The australian housing bubble

[taffordbark]

Just a bit of food for thought for those of you worried about property prices ,values etc.

These are a few of the predictions I made some time ago and now being spoke about by some of the leading economists across the country.

 

 

According to The Economist, Australian housing is now 56.1% overvalued based on the long run average of price to rent ratios. The price to rent ratio is seen as similar to that of the PE (price/earnings) ratio used to value shares.

Australia is in 1st position on the leader board of overpriced property. In close 2nd is Spain at 53.4%, Hong Kong at 49.1%, France 39.7%, and Sweden 37%.

 

According to Edward Chancellor, author of the book titled Crunch Time for Credit (2005) and a member of US Investment Firm GMO’s asset allocation team, Australia is in the midst of an unsustainable housing bubble that could burst at any time.

It’s hard to argue with these claims when reports out today show Australian house prices have surged 20 percent this year, the most since the ABS started the house price series in 2002. Melbourne recorded an unsustainable gain of 27.7 percent followed by Sydney at 21.0 percent. This comes after reports in February that wage growth fell to it’s slowest pace in a decade last year.

M Chancellor told The Australian, he estimates Australian house prices are more than 50 percent above their fair value, something he cites as a once in a 40 year event. “If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably.”

 

for more detailed info and graphs go to www.whocrashedtheeconomy.com

[Guest Fly Away]

I have been reading so much conflicting stuff in the press, I don't really know what to think. As a refugee from the UK housing crisis, I am very wary about buying right now. However that's just me. I am hoping that if they continue to raise interest rates slowly that prices will stabilise for a while and salaries will catch up with house values and a crash will be avoided. However the prospect of a crash does seem to be looming closer...

[taffordbark]

I have been reading so much conflicting stuff in the press, I don't really know what to think. As a refugee from the UK housing crisis, I am very wary about buying right now. However that's just me. I am hoping that if they continue to raise interest rates slowly that prices will stabilise for a while and salaries will catch up with house values and a crash will be avoided. However the prospect of a crash does seem to be looming closer...

Given that I have been through all of this before,,i think ther is no question of a crash not happening.

The figures are just not adding up as they were not in the UK in December 2006,,,yes that long ago!!!!!!!!!!

I had my own business in the Uk and just got a funny feeling about things ,,never been so right in my life,,think there is a lot of complacency in Australia that the mining sector will always pull the economy out of trouble,,mr Rudd and mr swann kissed that goodbye on Sunday,,and the over-enthusiastic real-estate idustry are making peoples realistic expectations of achievable property prices exhasperating.....watch this space!

[taffordbark]

Oh forgot to mention,,,watch out for the retail sales figures over the next couple of months,,,I would put my shirt on them declining,which shows my prediction that Aus will double dip quicker than any other major economy!

[ozzieclare2be]

think your wrong on the mining point bro, bhp are heading for their biggest expansion ever at olympic dam as it holds 38% of the worlds uranium reserves, the rudd goverment are taxing them more because they know expansion is imminent and they are a money pit. Dont forget australia has natural resources which it exports (britain doesnt) , we are more affiliated with the asian countries, britain isnt part of that. Maybe the housing bubble will burst but i dont think its imminent think that just wishful thinking,

 

Uranium exploration picking up in S Australia – Minister

[ozzieclare2be]

btw i agree houses are more over valued but alot of thats due to the rising costs in other states and more people from those states capitlising on the slow upturn of the market here, if you towards the other states sa still behind in terms of growth, and many overseas investors looking to sa also becuse of the imminemt expansion (but i cant say too much about that lol)

[Anne B]

I hope you are right taffordbark, and I totally agree with your analysis. I remember when UK house prices were overvalued but 'experts' kept saying there wouldn't be a price crash and that prices would just stop growing so fast. Well we all know what happened there. It's pretty much like that here. Australians are very complacent and totally obsessed with how much their house is worth. If prices are 56% overvalued and with the exchange rate at a 25 year low it would be mad for us to buy property at the moment. People keep saying we've got to get on the housing ladder here but I am hoping a house price crash hurries up and happens.

 

It is not a bad thing if prices crash anyway. If you want to move then OK you get less for your house but pay less for your next, making your mortgage repayments lower than they would have been. If you are a 1st time buyer then it's great. If you are a property investor with lots of property - well who cares you've probably made a load of money already.

[ShaunWilson]

think your wrong on the mining point bro, bhp are heading for their biggest expansion ever at olympic dam as it holds 38% of the worlds uranium reserves, the rudd goverment are taxing them more because they know expansion is imminent and they are a money pit. Dont forget australia has natural resources which it exports (britain doesnt) , we are more affiliated with the asian countries, britain isnt part of that. Maybe the housing bubble will burst but i dont think its imminent think that just wishful thinking,

 

Uranium exploration picking up in S Australia – Minister

 

 

And also working in the mining industry, i know Rio also have a deposit for Uranium of similar size to that of Olympic dam, with a estimated mining life of circa 200+ years, this taking into account advancements in minig technology in years to come.

[Diane]

think your wrong on the mining point bro, bhp are heading for their biggest expansion ever at olympic dam as it holds 38% of the worlds uranium reserves, the rudd goverment are taxing them more because they know expansion is imminent and they are a money pit. Dont forget australia has natural resources which it exports (britain doesnt) , we are more affiliated with the asian countries, britain isnt part of that. Maybe the housing bubble will burst but i dont think its imminent think that just wishful thinking,

 

Uranium exploration picking up in S Australia – Minister

 

 

I don't think it's a bad thing at all that the Govt have increased taxes on the big mining companies. After all, most are foreign owned and why should another country's economy get the benefits of Australia's rich resources? There are some arguments that the mining companies will go elsewhere if taxed highly here, but at the end of the day they need the minerals/resources, we have them. Who has the better hand in that game of cards? My opinion is "if you've got it, flaunt it" and Australia in terms of uranium etc defnitely has it!

 

I think they should go further and make it a legal requirement that all resource processing should be done in Australia, not overseas, providing jobs for Australians. Arguably SA is also in a strong position within Australia as Olympic Damn has phenomenal potential still, and the house prices here are no-where near as high as elsewhere in Australia.

 

It makes me smile that people emigrating here expect to get as good, if not better salaries (in a lot of cases), and still want houses to cost a lot less! It's always going to be a basic case of supply and demand, and rental occupancy rates are still really high.

 

Comparing prices to the South East corner of the UK where we used to live, (and in terms of employment opportunities within reasonable commuting distance there's not a huge difference), SA housing is still a lot cheaper. Been a long while since you could find anything less than STG200k in Essex yet there are still places around here for less than $300k.

[Anne B]

It makes me smile that people emigrating here expect to get as good, if not better salaries (in a lot of cases), and still want houses to cost a lot less! It's always going to be a basic case of supply and demand, and rental occupancy rates are still really high.

 

Comparing prices to the South East corner of the UK where we used to live, (and in terms of employment opportunities within reasonable commuting distance there's not a huge difference), SA housing is still a lot cheaper. Been a long while since you could find anything less than STG200k in Essex yet there are still places around here for less than $300k.

 

To be fair, no-one so far has said anything about their expectations with regards house prices or salaries, merely the fact that house prices are very high - and whether the bubble will burst or not.

 

You may be out of touch with UK house prices too, for example in Chelmsford, county town of Essex, there are plenty of 2 and 3 bedroomed terrace houses for sale for £180K which is approx A$300K, I've even found a 2 bed apartment for £93K (A$150K) and a 3 bed semi for £200K so prices have dropped quite a bit there. See www.rightmove.co.uk. SA property is cheap the further you go out, but many suburbs closer to the city and the beach are not.

[taffordbark]

Just to put everyone in the complete picture,tis is a short summary of everythig mr Chancellor said,,,his words reflect my beliefs,and seem to mirror my thoughts 'as a businessman' of what was about to occur around the beginning of 2007 in the UK.

I am not a doom and gloom merchant,just a realist....... read on!

 

 

He described Australia's banking system as a "cartel" and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.

He attributed Australia's "luck" to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.

"My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom," he said.

"Those are the facts and you can't paper over them.

"In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.

"The problem is the bubble and that hasn't gone away."

A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.

"It's the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse," he said.

Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.

"We would see the Chinese demand for Australian commodities as being potentially vulnerable," Mr Chancellor said.

He said he expected the negative news in Australia to come from "the housing market falling under . . . the sheer weight of its overvaluation and lack of affordablity" and a "terms of trade shock".

Everyone referred to Australia as the lucky country, he said. "I think that's pretty apt."

However, "given the great growth in private sector credit and the vulnerability of the housing market . . . Australia is not out of the woods. It hasn't even entered the woods."

[Guest kangomik]

If your going to tax business that earns an extortionate amount of money, when will the banks be taxed in the same way?

 

For those prediciting a bubble burst, please put an accurate time frame on your prediction.

Just so people can guage your accuracy.

 

 

What happens if the housing martket bubble bursts, and no one sells?

 

Please do not misunderstand me, i came from the same school of thought 2 years ago when arriving. However i have not managed to convince my self that it will deffinately happen due to the time scale i gave it.

 

We all know our world will end one day, but no one knows when;) ( i do keep asking them)

[taffordbark]

My own predictions based on the figures and like for like time scales of similar cenarios are that we should expect a downturn somewhere betwen August and November this year.

Very difficult to accurately predict a date but if you study the micro economics on a daily basis as I have done then you wil see why these dates will eventualy prove to be about right.............

[Guest Fly Away]

More mixed messages;

 

MORE than 90,000 recent first-home buyers could be forced out of their homes because interest rates have risen faster than expected.

 

They have been caught out by the Reserve Bank's increase in rates - yesterday's increase to 4.5 per cent was the third in three months and the sixth since October.

 

Rate rise to crush 90,000 families - and experts warn of more pain to come | News.com.au

 

More properties on the market means more competitive pricing - not a bubble bursting but hopefully deflating a little before it gets out of hand. I pity anyone in this situation however.

[Guest kangomik]

If the property bubble burst would the exchange rate turn around or would the rental market boom?

 

I have two dilema's. Where will people live if they loose their home, will they all go back to their parents places? Or will they look to rent as a cheaper option?

Afterall there is already a housing shortage hence the high price and demand.

 

If the exchange rate changed from say 1.6 quid (sorry aussie laptop now pound sign) to 2.5 quid do you think that a certain few poms (can i still use that term?) and other over sea's investors would wait to see if the market bucks, or are they going to plough in and take advantage of the new situation? Or do you think the it could drop to 3 quid to the dollar because of the recession?

 

If all of this depends on China's demand dropping, what happens when China drop the one child policy, will this mean that China will require less from Australia?

 

Did we mention the biggest growing country of all - India. It's demand may not grow, though i do see a few "made in India" labels on products now. What about the amount of people/students who want to leave that country alone?

If they come to Aus - by the way India has the most millionare/billionare's in the world - will the parents of the other children accept these new imigrants into their homes or will they require their own homes to live in?

 

House prices in Sydney dropped dramtically BEFORE the world recession, they have slowly increased in value to were they where before the crash.

WA is on the edge of a boom, with prices and wages following, would mining be investing so much if they thought that demand would ease or drop?

 

I don't know about you but things don't seem to add up, and i look forward to the forcast at the end of the year.

 

I used to agree with these people who wrote these books, but when you predict 5 years ago that SOMETHING will go wrong then i think there is too wide a time scale, it's a bit like the ladies with those crystal balls.

 

Now if someone had said the world would stop as we know it after a volcanic eruption in 2010 but would then return to some type of normality........ I would really start to listen to them!

 

Cheers

Mik

[Guest smit]

More mixed messages;

 

MORE than 90,000 recent first-home buyers could be forced out of their homes because interest rates have risen faster than expected.

 

They have been caught out by the Reserve Bank's increase in rates - yesterday's increase to 4.5 per cent was the third in three months and the sixth since October.

 

Rate rise to crush 90,000 families - and experts warn of more pain to come | News.com.au

 

More properties on the market means more competitive pricing - not a bubble bursting but hopefully deflating a little before it gets out of hand. I pity anyone in this situation however.

Increases in interest rates have been on the cards for months and it is now panning out........however with inflation now coming under control and retail sales starting to ease , ithink it will be interesting to see RBAs next move........probably hold steady next month i reckon.

 

However because of Rudds fhog bonus i do believe there will be some first home buyers who are going to struggle now because of over commitment.

[Guest smit]

If the property bubble burst would the exchange rate turn around or would the rental market boom?

 

I have two dilema's. Where will people live if they loose their home, will they all go back to their parents places? Or will they look to rent as a cheaper option?

Afterall there is already a housing shortage hence the high price and demand.

 

If the exchange rate changed from say 1.6 quid (sorry aussie laptop now pound sign) to 2.5 quid do you think that a certain few poms (can i still use that term?) and other over sea's investors would wait to see if the market bucks, or are they going to plough in and take advantage of the new situation? Or do you think the it could drop to 3 quid to the dollar because of the recession?

 

If all of this depends on China's demand dropping, what happens when China drop the one child policy, will this mean that China will require less from Australia?

 

Did we mention the biggest growing country of all - India. It's demand may not grow, though i do see a few "made in India" labels on products now. What about the amount of people/students who want to leave that country alone?

If they come to Aus - by the way India has the most millionare/billionare's in the world - will the parents of the other children accept these new imigrants into their homes or will they require their own homes to live in?

 

House prices in Sydney dropped dramtically BEFORE the world recession, they have slowly increased in value to were they where before the crash.

WA is on the edge of a boom, with prices and wages following, would mining be investing so much if they thought that demand would ease or drop?

 

I don't know about you but things don't seem to add up, and i look forward to the forcast at the end of the year.

 

I used to agree with these people who wrote these books, but when you predict 5 years ago that SOMETHING will go wrong then i think there is too wide a time scale, it's a bit like the ladies with those crystal balls.

 

Now if someone had said the world would stop as we know it after a volcanic eruption in 2010 but would then return to some type of normality........ I would really start to listen to them!

 

Cheers

Mik

Interesting to see your different point of view from 2 years ago. Things look different after youve been here a while. The whole market situation is so different from uk us being the other end of the world.In world terms we are a small country at the end of the chain......and SA is a small part within oz!

Trafforbark reminds me of your posts. He may be right he may be wrong.We will see:)

 

Australias housing market has been overpriced for years but it is propped up by differing market activities than other countries eg the negative gearing on rental properties and the increased immigration especially here in sa.

 

It may well be due a fall but when and why will it happen. Most housing crashes happen through economic recession because of job losses , high interest rates . Demand is low , so prices drop.

Oz escaped the one just happened, cant see anotherone happening soon. Maybe within 5/7 years as oz manufacturing jobs go overseas.......but as everyone says with the resources keeping the economy afloat????????

[Guest smit]

oh , and cant see exchange rate changing much with oz rates higher than uk. Itll change when uk economy eventually gets going and interst rates start going up.

 

Im sure there are tax implications.......but sell your house here , go in rented , buy place in uk in pounds wait 2/3 years...uk house prices up, pound up , bring money back ....whoo hoo:)

 

only my own opinion .....of course

[Guest kangomik]

Smit mate

Two years ago i left half of the world that was on a steep slope downwards, i had travelled to various parts in the western world and could see and work out what had happened, and did ok out of the situation, along with other family members.

Arriving here on a fastly dropping exchange rate i thought i knew what was happening, and could use my experience and history trend to second guess which way things were going.

 

With a little more luck then accurate guessing we bought at the right time (in the last 2 years)..... i know everyone thinks this, it's why we buy..... but in all the time here i still cannot get my head totally around how Australia ticks.

 

There are quite frankly, to many variables. People do not do things here like they did in the UK and the USofA. There is credit yes, but not on a scale like over there. I have never met so many people that do not have credit cards, If you don't have it you don't get it. What a wonderful attitude that would make others shudder in disbelief.

 

Property and property investment is huge here, just how many people do you know that OWN more than one property? Theres quite a few out there.

[Guest kangomik]

With limited exports from UK and US i see little change in the exchange rate.

 

You could have a good point there regarding buying in UK.....but maybe not sell and rent, afterall if the rise rate is high here why not take advantage of UK credit, short term plunge with high reward..... ummmm cheers

[Guest kangomik]

I had a quick look into this, house prices are higher than when we left!

 

I found this example.

 

3 bedroom semi-detached house for sale in Langden Crescent, Bamber Bridge, Preston PR5, PR5

 

The floor plan kind off makes me shudder.

[Guest whitfan]

One of the main reasons the bubble is as bad as it is is that you Pom's come over here, and buy up anything and everything worth a damn. Too bad the young people of adelaide dont have flats in london to sell to fund their purchases.

 

Immigrants using favourable exchange rates and paying cash for any property that isnt a ****hole is causing the bulk of this. Dont kid yourself otherwise.

[Guest kangomik]

LOL@ whitfan. what favourable exchange rate?

Most aussies i meet have more than one property.

 

Don't kid YOUR self

[Guest whitfan]

1 AUD = 0.600356295 GBP

 

 

not so long ago it was more like 1 = .40

 

...

[Anne B]

1 AUD = 0.600356295 GBP

 

 

not so long ago it was more like 1 = .40

 

...

 

You have got your maths totally wrong. At $1 = 40p, then you only needed 40p to buy $1. So £40,000 would get you $100,000.

 

Now at 1 = .60 you need £60,000 to buy the same $100,000

 

If you had £40,000 that would only get you $66,666

 

The cash up pom is now not cashed up at all !!!!!!!!!!!!