David Murray, Chairman of the Future Fund has today warned that Australia’s high house prices have made the Australian economy vulnerable to shock from overseas events. Two weeks ago, The Economist magazine released its quarterly update on global house prices showing Australia, once again, has the most expensive housing in the world.
Mr Murray said “The relationship between house prices and incomes is uncomfortably high,’’ saying Australia could be vulnerable if interest rates increased around the world, putting downwards pressure on commodity prices leaving Australia exposed with high house prices. He believes Australia property prices are high because the boom in China was fuelling commodity prices and that a fall in commodity prices would cut income flowing in, reducing pay packets and household incomes, and making it difficult for highly leveraged households to service their home loan debts.
This comes as Finch Ratings said mortgage arrears in Australia have increased in the fourth quarter of 2010.
» High house prices ‘make economy vulnerable’ – The Sydney Morning Herald, 16th March 2011.
What also needs to be looked at is the issue of Property Hoarders who exploit Negative Gearing thereby using taxpayer dollars to socialize their losses and privatise the profits at the expense of those whom have been locked out of homeownership.
I don’t suppose he is referring to our 2nd biggest trading partner, Japan, when he talks of overseas events.
Look out below!!!!
$AUD falling, commodity prices and volumes collapsing, certain trading partners sliding back into a depression, new great taxes, cost of living pressures (food and fuel).
Australians will not be able to keep the game going by leveraging up to support house prices. The sheer weight of investors bailing will oversupply the market. Heaven forbid if unemployment starts to rise.
One of my friends has all four of her properties (investments) on the market and is getting no offers. The leverage is killing them…..Won’t get back what was paid and has lost money each year the houses have been held!!
The perfect storm is on the horizon and heading to our shores. Batten down the hatches and wait for the blood on the streets.
It’ll all be OK. It’s different here in Australia.
House prices only go up.
Prices paid at auction for similar properties are down 10 percent in 12 months on the NSW Sth Coast, from my personal observation. Asking prices haven’t gone down and a lot of properties from 3 years ago are still on the market at the max bubble price. Sales happen when the odd seller drops the asking price on recently advertised properties by 10 percent or more. No RE agents have shut up shop yet – that’s my key indicator! Sorry for any recent buyers who will be stuck with high mortgages but you can’t say the info hasn’t been out there about the bubble.
Dodgy REIV data for auctions conducted in Melbourne 19=Mar-2011!!!
http://reiv.com.au/home/inside.asp?I…=1226&nav2=162
Auction results for Saturday 19th March 2011
This week: 816
S Sold at Auction: 437
SB Sold before Auction: 105
SA Sold after Auction: 4
Passed in: 270
Clearance rate: 67%
Postponed: 2
Withdrawn: 1
Auctions with no result: 128
816 (claimed auctions)
105 sold before auction (these properties did not go to auction today)
Hence total auctions held today = 711
437 sold at auction
4 sold after auction
270 auctions passed in
Hence actual auction clearance rate = 441/711 = 62%
The 128 auctions with no result does not allow the above numbers to add up. Here is the answer:
http://www.reiv.com.au/news/details.asp?NewsID=1053
The REIV stated approximately 950 auctions were planned for today! 816 + missing 128 = 944
Therefore the 128 auctions with no results (expected to be unsold) have been removed from the total number. This makes the actual clearance rate:
441/(711+128) = 53%!!!!
We”, Rod, our “Local” branch of Elders has definitely shut (and the property is up “for auction” too – pity that they have not noticed that of the TEN other recent “for auction” sales, ALL were passed in (and are now flying very modest “for sale” signage). We live next door to a (now “almost”) brand new duplex (with “Ocean Views”), each of which was put up for auction 18 months ago with a reserve of half a mil $. Passed in, and been sitting there for all this time unsold. The “big” billboard outside is looking very shabby now, especially since our local Cockatoo population have found it’s a very good perch, AND tastes particularly nice!!
MUST be costing the owners a bomb – the “old” demolished property was in the order of $400K, add on the cost of demolition, planning approvals, new build, and the outlay would have not generated that much return even if they had both sold for the combined $1 Million or more; with their sitting unoccupied for an extended time, especially with the less than great weather this year has seen, neither property is looking quite so “brand new” anymore, which will make selling more of a problem than say 18 months ago.
Will they recover the outlay? Looking less likely by the day, and with recent Global events to consider, I’d be very surprised if they manage to avoid bankruptcy.
– And, this is just ONE pair of properties in a supposedly “desireable” area. What is the situation everywhere else??
Have been reading this blog for several years. I got in the market when I was 18 and banks were handing out money to anybody in 2001 and sold in 2005 due to not wanting to live life with the stress of the mortgage at that age. Doubled my money thanks banks and fractional banking for creating credit out of thin air and im sure the property is still barely worth what I sold it for back then…outer suburbs.
I now have a career I enjoy and intend to stay in, a stable job earning over 100k and I am faced with some difficult choices and would like your advice.
I currently sharehouse which is great for now but more and more I have been thinking about going out on my own. Rents are upwards of $350 per week for a half decent 1 bedroom place within 15kms of the city here in Sydney. Having a nice deposit, I am tempted to just take a 300k loan and pay the damn thing off costing me around $650 a week which is a % of my wage i can easily handle. I am looking at places that are 1 bedroom around dulwich hill/inner west that are not work 450k but for an extra few hundred per week I would rather just pay of my own loan than cough up 350 a week for someone elses investment.
I am aware of the risk that I may not get capital growth, I dont really care because I intend to hold it for the long term and pay it off within 7-8 years. The other thing I am worried about is the inflationary pressure of the amount of credit that has been dropped on the world in the past couple of years which is making my life savings more paltry by the day and 450k seem like not alot of money.
What are your thoughts/suggestions/feedback? There are alot of people in my boat due to rents being so high close to the city and transport being such a pain from the burbs.
@Confused. I live in Kogarah 16km south of Sydney and I purchased my property in 2008 when the GFC hit and I got a 3bdm stock standard house for $480K. I thought this was overpriced when I purchased this.
The same house 2.5 years later is almost $700K, an increase of almost 30%. (thanks to the Govt prop up and easy credit) Having also looked around the inner Sydney areas this % increase is actually more.
Do some research yourself and get your hands on housing statistics.
I would wait until property starts falling (it is happening already) and has bottomed out before committing to a purchase. This may take some time, but better to be safe than sorry.
Holding your property for long term is OK, but keep in mind the level of dept you will be in as this will be considerably large at these prices.
@Confused. Domenic is defintely leading you the right way. Now would not be a good time to buy. I would sit for a few months and see what happens. I would say keep an eye on the listings but also be aware of what is happening in China. If China is looking even shaker than it is now then I would sit on the side lines. Once the commodity crash happens then you will see the bubble really pop and probably get a steal by then. The question is when it will happen.
LBS
@Confused. I know it isn’t Sydney but we are having a similar problem in Canberra. We have a 60% deposit but prices are falling. The properties that have been on the market since October are there because the owners aren’t willing to drop their prices. We rent for $2000 a month and the house would be worth over $700 000. We save a few thousand a month by not paying the mortgage/rates/insurance etc and without capital gains it is not worth it as much as I would love to paint the beige walls. Patience is a virtue. We are spending the extra money on holidays for rewarding ourselves for being patient.
Just keep watching the market carefully…..
@Confused. If you paying $350/week rent, that is equivalent to $17,500 per annum.
If the property market takes two years from today to adjust then you have spent $35,000 in rent.
If the adjustment in property price is 10% then a 450k house today will be worth $405k (i.e. 10% x $450k = $45k drop)
Question you must ask yourself do you think will drop by at least 10% with in two years?
If the prices drop by at least 10% in two years and then you buy your house =>then you have effectively saved yourself $10k (i.e. $45k saving on purchase price – $35k cost of rent)
seeying the same in melbourne. Specific houses that are candidates for us (however overpriced) have been on the market since last year ! Some of these houses are dropping, but very slowly (20-50k), where others are being taken off the market alltogether. Our position is as follows: watch the market carefully but not too much…eventually these people will be forced to sell and that’s when you will see substantial price drops. At this stage I will not settle for a 50k drop, it will have to be more, and that will take some time yet…
As much as i agree with Mr Murray that house prices are too high. He is terribly wrong in his reasoning as to why. As with ALL previous asset booms in history, they were only allowed to develop thanks to excessive credit expansion. In the modern era, this has been fuelled by govt/central banking allowing the money supply/credit to grow rapidly through arbitrarily adjusting interest rates lower. This creates excessive malinvestments, i.e. housing, stocks etc. Moreover, government interventionism in the free market also adds to the dilemma. It is sad that so many people who considered to be experts, have not the slightest clue about economics, especially from a historical context. I’d suggest they read-up on Austrian Business Cycle Theory (refer Ludwig Von Mises, Freidrich Hayek et al).
@Confused
I make it that you are 28 years old & earning over 100 grand a year doing a job you enjoy.
Why are you even concerning yourself with such things as real estate?
EasyAs123 – You need to include the cost of interest in your calculation. You may pay $35k on rent vs. lose $45k on the buying price (IF prices were to drop as you say), but you need to add interest on loans into the ‘buying’ side of the equation.
Excluding possibilities of capital gain/loss, rent money is dead money, just as interest paid on loans is dead money.