Wall St was down 94 overnight, its biggest fall in a month, while the local market is down 66.
Crikey cage match: the truth about house prices
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The crystal ball gazing over house prices continues to twist and turn with another prominent article today suggesting that investors will emerge to fill the gap posed by the demise of First Home Owners Grant. Rismark managing director Christopher Joye agrees, saying refusenik commentators are only looking at one side of the coin: One of the reasons Schwab and Co. got it so wrong is because they ignored the fact that house prices are determined by demand and supply. They focused purely on demand-side factors like affordability (which has now turned against them), and neglected the fact that Australia is currently suffering the biggest housing shortage on record. On the demand-side, Australia is also benefiting from the strongest population growth since 1971. When demand exceeds supply, asset prices rise. Housing is no different. Crikey’s Adam Schwab says it’s the FHOG that is the real factor artificially boosting demand: While Joye and the RBA claim that property prices are rising across-the-board, it has been first home buyers which have led the recent growth, evidenced by the “first-home buyer” share of finance commitments have increased from around 10 per cent to almost 30 per cent of mortgages issued (in addition, first home buyers would be acquiring less costly properties, so the rise is especially telling in nominal terms). Further, mid-range properties have also benefited from the flow-on effect from the grant — for example, many of those selling inflated homes to first-home buyers will then have more to spend on their next purchase. Christopher Joye writes: Do you remember back in school when you confidently blurted out a big declaration only to discover that you were completely wrong? That burning sense of embarrassment as you were humiliated in front of your colleagues? Well, that is how Adam Schwab, Steve Keen, Gerard Minack and Shane Oliver feel right now. These guys were part of a small but highly visible minority who relentlessly told Australians on radio, TV and in print/online that the value of their homes would fall by 10-15 per cent (Oliver), 20-30 per cent (Minack), and 40 per cent (Keen) last year. Rismark repeatedly responded that the analysis underpinning these claims was deeply flawed and would lead to a reputational day of reckoning. And so it has. Poor old Steve Keen is about to lose his bet with Macquarie Bank’s Rory Robertson that will see Steve hike all the way from Canberra to Mount Kosciuszko wearing a t-shirt emblazoned with the message, ” I was wrong about house prices. ” Recall that Steve’s “best case” outcome for Australia was 15 per cent unemployment — amazingly, his more likely scenario was 30 per cent (today it is just 5.9 per cent). Australian dwelling values fell by a modest 2.6 per cent in 2008 and have risen by more than 4 per cent in 2009. We expect to see the June data, which is due by the end of this week, to show continued growth. These results are based on the RP Data-Rismark Hedonic Index, which is used by the RBA and many leading economists, and, unlike the simpler ABS index, includes all dwelling sales (the ABS excludes apartments, semis and terraces, and only includes free-standing houses, thereby missing up to 30 per cent of sales). They are also consistent with the findings of other index providers, such as APM and Residex. Importantly, dwelling prices are now rising across all suburbs, not just the cheap ones. While in 2008 the most expensive suburbs bore the brunt of the losses, these areas are rising in value again (see chart below). This eviscerates the notion that the recovery has been limited only to first time buyers. We are also starting to see the return of investors who after being hit by 50 per cent plus falls in shares and 10-20 per cent falls in the value of their super are opting for the safety of bricks and mortar.
The tiny losses in 2008 had little to do with the GFC and were brought about by the gut-wrenching 9.6 per cent mortgage rates that the RBA imposed on borrowers. The subsequent recovery has been underpinned by a 40 per cent decline in lending rates and an improvement in affordability to near record levels. One of the reasons Schwab & Co. got it so wrong is because they ignored the fact that house prices are determined by demand and supply. They focused purely on demand-side factors like affordability (which has now turned against them), and neglected the fact that Australia is currently suffering the biggest housing shortage on record. On the demand-side, Australia is also benefiting from the strongest population growth since 1971. When demand exceeds supply, asset prices rise. Housing is no different. The doomsayers also chose to overlook the lessons of history. In the last recession, when unemployment rose from 5.6 per cent to 10.9 per cent overall house prices did not fall at all — they actually increased slowly. In 2009, history repeated itself. Don’t expect any mea culpas though. The protagonists will whine about the first time buyers’ grant (blind freddy could have anticipated this counter-cyclical measure), or try to rehash their original predictions by switching from “nominal” (the house prices we see) to “real” (house prices less inflation) terms. It’s a pity, because people should hold them to account. The unfounded claims they made in 2008, which were taken at face value by a naïve media, scared the daylights out of millions of unassuming households. *Christopher Joye is CEO of the research group Rismark International, which developed the patented RP Data-Rismark hedonic index methodology. Rismark also produces products that allow investors to go “short” (bears) or “long” (bulls) housing. Adam Schwab writes: In the acclaimed documentary The Ascent of Money , Professor Niall Ferguson noted “real estate is fundamentally no different to any other asset…its price can go down as well as up. It turns out that no amount of financial alchemy can turn little suburban boxes into treasure chests with roofs. Which raises the question — is property really as safe as houses? Or could it be that we have let our love affair with real estate get completely out of proportion?” However, for Australians, especially younger ones, the love affair with real estate has so far, shown little sign of dissipating. In fact, according to the recent property data, things are getting even steamier. Notwithstanding despite real estate in other countries, including Western democracies like the United States, United Kingdom and continental Europe witnessing property prices drop by upwards of forty percent, Australian property is not far off record levels, with the exception of top-end blocks, which have suffered from lowers bonuses and bankers foibles. The recent price recovery has led property bulls to claim victory over the forces of property deflation. In a typically self-congratulatory post, Business Spectator’s Chris Joye pointed to an offhand comment by the RBA that “members also noted that, according to a range of private-sector measures monitored by the staff, house prices had increased in almost all areas over recent months.” Aside from the somewhat unscientific methodology adopted, the RBA observations (and Joye) are reasonably correct — property prices, led by low-end housing, has remained remarkably buoyant, despite world economic conditions at their lowest ebb since the Great Depression. However, before the celebrations begin, it is worth remembering that the property market is still being spurred by the boosted first home owner’s grant and Australian banks’ remarkably lax lending policies. While Joye and the RBA claim that property prices are rising across-the-board, it has been first home buyers which have led the recent growth, evidenced by the ‘first-home buyer’ share of finance commitments have increased from around 10 per cent to almost 30 per cent of mortgages issued (in addition, first home buyers would be acquiring less costly properties, so the rise is especially telling in nominal terms). Further, mid-range properties have also benefited from the flow-on effect from the grant – for example, many of those selling inflated homes to first-home buyers will then have more to spend on their next purchase. Leaving aside the reasons for Australia’s continuing property boom (of which, bulls would inevitably claim that it is Australia’s limited supply of homes and continued immigration which has maintained higher prices), what property optimists have never been able to explain is why Australian property is far more expensive than property in the US. The median price of an existing US home is US$181,500 — in Australia, the most recent reported median is AUD$405,000 (the figures in Sydney and Melbourne are far higher). Median US income levels are around US$50,300, which means that median property prices are approximately 3.6 times income. In Australia (as at 2006), with a median income of $53,404, property prices are 7.6 times income. Ignoring all the hyperbole sprouted by property bulls or real estate agents — Australian property is more than double the price (relative to income) than US property. How long will banks continue to lend home buyers upwards of 90% of the value of a property? If interest rates increase (which appears inevitable given the widespread fiscal stimulus and massive expansion of the global monetary base), local unemployment rises or banks turn off the flow of easy money, it would be difficult to envisage Australian property prices not following the trajectory of the US, UK, Ireland, Germany, Spain and most of Eastern Europe. Putting it another way — after two decades of growth and the simultaneous bursting of credit and equity bubbles, how is it possible for residential property to remain at record levels? For how long will investors tolerate net negative real yields, relying on a Ponzi-esque scenario of promised capital gains from their outlay? As Niall Ferguson noted and millions of Americans have experienced first hand — asset classes, even property, do not rise indefinitely. Every bubble eventually pops. (And a bit like a dream, one rarely realises they are in a bubble existed until it ends). Despite the bulls’ claims, the price of an asset will ultimately return to its intrinsic value, even one as cherished and misunderstood as residential property. |
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37 Comments
Christopher Joye asserts that “blind freddy” could have anticipated that the government would introduce the $7k First Home Owners Boost. I actually don’t recall ANYONE predicting that the First Home Owners Grant would be temporarily increased prior to the government’s announcement of 14th October 2008, let alone blind freddy. Blind freddy would be able to predict, however, that this measure will cause a lot of pain in the next few years to those first homebuyers who have been enticed to take on bigger loans than they can afford.
can i call it FOG instead of FHOG?…the reasons are obvious as it connotes the state of mind of the participants.
The FOG is the last and final net that has been cast to catch all the little fishies that had previously escaped the housing debt trap.
the self interested Chris No-Joy should be locked up for promoting the ultimate in “ponzi schemes”…the Australian housing market.
once the FOG has cleared, house prices in this country will plummet to the same levels as the US and Europe, 40-50% if not more, and the govt’s nashing of teeth will fall on deaf ears due to their own complicity in this crime of the century.
Adam Schwab: no self interest other than the truth.
No-Joy: Industrially self seeking and hates truth.
what’s remarkable about both criticisms of Chris Joye is that they completely fail to address his arguments on their logic, trying emotive sweeping assertions instead
and it doesn’t appear that Adam is listening either, when he says “what property optimists have never been able to explain is why Australian property is far more expensive than property in the US”
the answer, as Chris Joye says, is driven by the simple economic laws of supply and demand
reading Adam’s piece is like Fallacious Logic 101 - if you can’t win on the data, try to gain points on inappropriate analogies and comparisons
whether property in the the US, the Ukraine or Vanuatu is more or less expensive than Australia is largely irrelevant. It’s also foolish to speak of Australia (or the US) as a whole rather than a number of distinct markets
yes, property is an asset that can go up and down. Has it gone down as many doomsayers predicted?
NO - so now is the time to stop embarrassing yourselves
there is no truth to the rumour that Lynn Anderson is a Real Estate Industry representative:
“NO - so now is the time to stop embarrassing yourselves”
Don’t you really mean that …” No- so now is the time to go out and buy”…. hahahehe…it’s ok Lynn, it was just a Freudian ( real estate jargon) slip.
The fact that each of the first two comments highlighted a critical factor on the demand side of the supply and demand model of house prices in Australia (ie, government policy in relation to first home owner grants) seems to have passed Lynn Anderson by.
Chris Joye, sometimes a prediction brings about a policy response in time to neutralise the forces already at work. The predictions of Schwab and others were taken as bad news by the majority of the market, because there are always more people already invested in property than there are ready to buy.
Therefore Kevin Rudd undertook at least three countermeasures (and maybe more that I don’t know about):
1. Increasing the FHOG
2. Removing restrictions on overseas investment in Australian residential property
3. A bank deposit guarantee one of whose purposes was to hold down interest rates
Boosting home prices was the sole reason for the first two measures, and was also a secondary consideration for the bank guarantee.
Other measures such as State barriers to land release, Federal control of migration levels, and a tax regime that favours speculators and penalises developers, have been carefully fine tuned for many years to keep residential prices rising. This may sound like a grand conspiracy theory but is really more of a common consensus with no need for secrecy, since voters quickly get angry if their home prices go down and are happy if they go up.
Rather than crowing about analysts being “wrong” you should perhaps be thanking governments which have put a lot of work into keeping your investments booming, as well as analysts like Schwab who provided the current government with timely warnings of the price crash that really was looming (although that may not have been Schwab’s intention).
There is some World Bank research, cited by Shane Oliver himself some years back, which shows that house price levels correlate strongly with the degree of urbanisation across different countries.
Australia is one of the most urbanised countries on Earth, much more than the US and even the UK.
It suggests that there are solid reasons why house price- income multiples are higher here than elsewhere, and likely to remain so.
GRN, I also think Shane Oliver is one of our best analysts and the 12/11/2008 Oliver’s Insights is worth reading as it makes it clear how things could have gone either way: http://www.ampcapital.com.au/K2DOCS/AC952C44-82B3-4AE0-89BD-DB32B638A27A/olivers-insights_House-prices-and-debt-Australia%27s-Achilles-heel_12-11-2008.pdf?DIRECT
I’d also like to correct a myth often bandied about with the apparently simple words “supply and demand”.
The Supply:Demand ratio that matters is not the number homes needed in a market versus the number of homes that exist in that market.
The ratio that does matter is the number of people/couples able and willing to buy a home in a given market at a given time, versus the number of homes available for sale in that market at that time.
The numbers in the second (relevant) ratio are much smaller than the numbers in the first (less relevant) ratio, and are therefore far more volatile and subject to influence from public policy, interest rates, unemployment, and the number of homes that are off the market because they are tied up in investors’ portfolios.
That’s why government policy is effective in keeping home prices up. That’s also why large numbers of speculators are able to exert enormous influence on prices by buying and holding. The percentage of total homes owned by investors in capital cities has gone up by something like one percentage point in the last ten years. The effect on the second ratio - ready buyers to available homes - has been dramatic and is one of the main reasons for the relatively high prices in Australia compared to other urbanised countries.
GRN, agreed. That research actually comes from Luci Ellis at the RBA — refer to her Zipf curve analysis in one of her excellent RDPs in around 2002 from memory. I repeated that analysis in my 2003 report to the Prime Minister’s Home Ownership Task Force…
So it’s all inevitable is it Chris - like gravity?
Last recession, 90/91, house prices did drop almost as far as the stock market did. They stayed down for several years and then only started to pick up in select quality markets that dinks could afford. It wasn’t until 2001 that real estate markets started rising across the board.
Our economy lags behind the rest of the world, both on the way up and down. The full effects of the GFC world wide with other economies still on the way down or staying down, (no green shoots at all) will not be filtering through to our real economy for another 6 to 12 months.
As unemployment rises young, dink, first home owner’s and their mortgage belt suburbs will come under increasing downward pressure. Many of these kiddies signed up for no deposit, legals, stamp duty or worries, 100% loans. Then went to retailers offering no deposit or repayments for up to 5 years on a houseful of furniture, white goods, etc. All its going to take is for one of them to lose their job, overtime, get pregnant and the dominoes start falling.
That is exactly what happened in the last recession and debt levels are even worse than they were then.
Just because house prices haven’t dropped…yet…..doesn’t mean they won’t. The fact that the share market is vastly lower than prior to the crash and the housing market is not, is a reason to invest in shares, not houses. I would conclude that houses have far further to fall, particularly if we examine the typical P/E ratio of houses as an investment. Furthermore housing has major difficulties with liquidity, particularly in a crash. Shares can be liquidated in seconds, selecting only the non-performing parts, and as much or as little as is required. Try selling off just that termite affected North wall because you’ve lost your job.
Since houses are almost entirely purchased on credit, the overwhelmingly powerful determinant of housing prices is the amount of credit that will be extended. After all do you know anyone who can buy their house with cash? Or even put down the traditional 30% deposit? Do the housing bulls honestly think that the banking system can continually expand credit ad infinitum, regardless of how large a proportion of income this debt becomes? Just changing the deposit requirement from 5% to 10% reduces the loan available to a buyer by 50%. Guess how much house prices go down as a result of this small change in policy? For most buyers (i.e those not able to pay cash), the price that can be paid for a house is mathematically determined by banks, and has absolutely nothing to do with how much “demand” exists. If a bank doesn’t believe you will be able to return all their money, they will be more cautious in their deposit requirement. If this happens en masse, house prices fall. Even a change from 10% to 11% deposit decreases the possible loan by 9%. I don’t think it is much of a stretch of probability to imagine that at some point in the future deposit ratios might change by this much. Still sitting comfortably, housing bulls?
As if this wasn’t bad enough, will the overseas investors who provide two thirds of our banking credit lines allow a continually expanding debt at the current interest rates? I certainly won’t allow my money to be loaned out to incompetent gamblers to “invest” in risky, highly leveraged assets at the current rate of return. If the interest rates become any lower it will be worthwhile to simply hold cash, with diversification into shares and precious metals. Ours is almost the only housing market in the world to remain at such a ludicrous P/E ratio, and presents a significant risk of capital loss. I can’t imagine many other investors will be willing to lend capital on easy terms to our residential mortgage market. What do you think the mortgage market will be worth if people have to pay through the nose for credit (rising interest rates), and their deposit requirement are increasing?
I have to smile nervously at the pro crash people in this debate - it’s almost as though they WANT house prices to fall by 30-40%. I can assure you if house prices fell by this much across the board, in a systemic crash, the value of your home will be the last thing on your mind. I’d be investing in a shotgun, tinned food and ammo in this case, not property or shares.
House prices will not fall this far simply because this would require a total, complete armageddon in financial markets and employment figures which would mean you may be more worried about the fact your home is secure shelter to keep amaruding hordes out rather than the value of it.
American house prices have crashed significantly but they have only fallen to prices around 2005-2006. That shows the ridiculous increase they had over there, which is not matched by the Australian experience.
House prices falling by these levels will not make it easier to buy a home either - the banks simply will not lend to purchase, therefore we will see a further collapse in financial markets and again, more bloodshed.
Buying a home has never been easy - fact. Deal with it.
Keen (economist) provided a roughly 10 yr scenario: a long term lowering of house prices in real terms. Joye (real estate industry) attempts to refute this on a short term outcome in nominal prices. Case dismissed.
It never ceases to amaze me how people will lie to support their positions.
GEOFFREY ROSS FAWTHROP: Australian house prices did not fall in the last recession (ie, over the period 1990 to 1992). According to every single public house price index, including the ABS, they rose over this period.
JETHRO: Steve Keen did not predict a 40% “real” fall in house prices as you argue. In fact, I predicted exactly your argument in my article above, noting “Don’t expect any mea culpas though. The protagonists will whine about the first time buyers’ grant (blind freddy could have anticipated this counter-cyclical measure), or try to rehash their original predictions by switching from “nominal” (the house prices we see) to “real” (house prices less inflation) terms.”
Steve Keen predicted a 40% fall in nominal house prices, just like he predicted the unemployment would go well north of 15% (best case) and hit 30% (base case).
Oh No-Joy, just dot those “i’s” and cross those “t’s”….can we trust any compilation of figures put out by the real estate industry? It’s the police investigating the police.
When the Govt or the media want any relevant information, who do they go to?…the real estate industry. It’s a bit like giving a loaded gun to a baby, hopefully they will only shoot themselves in the foot.
The truth is that real estate prices have been artificially contrived for reasons that Adam Schwab has been shouting about from the roof-tops for years …..man, you should have seen them kicking Edgar Allen-Poe.
I don’t know about you No-Joy, but I have a conscience and I see thousands of fresh-faced young people signing themselves into financial oblivion on the basis of the Great Australian Dream…this will be their night-terror and you know it and so does your partner in crime…the Govt.
Chris that’s not very smart instantly replying with a personal attack. What is this, kindy? Liar, liar pants on fire. Sheesh what a waste of time you are.
The Productivity Commission’s First Home Ownership report 2004 http://www.pc.gov.au/__data/assets/pdf_file/0016/56302/housing.pdf
… has lots of interesting things including real and nominal price index graphs from 1959 to 2003 on page 16. The real-prices graph shows the index almost doubled from ‘59 to ‘74, sank from ‘74 to ‘79, and fluctuated with no trend from ‘79 to ‘87. Between ‘87 and ‘89 prices then rose about 35 per cent in the biggest two-year increase we’ve ever seen. Followed by about a 10 per cent decline and then flatline to 1996.
Altogether, the real price index rose by 120 per cent in 35 years to 1996. The graph then shows it rose 80 per cent in just seven years from 1996 to 2003, and we know that if we include post-2003, prices doubled in the speculators’ boom.
But as they say, past performance is not an indication of future returns. Share analysts would say the post-1996 increase has the classic appearance of a bubble, but there is a crucial difference between shares and houses: folks don’t really need shares but they have got to live somewhere. There is often (but not always) money to be made by standing between the next generation and what they need or want most. Whether this serves any socially useful purpose does not seem to be a burning question in public policy.
JAMES MCDONALD: You are confusing “nominal” with “real” house prices. The house prices we see rose in value. House prices less inflation fell in value. Normally when talking about house prices, people mean nominal prices. My comment stands:
Australian house prices did not fall in the last recession (ie, over the period 1990 to 1992). According to every single public house price index, including the ABS, they rose over this period.
And here is a recent comment from Macquarie Bank’s Rory Robertson on house prices:
” Private-sector providers like RP Data-Rismark…and others now publish world-class price indexes, after mining great detail from a large subset of recent home sales.
Indeed, now that the private sector has made providing reliable monthly home-price indexes a major focus, there seems little point in the ABS continuing to produce its quarterly House Price Indexes (HPI). The next time the ABS finds itself looking for budget savings, it should discontinue its now-supplanted HPI before it considers again downsizing its labour-market and retail-sales surveys.”
Chris, telling deliberate premeditated lies in public will get you nowhere fast with me or anybody else. During the 80’s boom period the price of all assets rose dramatically and interest rates were put up deliberately to cool down an overheated economy. Hence the “recession we had to have” in which the price of all those assets fell back again. In some of the worst hit mortgage belt suburbs like “Deception Bay” north east of Brisbane there were near new homes, selling 5 at a time to investors from down south and overseas for between 30% & 50% less than what the first home owners had paid for them. This was occurring during the early to mid 90’s. I knew some of the real estate agency staff involved and met a couple of the victims who went bankrupt after divorce, pregnancy or job loss and found their “Devine home” was worth a lot less than what they owed on it.
Geoffrey, you can speculate and provide all the anecdotes that you will, but, for the factual record, between December 1989 and December 1992 these were the changes in value to all the publicly available Australian house price indexes:
1) Real Estate Institute of Australia house prices: +9%
2) Residex house prices: +10%
3) ABS house prices: +6%
4) CBA/HIA house prices: +5.6%
I will stick to the facts and you can creative whatever alternative realities you like!
Chris, i was not talking about the entire Australian continent but specifically, mortgage belt suburbs, especially those run by developers selling homes on 100% loans and what about from 92 to 97 when some of these houses had been on the market for ages and eventually had to be sold at a loss. The “recesion we had to have” was not over in 1 single year and then all of a sudden the boom times were back, it took 1 decade for the boom times to return fully.
“Confusing ‘nominal’ with ‘real’ house prices” … Well, not really, Chris. For those interested in facts (or as near to facts as an index can come), see page 16 of the report I linked above. Or if someone with a web server would be so kind as to post an image of the two-part graph (both real and nominal together).
“Normally when talking about house prices, people mean nominal prices.” Yes, and in terms of actual wealth that would be … confusing nominal and real house prices.
Geoffrey, you are right — in certain areas prices did fall. That is of course true. But when I talk about Australian house prices, I am not talking about certain areas. I am talking about the overall market or, put differently, the representative Australian home.
James, every single reference in your note refers to “real” not “nominal” house prices.
Yes, because real price changes are the only ones that matter, unless the only alternative is to bury cash in the backyard.
Thanks, I was right then. Nominal Australian house prices did not fall in the last recession.
Chris, do you remember back in school when you confidently blurted out a big declaration only to discover that you were completely wrong? That burning sense of embarrassment as you were humiliated in front of your colleagues?
Why in this debate is no-one looking at the demographic factors that will determine house prices over the next decade? How can house prices continue to rise indefinitely into the future when most of the real estate net worth is owned by the soon to retire Boomers and the generation before them, yet the younger generations (X and Y) coming through have almost no personal equity saved up? They are not in any position to keep bidding up the price bubble.
In coming years the Boomers are going to be urgent mass sellers of property to fund retirement (hastened by the impact of the GFC on investment portfolios) but the next generation of property buyers as individuals have only very shallow pockets. Sure they are eager to become home-owners, but raw demand alone does not mean valuations can keep rising past levels that are already beyond the incomes and financial capacity of the entire younger half of the population.
The value of family homes in the main capital cities has completely disconnected from the ability of the generations coming through to afford them. Real price falls in the medium to longer term are inevitable.
I haven’t picked up any mention of the negative gearing and how that affects supply and demand. Thats the one that I see friends(im 38) who have two houses that would never have even thought about it but for the negative gearing. These people are stretched now to keep paying off their loans. Real problems will be when the less moral of us have to choose between paying the mortgage or just walking away.
Just a note Chris, statistics are not facts and the sooner people stop presenting them as such the better we all will be. Please if you must supply statistics to support your arguement I hope you can also supply full details of the statistics, including who paid for the survey, who did they survey, how greater a percentage of the entire population was missed etc.I hope you see what I mean.
Heathdon McGregor makes a valid point about statistics.
They can be bent, twisted and turned to suit any particular agenda. Now imagine these vital statistics in the hands of the real estate industry…well, you guessed it….misinformation!!!
One other point in comparison to the US mortgage maket and the Australian mortgage industry is that in the US, most lenders have a “key” clause written into their contracts.
This “key” clause enables the borrower to walk out of the contract and the house if the value of the property falls below the amount borrowed for the property.
This completely alleviates the borrower from any more pain but he/she forfeits any hold on the property which reverts back to lender.
We don’t have this in Australia and there are many who believe that this small feature is contributing in actually maintaining the Australian house values…in other words, the punters here can’t dump the keys and run, forcing them to stay on and endure the pain…a form of self value maintainence which also helps keep properties artificially high.
Come on No-Joy….give us all some more of your suave and swanky statistical genius. I can see it rolling off your lips but I can’t hear it…blah blah blah…blah blah blah blah
Thanks to BEN LOITERTON for an insightful post - you hit the nail on the head, Ben!
42% of financial assets are held by those aged between 45 and 59; with a further 33% owned by those older than 60 (BRW). In other words, the Baby Boomers own the majority of Australian assets. What are the Baby Boomers scheduled to do over the coming years? Retire… And how will they fund their retirement? By selling assets…
Exactly the same challenge confronts our share market — stockbrokers would have us believe that there are mountains of cash waiting on the sidelines, desperate to bid up shares. But instead of chasing ‘growth assets’, Baby Boomers’ portfolios should actually be moving towards the ‘pension phase’. According to investment ‘rule of thumb’, your portfolio weighting towards fixed-income should increase by 1% for each year that you age — whereas BB’s are heavily skewed towards property and equities, they would be better served to have 60%+ of their investments in bonds (just like their parents and grandparents would have)… What does all this mean? The mountains of cash waiting on the sidelines + much of the cash already invested in the sharemarket should actually be invested in bonds and other fixed-income assets…
Here is a friendly tip for anyone who expects significant growth in property prices (real or otherwise) over the coming decade… Ask yourself: What rate of capital growth would I be happy with from my property over the next ten years? Calculate what you expect “nominal” prices to be in 2019, then extrapolate “nominal” wages growth at 4%pa (which would be a good achievement, in light of short-term unemployment risks)…
Let’s say you were budgeting on 7% capital growth annually — the price of today’s median house would almost double by 2019 (up 97%), whereas the median wage would “only” have increased by 48%.
Given that the wages-to-price ratio is currently sitting a bit above 6, by 2019 these property bulls would have us believe that the ratio would have increased to 8 without any issues whatsoever…
Next, assume that interest rates average a miserly 7% (which would, again, be a very optimistic outcome, given that the Federal Government is borrowing 10-year money @ 5.5% and bank spreads are only expected to widen from their current low-2% levels)…
What does all this mean? If property “nominally” increases at “only” 7%pa for the next decade and median wages grow solidly, the median new homeowner in 2019 will need to devote at least 56% of their BEFORE-TAX income just to paying off the INTEREST on their “great Australian” dream…
Good luck!!
Lies, damn lies, and real estate statistics.
thanks for the plug DMC333. here is the article she is referring to which readers here might be interested in:
http://www.businessspectator.com.au/bs.nsf/Article/Knowing-your-stats-pd20090727-UC59B?OpenDocument&src=is&is=Property&blog=Concrete Detail
The problem with simply mouthing the catechism of “supply and demand” is that the housing market stopped being as simple as that a long time ago.
A lot of the effective increase in the supply of new homes has been the increasing cost of the right to build. 30 years ago, a few pegs and string and a hand-drawn floor plan submitted to your friendly local council was all you needed.
Nowadays, you have infrastructure levies, transport levies, open space contributions, public art contributions - whatever far-fetched tax you can think of, some local government has dreamed it up. You also have GST since 2000 which is levied on new supply but not sales of existing homes.
All of which has artificially driven up the price of new supply, by perhaps as much as $70,000 per block of land. And that means that new supply relative to demand has been paltry.
Until now, that was no big deal as there were plenty of jobs up for grabs in the resources sector. But if unemployment rises, the pressure on governments at all levels to ease the tax grab and give a leg up to the construction industry will become irresistible. Its hard to imagine a construction boom coinciding with falling house prices but its the exact opposite of what we’ve been seeing the past few years - declining new supply combined with rising house prices.
There is also migration, of course. You only need new supply if your population is growing.
I don’t think there will be a precipitous drop in house prices. The more likely scenario is sustained falls over a 15-20 year period as was seen in Japan and Germany.
Joye-Boye, I think DMC333 was referring to this:
http://www.businessspectator.com.au/bs.nsf/Article/Lies-damned-lies-and-housing-statistics-pd20090408-QW3PH?opendocument&src=rss