone who tells you different, has no idea what they’re talking about. While the US and Ireland, to name two, did indeed have bubbles, they were fed by fraudulent lending practices that simply don’t exist in this country combined with massive over supply (the US used to build 1million houses a year until the 2000s, then they started building 2mill while the Irish just went completely nuts to the point there were more houses than people). Again there is no chronic over supply in this country (although Melb, Canberra and Adelaide are arguably slightly over supplied at the moment). If anything we have the opposite.

The lack of fundamentals is obvious to anybody with even the most basic background in finance, economics, accounting…. anything even peripherally related.

CASH FLOWS.
Where are the god-damn cash flows?
People have made a fortune over the past decade or so off of capital gains because prices have in fact become entirely detached from the actual cash flows that the relevant asset generates (ie: rental yields for investment properties, or more generally rents, since if you own your own house you’re not paying it).
Even with negative gearing investment properties are a money hole without capital gains – the whole problem with negative gearing in fact is that it encourages people to pay more than, in discounted cash flow terms, an asset is worth by making losses tax deductible.

Let me put it in terms even a monkey (or a real estate agent) should be able to understand.
If you are paying 6.8% for an asset that that only generates 2-3%, you are losing money. You are bleeding capital, and this is the exact reason that we can expect a crash rather than any long term moderation – because fundamentally, these assets are miss-priced relative to the cash flows they generate. You might think rents are high, and they are relatively high in Canberra, but they really don’t compare well to prices and interest rates. The story is a little worse in Sydney and much, much, much worse in Melbourne.

To actually break even you need a certain level of nominal capital gains, even a flat zero % is still a loss since in the vast vast majority of cases rents won’t cover interest.
For the system to keep rolling over, more people need to buy in so those already in the scheme can cash out with a profit – and well…. if you need new money to pay out the earnings expected by previous investors, then you have a ponzi scheme.
There’s what… 1.1 million or so people claiming losses on investment properties, a great many of them nearing retirement. Do we really expect that they’re going to be holding on to loss making assets (and to be claiming it on their tax they are by definition highly geared enough that they need to put money in just to cover interest) for eternity? Even when they no longer have an income to claim against?
Even if there wasn’t the whole generational issue, I severely doubt that with stagnant or slightly falling prices with no end in site, we wouldn’t see more and more people trying to offload investment properties simply because they offer a poor return compared to shares or term deposits… and onto a stagnant market, thus the reasonable expectation that falls will tend to accelerate.

Unless the RBA is actually willing to jam interest rates to 0.5% or so and leave them there for a decade regardless of CPI, there’s no way for this to wind down gently.

Enjoy your retirement boomers, enjoy the dogfood and kerosene baths. You’ve certainly earned it given what you’ve done to this country.

(The market in Melbourne isn’t slightly overbuilt either, it’s massively overbuild with more and more stock still coming onto the market despite population growth crashing.)

LSWCHP said :

Over the last 15 years or so I’ve seen friends and colleagues borrowing money from their mortgages to invest in the stock market, or buy cars and other depreciating assets and generally doing things that I would classify as bonkers. Several others are in the unfortunate situation of owning two or three heavily leveraged properties that are decreasing in value. These people have suffered financial losses that are in the tens of thousands of dollars, and they’re just middle class professionals rather than millionaires, so they seriously can’t afford it.

I wish it weren’t so, but I suspect that there’s gonna be some very hard times ahead for quite a few folks over the next few years.

Why is it ‘bonkers’ for an owner occupier to remortgage their house and buy a car, or a share or anything? The reason house prices have gone through the roof over the past 10-15 years is because debt is cheap and incomes have similarly gone through the roof. If you’ve got a job and you can service debt, it makes perfect sense to leverage an asset that happens to have appreciated up to 300 per cent. You’d be stupid not to. Even if house prices are falling, the above still holds. Exactly where are you getting cheaper debt than a housing mortgage??? But just because house prices have gone up, doesn’t mean there is a bubble. Does anyone here understand what a bubble is? It’s when price growth becomes entirely detached from fundamentals. Well incomes are high, debt is cheap unemployment is low and vacancy rates are low (hence rents are high and growing in excess of CPI). So someone do me favour and point out where the lack of fundamentals are?
Australia’s housing market in the 2000s is nothing like the US or Ireland. So yes, Australia is different in that respect and anyone who tells you different, has no idea what they’re talking about. While the US and Ireland, to name two, did indeed have bubbles, they were fed by fraudulent lending practices that simply don’t exist in this country combined with massive over supply (the US used to build 1million houses a year until the 2000s, then they started building 2mill while the Irish just went completely nuts to the point there were more houses than people). Again there is no chronic over supply in this country (although Melb, Canberra and Adelaide are arguably slightly over supplied at the moment). If anything we have the opposite.
The only issue that would see Australian house prices fall dramatically is if unemployment starts heading north in a big way and people simply can’t repay their mortgages (take note Canberra if the feds keep smashing the public service). Again, a fundamental falling over. Barring that, house prices will just keep going sideways until Australian’s decide to start indulging in debt again.

drfelonious said :

justin heywood said :

With many people so heavily leveraged, everyone better hope that house prices don’t drop by too much.

With so many people so heavily leveraged into multiple investment properties, in my opinion, it is almost inevitable that house prices will drop by “much” and more.

There will be an echo effect that forces ever increasing cycles of price reductions as more and more ridiculously over-leveraged aspiring property moguls are forced to liquidate their portfolios. Canberra’s property downturn in the mid 90s will be like Play School in comparison to what is about to unfold. This time we go into the down cycle with so much more debt and insanely high prices.

For those of you still drinking the “Australian housing is different” Kool-Aid, you need to know that Australia has the highest levels of individual mortgage debt in the world. That’s right folks – in the world – be my guest and google it for yourself.

Sad, but most probably true.

Over the last 15 years or so I’ve seen friends and colleagues borrowing money from their mortgages to invest in the stock market, or buy cars and other depreciating assets and generally doing things that I would classify as bonkers. Several others are in the unfortunate situation of owning two or three heavily leveraged properties that are decreasing in value. These people have suffered financial losses that are in the tens of thousands of dollars, and they’re just middle class professionals rather than millionaires, so they seriously can’t afford it.

I wish it weren’t so, but I suspect that there’s gonna be some very hard times ahead for quite a few folks over the next few years.