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Housing bubble, what housing bubble? The Canberra’s inner south from 2005-2013.

justsomeaussie 10 February 2014 44

Canberra inner south housing prices
Justsomeaussie sent this in challenging the notion that we’ve had a housing bubble in the inner south that’s going to ‘burst’.

What are your thoughts? Is housing in Canberra over priced? due to crash or will we just see stagnation for a while?


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44 Responses to Housing bubble, what housing bubble? The Canberra’s inner south from 2005-2013.
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dungfungus 11:17 am 01 May 15

I think the Canberra bubble is about to burst. Every region except Canberra had increases. The fall in Canberra prices was substantial.

MEDIAN HOME PRICES IN APRIL
* Sydney, up 1.0pct to $732,500
* Melbourne, up 0.8pct to $555,000
* Brisbane, up 0.6pct to $452,000
* Adelaide, up 1.6pct to $400,000
* Perth, up 0.6pct to $520,000
* Hobart, up 1.6pct to $320,000
* Darwin, up 0.3pct to $540,000
* Canberra, down 1.5pct to $530,000
Source: RP Data

Maya123 10:20 am 17 Aug 14

arescarti42 said :

rigseismic67 said :

Agree with NoImRight. In the 1980s I was working in a low paid job (apprentice) and decided to buy a house in the Inner South. Coworkers said I was an idiot and that I should rent, later I bought another house nearby with all and sundry telling me to invest instead in Telstra shares. I paid $340,000 for both houses and they are now worth a combined $1.5 million (both owned outright). That’s my super nearly sorted. When purchased they were both around 5 years salary each, which seems to fit with todays market.
Bubble? who cares I think I will get my money back no matter what happens. I know someone who has been saving for over 10 years to buy a house and never taking the plunge, they keep saying prices will go down…….good luck with that strategy. You will likely not save enough to meet the increases in house prices. There is no time like the present.

Nothing like being able to buy a house in the inner south on an apprentice’s wage. I think you’d struggle to rent a room in a share house if you were an apprentice nowadays.

Of course there is the problem of getting the loan in the first place, but managing that, the way I paid for my first house on a low wage was to rent out the other two bedrooms in the house. That way (as well as living very frugally – no travel, growing my own vegetables, etc) I was able to pay off the loan in five years. Then I bought a rental property.

Fluffy 8:46 am 17 Aug 14

justsomeaussie said :

For me what is interesting is the vacancy rates. Traditionally sitting at 1% are now at 6.5% and have been up to 8%.

The most important thing that figure (an increase of 650% to 800%) is that the rental prices are much higher than they should be for such a small country town. The result: renters are condensing into share houses, lots of people living together, to minimise their own expenditure. The people renting out their houses and apartments are losing out, with their properties sitting vacant and not earning a cent.

If, as the supplier of a product or service, you do not meet the needs of the market, you do not make money. That is what’s happening.

VYBerlinaV8_is_back 8:57 am 18 Feb 14

Property in Canberra is reasonably expensive, at least when compared with prices of 15 years ago. There are three reasons for this:
1) Canberrans earn a lot
2) Credit is cheap
3) New house/land is very expensive, and this puts a floor under the price of existing stock.

To suggest Canberra property is in a bubble is simply parroting the emotive BS of the various property bear web sites. Unless there’s a major economic upset, prices won’t change much. I’ve always believed that 2010-2020 will contain some major stagnation, and have no reason to change that view. The public service cuts won’t be like 1996, and there’s bugger all new supply worth buying.

NoImRight 11:32 am 15 Feb 14

Except……damn typos..:-(

NoImRight 11:31 am 15 Feb 14

howeph said :

Another perspective on the issue on The Guardian today:

“Australia’s housing bubble ready to burst, US investment guru claims”
http://www.theguardian.com/business/2014/feb/14/australia-housing-bubble-ready-burst

Yes hes quite the fan of predicting that bubble burst. Exept according to him it already happened at least two years ago. Along with a stockmarket crash. I must have been off sick that day.

http://www.couriermail.com.au/news/worse-to-come-for-australian-economy-says-harry-dent/story-e6freon6-1225737771821

howeph 5:04 pm 14 Feb 14

Another perspective on the issue on The Guardian today:

“Australia’s housing bubble ready to burst, US investment guru claims”
http://www.theguardian.com/business/2014/feb/14/australia-housing-bubble-ready-burst

howeph 3:08 pm 14 Feb 14

A_Cog said :

(1) “Can you explain what you mean by “the government will ALWAYS pay it out”?”
– neg gearing is built into the tax system and isnt going anywhere. Govt will always pay it out.

I agree that it is too hot politically to remove negative gearing from the tax system right now. To remove it would burst the bubble. No politician wants to be blamed for that.

But the government isn’t and won’t “pay out” anything. They are only sacrificing lost payroll tax revenue.

A_Cog said :

(2) When I said “I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses” I meant that neg gearing prevents the magnitude of losses from increasing, by propping up housing prices. So if prices do fall and the market gets a little spooked, investors step into the market and buy (because neg geasring makes it attractive to run a loss) and this stops prices tumbling further. “Neg gearing subsidises the magnitude of losses” means Aussie losses never approach northern hemisphere experiences (US, Japan, UK).

I don’t agree with your logic.

Negative gearing means that a larger loss can be carried, but not any loss, not matter how great. That’s why I said:

“It only means that in Australia, compared to other economies, speculators can afford a wider gap between the revenue they receive from rent compared to their expenses servicing their debt. I.E. because of the negative gearing tax concessions, “investors” can carry a bigger debt; and this just means that, all other things been equal, our real estate bubble will just burst later and higher.

A_Cog said :

(3) You said “And Keen was one of only a handful of economists that predicted the GFC. That’s got to count as some beef.”
– wearing a ” The End Is Nigh” sign makes you right once.

Wearing a “The End Is Nigh” sign that details *why* doom is coming; and it does come, for the reasons predicted… surely that’s different?

A_Cog said :

Thinking about this issue over the last few days, I’ve realised there is no bubble (because there will be no ‘pop’). Neither party will cut aged pension or superannuation tax breaks. Too many older voters (increasing as a proportion of the population also). Well, SMSF is becoming a major superannuation vehicle, and is being leveraged into property. The same political argument holds for not clamping down on SMSF. Which means (I think it means, anyway) that as SMSF increases, and the proportion of older aussies increase (and they’re using SMSF) that house prices will not fall. House prices will continue to rise.

I think that is why I am right and Keen is wrong. I blend politics and reality into my economics, rather than just looking at the economic model like Minsky and Keen.

I think that economic reality has a habit of not caring two hoots about the politics. If your blending politics and reality, I think you’ll find reality always wins eventually.

Dilbert on reality: http://photos1.blogger.com/blogger/1193/829/1600/dilbert%20-%20reality.0.gif

I guess we’ll have to agree to disagree and only time will tell who’s right.

chewy14 2:44 pm 13 Feb 14

A_Cog said :

F&$ing comment quote not working.

Howeph:

(1) “Can you explain what you mean by “the government will ALWAYS pay it out”?”
– neg gearing is built into the tax system and isnt going anywhere. Govt will always pay it out.

(2) When I said “I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses” I meant that neg gearing prevents the magnitude of losses from increasing, by propping up housing prices. So if prices do fall and the market gets a little spooked, investors step into the market and buy (because neg geasring makes it attractive to run a loss) and this stops prices tumbling further. “Neg gearing subsidises the magnitude of losses” means Aussie losses never approach northern hemisphere experiences (US, Japan, UK).

(3) You said “And Keen was one of only a handful of economists that predicted the GFC. That’s got to count as some beef.”
– wearing a ” The End Is Nigh” sign makes you right once.

Thinking about this issue over the last few days, I’ve realised there is no bubble (because there will be no ‘pop’). Neither party will cut aged pension or superannuation tax breaks. Too many older voters (increasing as a proportion of the population also). Well, SMSF is becoming a major superannuation vehicle, and is being leveraged into property. The same political argument holds for not clamping down on SMSF. Which means (I think it means, anyway) that as SMSF increases, and the proportion of older aussies increase (and they’re using SMSF) that house prices will not fall. House prices will continue to rise.

I think that is why I am right and Keen is wrong. I blend politics and reality into my economics, rather than just looking at the economic model like Minsky and Keen.

You’re basically describing a ponzi scheme though. Negative gearing only helps so much and is only worthwhile if there are capital gains to be made.

For real prices to keep rising you would need a very restricted supply (which I cant see becoming a massive issue) or an ever increasing amount of investment dollars from somewhere. If it just becomes a whole lot of investors trying to sell to each other at higher and higher prices then the difference between possible rental returns and capital value will become too large to sustain and prices will stagnate or fall.

Sure I don’t see this happening overnight because as you say, foreign cash and SMSF cash might be able to sustain the demand in the next few years, but unless wages keep up with the price rises, there will eventually be a correction.

A_Cog 1:06 pm 13 Feb 14

F&$ing comment quote not working.

Howeph:

(1) “Can you explain what you mean by “the government will ALWAYS pay it out”?”
– neg gearing is built into the tax system and isnt going anywhere. Govt will always pay it out.

(2) When I said “I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses” I meant that neg gearing prevents the magnitude of losses from increasing, by propping up housing prices. So if prices do fall and the market gets a little spooked, investors step into the market and buy (because neg geasring makes it attractive to run a loss) and this stops prices tumbling further. “Neg gearing subsidises the magnitude of losses” means Aussie losses never approach northern hemisphere experiences (US, Japan, UK).

(3) You said “And Keen was one of only a handful of economists that predicted the GFC. That’s got to count as some beef.”
– wearing a ” The End Is Nigh” sign makes you right once.

Thinking about this issue over the last few days, I’ve realised there is no bubble (because there will be no ‘pop’). Neither party will cut aged pension or superannuation tax breaks. Too many older voters (increasing as a proportion of the population also). Well, SMSF is becoming a major superannuation vehicle, and is being leveraged into property. The same political argument holds for not clamping down on SMSF. Which means (I think it means, anyway) that as SMSF increases, and the proportion of older aussies increase (and they’re using SMSF) that house prices will not fall. House prices will continue to rise.

I think that is why I am right and Keen is wrong. I blend politics and reality into my economics, rather than just looking at the economic model like Minsky and Keen.

howeph 10:21 am 13 Feb 14

A_Cog said :

howeph said :

I don’t see how government sponsored speculation, via negative gearing tax concessions, changes the equation… this just means that, all other things been equal, our real estate bubble will just burst later and higher.

This is the crux of why I disagree with Keen (and you). Neg gearing defuses the bomb of a property bubble, because the government will ALWAYS pay it out, thus propping up the market.

Can you explain what you mean by “the government will ALWAYS pay it out”?

I agree that every time the market started to look a little shaky in the past the government (Howard and Rudd) would rollout or double the First Home Owners Grant, giving the market a steroid injection, driving prices and mortgages to new heights. But do you think that that trick will keep on working for ever?

Or do you think that the government would step in and start buying houses in order to maintain prices (like the reserve bank might buy the Australian dollar to maintain it’s value in some circumstances)? That doesn’t sound plausible to me. How would they fund or justify that?

A_Cog said :

Property bubbles pop when (at least) one of the sources of capital (customers / investors / renters / creditors / banks / etc) withdraw from the property market, leading to price falls, which then turn into a torrent.

Correct.

The source of capital that has stopped flowing (but has not yet been withdrawn) is people’s appetite for increasing debt:

http://www.abc.net.au/news/2014-02-12/jericho-graph-3/5252420

Since the GFC debt growth has flatlined in real terms. People just don’t seem to be willing or able to get the ever bigger mortgages that are required to keep inflating prices.

The market started to fall in 2010, but lower interest rates held it back up again. But interest rates aren’t going to go any lower, so that shot it spent. What else is there to keep prices high? The market is looking unstable.

Potential triggers to burst the bubble are:

(a) Interest rate rises
(b) Sustained static prices leads investors sell as capital gains aren’t covering their debt repayments.
(c) Baby-boomers (who own most of these investment properties) start selling their properties to provide the cash to fund their retirement and health costs.
(d) ALL OF THE ABOVE

A_Cog said :

I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses, …

I don’t understand what you mean by this.

A_Cog said :

Yeah, Keen and Minsky are brilliant economists, but Keen’s been belting on about bubble-pops for years now (almost the entire time I’ve happily and enthusiastically read him). But still, where’s the beef?

Well that’s the difficult thing about bubbles. They are driven by irrational speculative behaviour and so by nature are very unpredictable.

And Keen was one of only a handful of economists that predicted the GFC. That’s got to count as some beef.

justsomeaussie 9:35 pm 12 Feb 14

SheepGroper said :

Have you got a source for the statistic that currently around half of homeowners own rental property?

I’ll again look for that figure, but you are right it does appear far too high.

SheepGroper said :

The second quoted paragraph has some odd logic – you’re saying that if rent drops, properties become positively geared, which automatically leads to them being sold? If rent drops, a given property may or may not continue to be negatively geared, but surely the average investor will just drop the rent until it’s tenanted again?

We are saying the same thing, except where if the rent drops to below the threshold of where the owner can no longer make ends meet, they will be forced to sell. We had individuals on here just the other week talking about how if their rental returns it got much lower they would have to do similar.

People can only bear empty rooms for so long before they will have to sell up and cut losses. Any drive through Kingston and surrounds will show the large number of properties still sitting on the market and with lots more being developed, i’m at a loss to know who is going to buy them if the current ones aren’t being rented out.

So it’s either a bad day for the existing owners or a good day for renters and owner occupiers who want to pick up a distressed IP owner who needs to get something out as they can’t rent it.

tommy 8:15 pm 12 Feb 14

We recently had to re let one of our units out in Bruce. There seems to be less demand as uni of canberra supply more student accommodation. Allhomes had a very long list of empty places. While we dropped the rent $20 a week we got a good tenant again after a couple of weeks of it being empty – plenty of groups came to view the place and submitted applications.

The original tenant moved into something larger.

chewy14 6:13 pm 12 Feb 14

Maya123 said :

justsomeaussie said :

I think you’ve missed my point. What I’m talking about is removing investors from buying into the cheap end of the market. I would propose is perhaps some form of income testing or investment property testing which does not allow those with significant wealth to buy low end properties. So we create supply in the market by encouraging people to sell some of their existing cheap investment properties where they can trade up into a single more expensive property barring other investors from those cheap properties.

I haven’t been following this whole conversation, but some of it I have read is worrying. Not everyone who buys a second house might be wealthy and it would be unfair to exclude them from doing so. I’ll give my example. I bought my first home; a small fibro house. I wanted a better house so I rented out the spare rooms and saved. I paid off this house in a few short years doing this. Then I saved and after about fifteen years I was able, with a loan, to buy an old cheaper house in an inner suburb. I put a tenant into this house, which by the way had extremely reasonable rent; below average. I rented this for many years until I paid off this house. Then with savings and another loan I replaced this house with a new house and moved into it. I sold my old house to clear the debt. Under your rules I might not have been able to buy this lower end house, as initially I needed to rent it out to supplement my adequate, but which was lower than the average male wage. With my savings (I lived very frugally) and a paid off fibro ‘box’, I might have been deemed too wealthy to buy a low end property. I would have been condemned to continue to live in low end housing, as without buying this investment property I would have been much less likely to have been able to afford to upgrade my housing. Not everyone who buys low end housing to rent out is wealthy. What is your definition of wealthy?

I think that’s the whole point though. Why would we actually want people to invest in property, when they are only doing so in the hope of capital gains? It would be far more productive for our economy I’d they were investing that money elsewhere. ie. Other businesses or shares.

I personally don’t think we should limit people from owning multiple properties but we definitely need to limit some of the perverse incentives currently given that often act counter to stated policy goals or actively harm our economy.

Maya123 5:41 pm 12 Feb 14

justsomeaussie said :

I think you’ve missed my point. What I’m talking about is removing investors from buying into the cheap end of the market. I would propose is perhaps some form of income testing or investment property testing which does not allow those with significant wealth to buy low end properties. So we create supply in the market by encouraging people to sell some of their existing cheap investment properties where they can trade up into a single more expensive property barring other investors from those cheap properties.

I haven’t been following this whole conversation, but some of it I have read is worrying. Not everyone who buys a second house might be wealthy and it would be unfair to exclude them from doing so. I’ll give my example. I bought my first home; a small fibro house. I wanted a better house so I rented out the spare rooms and saved. I paid off this house in a few short years doing this. Then I saved and after about fifteen years I was able, with a loan, to buy an old cheaper house in an inner suburb. I put a tenant into this house, which by the way had extremely reasonable rent; below average. I rented this for many years until I paid off this house. Then with savings and another loan I replaced this house with a new house and moved into it. I sold my old house to clear the debt. Under your rules I might not have been able to buy this lower end house, as initially I needed to rent it out to supplement my adequate, but which was lower than the average male wage. With my savings (I lived very frugally) and a paid off fibro ‘box’, I might have been deemed too wealthy to buy a low end property. I would have been condemned to continue to live in low end housing, as without buying this investment property I would have been much less likely to have been able to afford to upgrade my housing. Not everyone who buys low end housing to rent out is wealthy. What is your definition of wealthy?

howeph 5:25 pm 12 Feb 14

arescarti42 said :

justsomeaussie said :

The key take away is that the vast majority of property investors aren’t buying new builds. They aren’t creating supply as commonly claimed. They are buying and therefore inflating the price on existing builds. So this myth that investors drive the supply needs to be debunked, the data doesn’t support it.

Correct.

I also agree this is correct.

arescarti42 said :

justsomeaussie said :

My take is that we need to encourage investors to sell down their number of properties (the cheapest first). This creates supply in housing stock, not just building more houses on the fringes of cities. That money can be reinvested in other areas of society like shares.

I still disagree with you on how useful this would be. It’s unlikely to have any real impact on prices, because it increases demand for houses to buy at the same rate as it increases the number of houses for sale (by reducing the number of properties available to rent and forcing renters to become buyers).

If more investors were selling their houses, than investors were buying them then that would represent a decrease in demand by those willing and able to pay high prices. Sure the demand in purely numerical terms remains the same (the same number of people require housing irrespective of whether they rent or buy) but the demand curve has moved to the left.

The demand curve moving to the left is a decrease in demand means prices would fall.

Falling prices would mean even more investors selling to cash out of the market before prices fall further and represents the supply curve moving to the right – i.e. the bubble has burst.

So successfully “encourag[ing] investors to sell down their number of properties” most definetly would lower prices… it would burst the property bubble.

arescarti42 said :

To have any real impact on house prices (and rents), you need to increase the total housing stock, by building more houses/apartments.

As I have said on a previous thread I don’t see any data to support the theory that it is constrained supply that is holding prices high.

Justsomeaussies link tries to make that assertion using this chart: http://www.prosper.org.au/wp-content/uploads/2013/09/HGDp4.jpg arguing that the tiny up-tick in number of people per occupied dwelling between the 2006 and 2011 censuses is evidence of constrained supply.

But I read it completely differently. It looks to me like the level has nicely settled at the market optimum of around 2.6 people per home (what does he expect? That it should keep falling till every individual has a house each?).

The fact is that house prices have been going up while the number of people per occupied private dwelling have been going down and remained low, the complete opposite to what you would expect if it was constrained supply of housing stock that was driving or holding up prices.

justsomeaussie 4:39 pm 12 Feb 14

arescarti42 said :

I still disagree with you on how useful this would be. It’s unlikely to have any real impact on prices, because it increases demand for houses to buy at the same rate as it increases the number of houses for sale (by reducing the number of properties available to rent and forcing renters to become buyers).

To have any real impact on house prices (and rents), you need to increase the total housing stock, by building more houses/apartments.

I think you’ve missed my point. What I’m talking about is removing investors from buying into the cheap end of the market. I would propose is perhaps some form of income testing or investment property testing which does not allow those with significant wealth to buy low end properties. So we create supply in the market by encouraging people to sell some of their existing cheap investment properties where they can trade up into a single more expensive property barring other investors from those cheap properties.

Increasing supply has to come from both new builds AND existing properties. So people need an incentive to cash out of the market.

A_Cog 4:27 pm 12 Feb 14

howeph said :

I don’t see how government sponsored speculation, via negative gearing tax concessions, changes the equation… this just means that, all other things been equal, our real estate bubble will just burst later and higher.

This is the crux of why I disagree with Keen (and you). Neg gearing defuses the bomb of a property bubble, because the government will ALWAYS pay it out, thus propping up the market. Property bubbles pop when (at least) one of the sources of capital (customers / investors / renters / creditors / banks / etc) withdraw from the property market, leading to price falls, which then turn into a torrent.

I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses, which then keeps those losses small (and negating the possibility of a torrent). The result is a property market which has relatively minor market corrections – for example, where the OP has to cut rent by $20/wk and have a $1000 haircut, or Canberra vacancies climb up to 8% (against a background of the C/W Govt slowing and stopping new hirings altogether, and also cutting staff). That’s not a bubble.

Yeah, Keen and Minsky are brilliant economists, but Keen’s been belting on about bubble-pops for years now (almost the entire time I’ve happily and enthusiastically read him). But still, where’s the beef?

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