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Good news on Canberra house prices

By banco - 14 September 2012 22

According to the (real estate industry friendly) Real Estate Institute of Australia Canberra house prices fell 5% from April to June.

http://www.propertyobserver.com.au/residential/canberra-house-prices-fall-5-in-june-quarter-bucking-14-national-rise-reia/2012091256521

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22 Responses to
Good news on Canberra house prices
Tetranitrate 12:20 am 16 Sep 12

jared said :

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

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

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

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

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

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

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

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

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

jared 10:54 pm 15 Sep 12

LSWCHP said :

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

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

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

LSWCHP 3:07 pm 15 Sep 12

drfelonious said :

justin heywood said :

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

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

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

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

Sad, but most probably true.

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

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

drfelonious 9:38 am 15 Sep 12

justin heywood said :

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

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

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

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

AsparagusSyndrome 12:44 am 15 Sep 12

Jethro said :

justin heywood said :

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

Indeed.

When so many Australians have so much of their wealth tied up in property, a burst bubble would cause havoc in our economy. Look at the impacts of 2008s housing buuble burst in America.

The best thing for everyone involved would be a plateau in prices for the next 5 years or so. We’ve already had 2 years of flat prices, and the ridiculous price rises of the last decade are well behind us and highly unlikely to appear again for a very long time.

I remember folks saying just that in the late 1990s. But a ‘very long time’ went by real quick.

At first sight, you’d think it’s just a case of someone gets rich, someone gets poor. And that sometimes it’s the other way round.

Which leads me to wonder where all the money’s gone, ‘specially in other parts of the world. Sure, a shirtload of people ‘borrowed’ what they had no hope of paying back, and another shirtload of ordinary folks and pension funds and Norwegian school boards found out it was their cash on the line, after it disappeared. And some banks that was fixin’ to make all that happen got to keep a lot of it.

But those borrowers – they spent that cash to buy all those unaffordable overpriced houses – they paid that cash to someone. I’d like to meet that ‘someone’ and find out what they did with the cash. Because it doesn’t seem to be anyplace hereabouts. Leastways, not anyplace that’s helping any economy any. Teapots maybe. Or mattresses. Or Genie bottles.

There’s folks that reckon money gets destroyed – yeah, maybe. Wealth does, and value can. But most of that cash, all those disappeared numbers that look like they belonged in a cosmology book… well I reckon it’s hiding, cos they ain’t stopped printing more money yet, and when the rest of it comes back out to play… well… you wanna have a roof over your head already.

Jethro 10:40 pm 14 Sep 12

justin heywood said :

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

Indeed.

When so many Australians have so much of their wealth tied up in property, a burst bubble would cause havoc in our economy. Look at the impacts of 2008s housing buuble burst in America.

The best thing for everyone involved would be a plateau in prices for the next 5 years or so. We’ve already had 2 years of flat prices, and the ridiculous price rises of the last decade are well behind us and highly unlikely to appear again for a very long time.

JimCharles 8:18 pm 14 Sep 12

We took a 20% hit on our value, absolutely unthinkable at the time….house prices always rise, the bubble will never burst etc.
Markets rule though….if you have a good house, insulated and cheap to run and fuel, well-maintained…you can ride it out and find a buyer if needed.
It’s the rentals that haven’t had a lick of paint for 10 years that will suffer, nobody will touch them as investments if prices drop 30% but fuel keeps shooting up. Which might not be a bad thing for the housing stock quality round here, forcing a bit of improvement.

justin heywood 6:04 pm 14 Sep 12

Yep, you’ll think it’s good news right up to the day you buy a property. Then suddenly you will have the opposite view.

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

Watson 4:27 pm 14 Sep 12

futto said :

Good news depending on your point of view.

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

Just kidding…i’m buying a 60 inch.

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

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

LSWCHP 4:08 pm 14 Sep 12

futto said :

Good news depending on your point of view.

I thought the same thing when I saw the headline. I’m fairly sure that everybody who owns a property would like to see prices increasing, and everybody else would like to see them heading in the other direction.

Australia has undergone a huge housing price bubble over the last 15 years or so, for a variety of reasons. Other countries such as the US and UK had similar bubbles funded by “subprime” mortgages and other dodgy dealings, and in many areas they have undergone massive collapses in house prices.

House prices in Australia have been steadily decreasing nationwide over the last 18 months or so. I suspect that they will continue to slowly decrease or at least remain flat for quite a while yet. In the worst case, the price bubble may pop sharply rather than slowly deflating, and that would not be pretty. I wouldn’t want to be in the position of having to sell a house that’s suddenly worth a lot less than I paid for it, and end up still owing the bank money once it was sold.

There’s lots of discussion and analysis of this subject, along with a variety of long term statistics over at http://www.macrobusiness.com.au

Disclaimer: I have no association with Macrobusiness, other than being a regular reader and finding their work illuminating.

fromthecapital 2:58 pm 14 Sep 12

Deref said :

Damn good. Keep that up for ten months and prices will start looking sane.

If that happens some really bad things will be happening in the world economy which won’t be good for anyone… Things are fairly affordable comparatively right now.

arescarti42 2:22 pm 14 Sep 12

p1 said :

I can’t really be bothered looking into it, but is this stat meaningful? Just how many houses get sold in a quarter to get an average from?

TBH it is interesting, but I wouldn’t read too much in to it. There are a few different providers of this type of data, and they don’t often tell the same story over short periods. It’s really the overall trend and market sentiment that is most meaningful.

p1 1:51 pm 14 Sep 12

I can’t really be bothered looking into it, but is this stat meaningful? Just how many houses get sold in a quarter to get an average from?

Deref 1:39 pm 14 Sep 12

Damn good. Keep that up for ten months and prices will start looking sane.

futto 12:25 pm 14 Sep 12

Good news depending on your point of view.

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

Just kidding…i’m buying a 60 inch.

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