Author Topic: Australian Property - Gut feelings  (Read 5294 times)

misterhorsey

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Australian Property - Gut feelings
« on: March 12, 2015, 05:56:58 PM »
Just curious to hear what the MMM hive mind thinks about Australian property at the moment? 

And where to from here?

By any measure, Australian property is expensive - relative to income. But Australian wages and prices seem rather high by global standards as well.

Data is everywhere. But in my mind its inherently unreliable to use as the basis of long term projections.  You can make as many projections for the future based on current price to income ratios (which are very very high), increased/record levels of investor activity etc, but the housing market can stay pretty irrational on the upside, or downside, for a pretty long time. And recent data always looking at the rear vision mirror.

I note that Parliamentarians, Property economists, Real Estate agents, representatives of major lenders are all convinced that property is at fair value/slightly expensive. And there's no reason to panic just yet.  Rather unconvincing in my mind as its confirmation bias stemming from their own entrenched positions.  Here's what I think is a repository of their thinking, with the occasional nods to the bears: http://www.propertyobserver.com.au/

However, I'm similarly unconvinced by some of the permabears out there, i.e. Steve Keen, Phillip Soos, Callum Pickering.

But I do enjoy reading Christopher Joye (mainly because he changed his mind.  Like the Robert Manne of Australian economics):
http://www.afr.com/p/blogs/christopher_joye/house_prices_are_set_for_fall_ujN20Ujc6FF5Db2CaZnnbI).

But the shining light for reading about Australian property to my mind is Catherine Cashmore , who writes perceptive insightful articles pointing out failings in the current way we do things in Oz, from a market driven, but progressive community building framework (i.e. we shouldn't subsidise rich people to own 60 properties, and perhaps letting low income workers endure prolonged housing stress is a bad thing too). http://catherinecashmore.com.au/wp/

The value investor in me sees the increasing price growth of houses (as with any other asset/investment) as resulting in the increasing risk profile of that asset (whereas I guess a lot of mums and dad investors will see it as confirmation of the sagacity of their investment decision).  The investor in me is also convinced that house prices will go up (in nominal terms).  That's the easy part. This to me is a no-brainer. However, what I never know is when!!   And in real terms, by how much!!

The opportunistic investor (with a bias towards equities) in me thinks that there are likely to be better investments elsewhere, in equities.

But then the gardener in me and the unit dweller in me (who hates having to deal with his slightly noisy neighbour downstairs), would like to once again enjoy the intangible lifestyle benefits of owning a detached house somewhere. And I can appreciate how these issues inform a lot of purchasers who enjoy the lifestyle benefits and enforced savings discipline of a mortgage.

I started working in 2000 and it seems to have been a perennial hot topic since then. Note: I bought an expensive PPR in 2003 that morphed into an unsuccessful IP (due to relationship reasons) that was sold in 2009 to only break even. Aargh.

What I'm particularly interested is thoughts  from those who lived and prospered or struggled through the previous cycles. Who've seen it all before.  The sharemarket is generous enough to give us scares/buying opportunities every 7 years or so so that we can learn from the price run up and eventual decline.

But because Residential property is such a slower moving asset, is so highly leveraged and subject to minor interest rate fluctations, is such a variable market due to changing demographics, the growth and decline of cities, gentrification of inner cities, benefits from tax concessions in relation to the PPR etc etc - its a complex issue.

My view is that metropolitan residential is expensive at the moment. That there may be a bit more of a kick up in the short term. And this will remain the case while interest rates make capital so cheap to borrow. However, I think that this means that past stellar performance is unlikely to be repeated in the medium term. I don't think there will be a crash.  People irrationally service mortgages even when its not fiancially sensible to do so.  And the transaction costs of selling are so high its a real disincentive to get rid of an underperforming asset.  But my view is that property has done its dash for a while.

But I've been wrong before. I didn't see post GFC residential price rises coming. 

I'm from Sydney, but relocated to Melbs about 5 years ago for what its worth.

Woah. Long post. So over to you. What do you think?


misterhorsey

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Re: Australian Property - Gut feelings
« Reply #1 on: March 12, 2015, 06:09:13 PM »
Btw, just in case anyone thinks I'm a total idiot - I do think data is pretty valuable.  But not necessarily as a basis for accurate predictions!  Government can, will and do change the goalposts all the time, amongst other things.

So if everyone stayed exactly the same as when the data was collected, then yes, long term projections would be really accurate and valuable.

What really annoys me is when economists/real estate agents make projections like 'Sydney will go up another 5% this year.' On what basis are they even making these claims the eejits?  Reminds me of this:

https://www.youtube.com/watch?v=kRW7pITY5Cg

MMMaybe

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Re: Australian Property - Gut feelings
« Reply #2 on: March 12, 2015, 07:41:40 PM »
I am curious about this as well. I've lived overseas for a long time and would like to move back to Melbourne but would not be able to afford a house.

AdrianM

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Re: Australian Property - Gut feelings
« Reply #3 on: March 13, 2015, 12:56:10 AM »
My wife and I relocated to a regional capital to be able to afford a reasonably priced home.

Some of the interesting things I have noticed here, are house prices and rent's are falling.
There is about 8% oversupply of rental properties and its not getting much better as people continue to build new homes as it is cheaper than renting.

So when I see the news headlines about Sydney Melbourne house prices, I just think poor suckas having to over pay for a shoe boxed sized home.

My GUT feeling is we are into the blow off stages of a bubble and all that is needed now is a recession to bring an end to it.

steveo

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Re: Australian Property - Gut feelings
« Reply #4 on: March 13, 2015, 02:01:24 AM »
I also think its too high but I have no idea where it is heading. I can't see continual price increases like we have had in the past. At the same time I doubt we will see a 20% pullback in prices.

marty998

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Re: Australian Property - Gut feelings
« Reply #5 on: March 13, 2015, 02:06:01 AM »
1/3 of people rent. 1/3 of people own their home outright. 1/3 of people have a mortgage.

Of the 1/3 of people who have a mortgage, the average dynamic (i.e. current) LVR is about 45%.

So yeah if the economy went to shit I still cannot see house prices collapsing. People will pay their mortgages before putting food on the table. The ones who can't would still be able to sell out at a reasonable profit.


My ill-informed 2c.

happy

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Re: Australian Property - Gut feelings
« Reply #6 on: March 13, 2015, 03:34:57 AM »
2 years ago I thought Sydney had topped out, but she's off again. Just for fun for another thread I worked out the capital gain on the PPORs I previously owned in Sydney averaged 6% capital gain over 30 and 25 years. Parents' house averaged 8-9% over 50 years.
Whilst ever there is population pressure I don't see it collapsing. Interest rate hikes might slow things down… many Sydneysiders must be leveraged to the max.

agent_clone

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Re: Australian Property - Gut feelings
« Reply #7 on: March 15, 2015, 05:28:04 AM »
My gut feeling is to watch what happens when the interest rates go up again.  Personally I think that state governments perhaps rely too much on property prices being high.  To me Melbourne real estate is more reasonably priced than Sydney, however I understand that there may be a job situation existing Melbourne (or becoming a job situation).  This may get prices to go down a bit.  I don't really see there being a 50% reduction in prices occuring even with a recession, though I guess I could be wrong...

As a personal thing I calculated whether I could afford the mortgage with 10% interest rates, I doubt a lot of people have done that...

happy

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Re: Australian Property - Gut feelings
« Reply #8 on: March 15, 2015, 02:54:18 PM »
Coming from the 17% era, its something I always have done. When rates dropped to 12% we thought it was bliss.  I think even 8% would see a lot of people in trouble.

Annamal

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Re: Australian Property - Gut feelings
« Reply #9 on: March 15, 2015, 03:04:20 PM »
My wife and I relocated to a regional capital to be able to afford a reasonably priced home.

Some of the interesting things I have noticed here, are house prices and rent's are falling.
There is about 8% oversupply of rental properties and its not getting much better as people continue to build new homes as it is cheaper than renting.

So when I see the news headlines about Sydney Melbourne house prices, I just think poor suckas having to over pay for a shoe boxed sized home.

My GUT feeling is we are into the blow off stages of a bubble and all that is needed now is a recession to bring an end to it.

It's a little scary how much the NZ market mirrors the Australian market (prices in main centres rising while regional prices stay static or go backwards).

I know that there is an undersupply of homes but I can't help but feel that house prices vs rents make the main centre markets look slightly irrational.

sirdeets

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Re: Australian Property - Gut feelings
« Reply #10 on: March 15, 2015, 04:21:38 PM »
Started my research heavily about 5 years ago about property.
Had pretty much come to the conclusion I was going to rent for the medium term due to being economically better off renting and investing the difference.  And not just slightly better off.. by a significant margin.
I was in melbourne then and I have since moved to Brisbane.
In brisbane the economics stacked up better but still in favour of renting.
I then started looking into the Gold Coast where I bought a unit as a PPOR last year for about $300k, about 100m from the beach in a nice 2bdroom unit with low body corporate.
I bought my unit for less than the owners paid in 2007.  Property here has performed dismally (which is good for me) since the GFC.
So I guess for me it's always an economic decision, and the economics stack up in some areas but not others.
That's on a PPOR point of view with a relatively high income and tax rate.  As an investment, I think property is terrible, doing the sums on a bunch of places in vic, qld, nsw.
 
Looking at sydney prices just makes my head spin. 

misterhorsey

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Re: Australian Property - Gut feelings
« Reply #11 on: March 15, 2015, 06:22:52 PM »
When I bought a PPR in 2003 I did some calculations to see if I could afford the repayments if my income halved (as if!!) and if interest rates went up 3% (like that's going to happen!).

Both things more or less did happen when I quit the corporate sector for a bit and the economy slowed. I can't recall exactly how much interest rates went up at the time but they did. 

I'm glad I had a buffer.

What slightly annoys me/scares me is how many many people probably don't calculate a buffer.  They seem to assume that hay making weather is going to continue indefinitely.  And if you look at the market with that kind of viewpoint, you bid prices up (in the short term).



MMMaybe

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Re: Australian Property - Gut feelings
« Reply #12 on: March 15, 2015, 07:04:59 PM »
From a non-investment viewpoint, I must say that I hate what is happening in Australia. The general obsession with housing is bordering on ridiculous. I have noticed the whole character of neighbourhoods (or all character!) changing and it makes me wonder about the damage that it is doing to society as a whole.

Take the Melbourne suburb where my parents live. Its a strong favourite with Chinese investors. It used to be a typical middle class neighbourhood (not inner city) but now the totally unremarkable (and rather ugly, to be honest) 70's houses are selling for over a million dollars. Houses are being knocked down and re-built left and right. Others are clearly being left empty or rented out. The whole neighbourhood is becoming unrecognisable and its middle class nature is disappearing. I certainly could not afford to live there and neither could many of my peers. It really is a totally ordinary looking suburb. No gorgeous Victorian properties, not super close to the city. Its just insane and I struggle to justify the lofty house values.

Its hard not to wonder whether this is a good thing, long term, when your average middle class is getting pushed further and further out of the city. Or when your working class is getting totally airbrushed out of the inner city altogether. Or when its perfectly OK to be leveraged up to your eyeballs to own a very ordinary house.

I for one, would prefer sanity to prevail :) Bring back some socio-economic diversity and keep our neighbourhoods real and interesting. I'm sure this is not a popular viewpoint but I really feel the life is being sucked out of the place.


marty998

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Re: Australian Property - Gut feelings
« Reply #13 on: March 15, 2015, 07:53:13 PM »
Some of you may recall I bought an IP last September for $450k.

On Saturday a similar unit in the same complex was listed for sale at $490k. Spoke to the agent who said she'd had offers around $515k-$520k and was expecting it to keep going up.

I nearly had a stroke. Ahem. 15% in 7 months. - yippie!

Also took a trip out West to Liverpool & surrounds on Saturday. 100's of people going to each open house. Real Estate market out there is just as bonkers as the inner city.

misterhorsey

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Re: Australian Property - Gut feelings
« Reply #14 on: March 15, 2015, 08:15:18 PM »
@MMMaybe, I think you bring up some valid points.  I think socio-economic diversity among communities is really important.  Whether it has every actually been achieved is another matter however.

You should check out some of the Catherine Cashmore articles I've linked to in the OP. She writes very eloquently about how equity and diversity is being squeezed out of the property landscape by existing policies.

Having said that, I do think the spectre of 'Chinese investors' / foreign investors is a bit of a media beat up. For two reasons: people from Asian backgrounds don't comprise a homogenous bloc of acquisitive property buyers.  The term 'Chinese Investor' is too frequently bandied about to describe the mysterious 'other' that is taking over'our' suburbs.  Yes there are super rich entrepreneurs from mainland china who have bought houses, I have no doubt. And some of them demolish them to build yuck super neo-McMansions.  But super rich entrepreneurs from other backgrounds don't get a write up as they look like 'Us', whatever that means.

Of course, it would be silly not to recognise that 'Chinese' people value property investment. Much like Italians and Greeks, and may form a more visible and higher proportion of buyers.

(I may be sensitive to this one, as I'm Australian born (Sydney Westie), but of Asian background. I consider myself Australian and its not really an issue at all but for the fact that people still occasionally ask me where I'm from.  Answer: Sydney. Question: No where are you really from? Sigh..... So when I've been to auctions I do wonder whether people think I'm a privileged prince-ling and whether I am a focus for their resentment! )

Btw MMMaybe, I'm not trying to have a dig at you.  I'm just trying to interrogate the concept as its something I do feel strongly about.

Anyway the overly generous tax regime that favours residential property investment over decades has done more to inflate prices than the marginal impact of a few foreign buyers and now 'Chinese Investors'.  Every auction I have gone to when I was looking last year had 'white' (for want of a better description) baby boomers celebrating at the fall of a hammer, seemingly to buy as an investor or to kennel their adult children.

Although they are getting a beating in the media these days as well!


MMMaybe

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Re: Australian Property - Gut feelings
« Reply #15 on: March 15, 2015, 09:10:31 PM »
Misterhorsey,

I am not Australian by birth and have lived overseas for many years (now in Manila) so would need to support diversity myself! I don't look like the Other but culturally I am an outsider.

I wasn't actually having a dig at Chinese investors as such, I was really just giving a hint as to where I was talking about... I have lived in Asia for a long while and this is really more a moan about locust like investors...because I am seeing the effects here too.

The problem of investors bidding up the market is not only a problem in Aus, HK and Singapore have both seen the same issue. Lots of Mainland/foreign/investor money pouring in and socio-economic diversity getting crushed. So as you say, its a broad issue. I just am having a hard time embracing the new normal. I like to have a diverse community and I was not getting that feeling last time I was in Melbourne.

Sorry wasnt finished with my thoughts...pushed send too soon...

I used to live in an area in HK that was having this issue. Money was pouring in and all the Mom and Pop restaurants and shops were getting shoved out. Made me sad to watch a long standing community get pushed out.
« Last Edit: March 15, 2015, 09:15:02 PM by MMMaybe »

misterhorsey

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Re: Australian Property - Gut feelings
« Reply #16 on: March 15, 2015, 11:21:52 PM »
Hey MMMaybe, yes I didn't think you were necessarily having a bash.  Your comments were insightful and nuanced.

But often I see the terms 'Chinese Investor' used as a euphemism for a mild kind of xenophobia/race based moral panic etc. But I didn't think you were using it in that context, but just wanted to respond to the term. It often goes by without being challenged in any way, and I felt reasonably comfortable doing so.

Personally and politically, I'm supportive of foreign investment, mainly because you can't have it two ways.  But I'm also supportive of measures being used to ensure that local communities (whatever their complexion and composition) are able to fully participate in the life of their community.  I read about what's happened to London, the fact that the (rich) parts of the city are increasingly land banked by the global 1%, and I realise there are definitely some drawbacks with being the a global capital of Capital.

Basically I think we are on the same page. And MMM forum is overweight with intelligent contributors to discuss these issues I think.




deborah

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Re: Australian Property - Gut feelings
« Reply #17 on: March 16, 2015, 12:05:57 AM »
I think that while interest rates remain low there isn't much impetus to attack property prices. There was a recent article in Fairfax with a graph that showed housing affordability from about 1950 to now - that is the cost of repayments  versus income rather than the cost of a house versus income. I was interested that I bought my first house at the peak in the graph - the late 1980s - it is a lot lower now. With a mortgage rate of 18%, it is very difficult to get ahead, no matter what you pay. Very many people lost their houses.

Once interest rates dropped even a small amount, it was amazing how much easier it was to pay the mortgage and make ends meet.

I really dread what is going to happen to the 1/3 currently with mortgages when the current interest rates rise - even to normal standards. That is when politicians will have to rethink the regulatory system that makes it difficult to release land for housing, to build cheap and affordable housing in many parts of our cities, and to subdivide. At that time they will start to have voters on their side, because people will start to see what policies have been doing.

Things like negative gearing have not really helped people to invest, and those with PPORs don't really suffer when prices rise or fall - if you are going to sell and buy another, what do you really care about the actual prices - it is just the difference that matters.

However, a major problem is that of older people going into care, wanting to downsize or going to old peoples homes. Because the family home is tax free and not evaluated in the pension and care packages, there is a huge incentive for these people to own their own homes. Care packages cost a lot more than people actually have available to them in assets, so they need to get a reasonable amount for the family home when they sell it to pay for their care. Old peoples homes are very expensive, and people lose about half what they pay in back end fees.

happy

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Re: Australian Property - Gut feelings
« Reply #18 on: March 16, 2015, 03:04:59 AM »
Quote
and those with PPORs don't really suffer when prices rise or fall - if you are going to sell and buy another, what do you really care about the actual prices - it is just the difference that matters.

I beg to differ: if you bought at the peak, and are paying/have paid a big mortgage, you may lose a substantial amount of money. Sure you might later  both sell and re-buy at a lower price if the market  has corrected, but until the market recovers you may still have lost a lot.

deborah

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Re: Australian Property - Gut feelings
« Reply #19 on: March 16, 2015, 03:12:44 AM »
I was thinking of it without a mortgage. I tend to think that money for a house is "spent". The house is an asset, but it doesn't bring in money, so it is a lifestyle choice. Since that money is already barricaded off from my investments, I am just swapping an asset with a similar one - like hermit crabs.

I agree that this is an unusual way of looking at your PPOR, so I thought I would throw it in as a way of looking at it.

happy

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Re: Australian Property - Gut feelings
« Reply #20 on: March 16, 2015, 03:17:08 AM »
I agree if you paid off the house and have had it a long time, and housing prices have been stable, or at least not dropped too much. Just swapping assets in that case.

But in the case of Sydneysiders who have been trading after 2 successive years rises of 15%,  if there is a substantial correction they will come down hard and they may delay trading until the market recovers. ( which may delay the market recovering).

steveo

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Re: Australian Property - Gut feelings
« Reply #21 on: March 16, 2015, 05:00:18 AM »
I was thinking of it without a mortgage. I tend to think that money for a house is "spent". The house is an asset, but it doesn't bring in money, so it is a lifestyle choice. Since that money is already barricaded off from my investments, I am just swapping an asset with a similar one - like hermit crabs.

I agree that this is an unusual way of looking at your PPOR, so I thought I would throw it in as a way of looking at it.

I view my PPOR like this. Its a way to purchase housing for life assuming I do not upgrade.

But in the case of Sydneysiders who have been trading after 2 successive years rises of 15%,  if there is a substantial correction they will come down hard and they may delay trading until the market recovers. ( which may delay the market recovering).

The first thing that has to happen is a correction. People have been calling it for years and it hasn't happened yet. Then the issue is how big a correction will it be. For me personally a correction shouldn't really impact me as I view my house as per deborah plus I have a small mortgage which I'm looking to pay off this year.

In any sort of recession some people will come out of it worse off. I would assume that for prices to drop we would need a recession. It could happen but I'm not going to bet on it.

deborah

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Re: Australian Property - Gut feelings
« Reply #22 on: March 16, 2015, 02:53:02 PM »
The world should currently have high inflation because everyone is printing money. I hope it doesn't happen, but my feeling is that when the correction finally happens, and economies start moving again, they will start to inflate fast - meaning high interest rates as well.

I do not want to be positioned with any debt when that comes. I also think that this will give Australian house prices the ability to grow less than inflation, and to gradually ease into what they should be. It will be devastating.

superannuationfreak

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Re: Australian Property - Gut feelings
« Reply #23 on: March 16, 2015, 08:10:46 PM »
In the absence of substantial aggregate economic hardship (which is possible but rare and unpredictable on a large scale; I'm not thinking about a short-lived recession here) I think there is a more likely scenario than 30+% short-term drops in property prices.  Stagnation in prices and illiquidity in the market.

Think about the individual making the decision to sell their house or investment property.  They likely suffer from various biases including narrow framing (I care about how much I gain or lose on this one purchase or investment, not just the overall return of my portfolio) and loss aversion.  As long as they are employed, many will be unwilling to sell at a loss.  A more likely scenario (which we've seen for a short period in recent years, before prices in Melbourne and Sydney took off again, and seen internationally) is that people who might otherwise sell retain their property.  The market dries up as there aren't so many sellers who will sell at prices that buyers are willing to pay.  Prices don't necessarily fall much in nominal terms but (if the economic hardship lasts for a time) grind lower in real terms as they stagnate.

This_Is_My_Username

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Re: Australian Property - Gut feelings
« Reply #24 on: March 22, 2015, 11:06:06 PM »
I am racist against property as an investment because it is such a hassle to deal with, compared to shares.  If you want property exposure, buy a reit.

also, here are some more reasons: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/


However, inner-ring suburbs will go up forever.  because supply is fixed but demand will always increase.  That is a great place to own.

regional towns are terrible for property.  infinite supply and weak demand.