Australians lap up overpriced real estate

[bkmynn]

An article from the Globe and Mail, here in Canada.

You boys truly live in the wild west.

http://www.theglobeandmail.com/report-on-b...#articlecontent

Forget tickets to footy or cricket. The hottest spectator sport in Melbourne each weekend is free, and can usually be found on a stroll around the neighbourhood in search of one of the hundreds of real estate auctions being staged across the city.

Free, that is, unless you are a bidder. In that case, you could end up paying dearly.

If one is looking for heart-stopping drama, it’s hard to beat the weekly spectacle of regular folks jockeying to make the biggest purchase of their lives in a heated contest of one-upmanship, replete with bravado, financial recklessness and tears. In much of Australia, particularly in Melbourne and Sydney, this is how they sell homes.

The emotionally charged auction process, however, has helped fuel Australia’s runaway housing sector, where gravity-defying prices have some analysts warning of an impending implosion that could drag down the country’s long-running economic prosperity.

Australia’s real estate market was recently named the most overvalued on the planet – by 63.2 per cent – according to a survey by The Economist. Prices in Melbourne, for example, are up 18.8 per cent in a year, even as much of the developed world is still recovering from the global financial crisis. According to the OECD, the ratio of house prices to income in Australia is now about 36 per cent higher than its long-term average, and prices are well above the average of other industrialized countries.

Amazingly, Australia’s housing boom persists despite sharply higher interest rates. The fixed rate on a five-year mortgage is now above 8 per cent; this follows the Reserve Bank of Australia’s move to increased its key lending rate by a full percentage point this year to 4.75 per cent in a bid to contain inflation and keep the housing market in check.

Morgan Stanley economist Gerard Minack said in a report earlier this year that Australia’s market is overvalued by at least 40 per cent.

“There’s a word for a financial asset that is overvalued by 40 per cent, so let’s use it: housing is a bubble. Buying an asset that’s overpriced never ends well.”

The way homes are sold in Australia may help to explain why property prices have flown so high.

Prospective home buyers assemble inside a property for sale as an auctioneer whips up the bidding, much like an auction for art or livestock. Bidders feel an adrenalin rush from the contest, where prices can shoot up to $710,000 Australian ($719,000 Canadian) for a cramped, two-bedroom Victorian with a leaky roof. The pressure and immediacy of the auction induces rapid-fire bidding in increments of thousands of dollars at a time, often taking prices far above what buyers originally set out to pay.

“It’s human nature. They get involved, and they don’t want to lose,” says Chris Murphy, a smooth-talking real estate agent who has been auctioning houses in Melbourne for a quarter-century. “It gets competitive. There is a bit of a must-have mentality about it too,” Mr. Murphy says, as he packs up his two-seater Mercedes AMG following a Saturday afternoon auction in Abbotsford, a Melbourne suburb.

Auctioneers all seem to be cut from the same cloth. Nearly all are men – articulate, well attired, quick-witted and invariably good-looking. Auctioneers typically wear dark suits and ties and begin the proceedings by extolling the merits of a particular property.

“It is the Paris end of town – the epitome of downtown living,” says one auctioneer standing outside a condominium in Melbourne’s central business district. “It is a lifestyle desired by many but enjoyed by few,” he adds.

At a heritage building overlooking the laneway cafés and restaurants on Desgraves Street in downtown Melbourne, more than 50 people crowd into a 764-square-foot (71-square-metre) apartment that the auctioneer describes as “an exceptional opportunity” that “doesn’t disappoint.”

The atmosphere before the auction drips with anticipation. It’s like the mood before a race. People eye each other warily and speak in hushed tones.

The bidding for the shabby one-bedroom apartment begins with an offer of $380,000 (Australian) that the auctioneer rejects as below the vendor’s reserve minimum bid of $450,000. Soon, the bids are up to $520,000, jumping in $10,000 increments.

“At $520,000, we are playing for keeps,” the auctioneer says. Soon the offers are rising by $5,000, and one of four bidders, a fashionably dressed woman in a black leather jacket, pulls out. She looks relieved. When she was bidding, her pallor suggested that she might vomit.

At $540,000, there are three bidders left – a couple in their thirties, a single man, and an Asian woman whose outfit prompts the auctioneer to call her “the lady in red.” They are now raising their offers by $2,000 increments.

At $546,000, the lady in red stops bidding. At $552,000, the auctioneer says “Let’s keep on bidding; I’ll tell you when it gets too expensive.” The transfixed crowd titters. The offers continue all the way to $579,000.

“Five-hundred and seventy-nine-thousand dollars?” asks the auctioneer. “Imagine if this was London, Hong Kong or New York?”

That elicits three more bids from the two potential buyers who top each other’s offers by $250 each time. At $580,000, the couple stops raising their hands. The single man wins the apartment for $580,000 and the crowd erupts in applause.

Proponents argue that auctions are transparent, keeping the process in the open. Unlike in Canada, say, where a potential buyer blindly submits an offer to an agent, people get to see exactly what and who they are up against.

But many real estate experts and economists argue that auctions artificially inflate property values as desire and emotion have a greater chance of overwhelming prudence and logic.

Timo Henckel, a research fellow and lecturer at the Australian National University in Canberra, says the country’s property market is inflated, and a series of interest rate increases are starting to squeeze overleveraged homeowners. Australian mortgage debt when coupled with personal debt is nearly 100 per cent of the country’s gross domestic product – higher than it was before the global financial crisis.

“I can’t see how it can be sustained … a crash is a real possibility,” he says.

Frenzied housing auctions are only reinforcing price momentum with a process that strongly favours the seller, according to the professor.

“I find the auction system surprising and annoying,” Prof. Henckel says.

A number of studies have found that housing auctions do, in fact, increase prices. A 1996 study led by Penn State University professor Kenneth Lusht found that auction sales in Melbourne created a premium of $19,326 or about 8 per cent over houses sold by private agreement. A more in-depth study published in the Australasian Accounting Business and Finance Journal that tracked sales in Australia’s five largest cities between 2004 and 2009, also found that auction sales led to higher prices compared with properties sold privately.

Although regulations were recently strengthened to prevent it, dummy or fake bidders are not uncommon. They are used to get the bidding started and keep it lively. One property owner in Melbourne said her agent gave her a profile of the ideal type of dummy bidders to recruit from amongst her friends when putting her house up for auction – one single male in his 40s and a couple in their 30s.

Regardless, there has been little call in Australia to outlaw the auction process. Homeowners have a choice, of course, to sell their properties privately if they wish. Still, the fact that the number of auctions staged tends to drop when the market cools suggests that sellers know that an auction is usually the best way to get the highest possible price for a property.

And one of the most important factors is having the right person standing on your property soliciting bids. Mr. Murphy, the veteran auctioneer, certainly thinks there is no better way to sell a home.

“It’s a terrific environment. It is a show. You can tell I have fun with it. I like being the centre of attention. You are in control, it is great,” he says.

“And you can help people achieve their goals and their aspirations. That’s what I like about it.”

______

LUXURY HOUSING

Country to country, Australia’s average house prices are the highest in the world

According to the demographics and urban planning research firm Demographia, the country of Australia has the most unaffordable housing market in the world. (Vancouver is ranked as the most unaffordable city market ahead of Sydney).

There are other factors that have contributed to Australia’s buoyant market, including the fact that the country suffers from a shortage of actual housing units, partly owing to strong immigration rates. But some analysts say Australia’s housing auctions have helped inflate a real estate market that is set for a major price correction.

Average house prices in Australia’s eight state capital cities as of March, 2010, in Australian dollars.

Sydney: $580,000

Melbourne: $468,000

Brisbane: $460,000

Adelaide: $403,500

Perth: $517,000

Hobart: $352,300

Darwin: $529,000

Canberra: $550,000

Source: Australian Bureau of Statistics (latest statistics available)

[El Presidente]

We have seen housing prices double over the past 5 years.

While many of us have been predicting a bust (median house prices run at 9 times the avearge Australian yearly wage) it just hasn't happened. The market has slowed in the past 6 months but prices have held firm.

There are a couple of reasons for this.

1. Australians have the higherst % of home ownership in the world. Owning ones home is part of our DNA. There is no capital gains tax on the principal place of residence and of course no death taxes in this country either. Home ownership is a natural long term investment here.

2. Land scarcity and buyer preference. Australians traditionally believe in big houses which are the core of their world. They raise families there and entertain friends there. They believe in big blocks of land (comparatively to overseas) where there is room for a pool and a game of cricket in the back yard. The "average" house has four bedrooms, two bathrooms and entertainment areas both indoors and outdoors.

While we have a big landmass in Oz, the population is centred around the coast in capital cities. The cost of providing infrastructure in new regions is high (little if any Apartment buildings outside the CBD in most cities) and hence people compete for housing in the cities and close to whatever poor public transport there is.

3. Immigration/population.

In our own state of Queensland we have 1500 people moving here a week. They underpin the housing prices as we are not producing sufficient new housing to meet the demand. Traditionally they shun appartments and seek the 4 bedroom home on the quarter acre block.

There is a population debate going on currently within this country. If left unchecked

(which will be political folly) we will have an increase of 15 million people in 35 years. We only have 22 million now.

4. Default rates on housing mortgages here are miniscule even given the high earnings to loan servicing. Again it is mostly traditional where people will give up everything except their home. Should a default occur then there is no getting out of it, no handing in of keys. The house is sold by the bank and if there is a shortfall you cannot pay you are bankrupted.

5. Unemployment and economy.

We have effectively full employment and riding on a commodities boom which is likely to last another 20 - 50 years. China buys our resources in the main and while they transform their country (new cities/buildings/enterprises) we have a long term market. This low unemployment underpins housing demand and prices.

I can still see housing prices sliding back 10% over the next year to 18 months but there is an underlying string of fundamentals which should stave off a collapse.

[Ryan]

We have seen housing prices double over the past 5 years.

While many of us have been predicting a bust (median house prices run at 9 times the avearge Australian yearly wage) it just hasn't happened. The market has slowed in the past 6 months but prices have held firm.

There are a couple of reasons for this.

1. Australians have the higherst % of home ownership in the world. Owning ones home is part of our DNA. There is no capital gains tax on the principal place of residence and of course no death taxes in this country either. Home ownership is a natural long term investment here.

2. Land scarcity and buyer preference. Australians traditionally believe in big houses which are the core of their world. They raise families there and entertain friends there. They believe in big blocks of land (comparatively to overseas) where there is room for a pool and a game of cricket in the back yard. The "average" house has four bedrooms, two bathrooms and entertainment areas both indoors and outdoors.

While we have a big landmass in Oz, the population is centred around the coast in capital cities. The cost of providing infrastructure in new regions is high (little if any Apartment buildings outside the CBD in most cities) and hence people compete for housing in the cities and close to whatever poor public transport there is.

3. Immigration/population.

In our own state of Queensland we have 1500 people moving here a week. They underpin the housing prices as we are not producing sufficient new housing to meet the demand. Traditionally they shun appartments and seek the 4 bedroom home on the quarter acre block.

There is a population debate going on currently within this country. If left unchecked

(which will be political folly) we will have an increase of 15 million people in 35 years. We only have 22 million now.

4. Default rates on housing mortgages here are miniscule even given the high earnings to loan servicing. Again it is mostly traditional where people will give up everything except their home. Should a default occur then there is no getting out of it, no handing in of keys. The house is sold by the bank and if there is a shortfall you cannot pay you are bankrupted.

5. Unemployment and economy.

We have effectively full employment and riding on a commodities boom which is likely to last another 20 - 50 years. China buys our resources in the main and while they transform their country (new cities/buildings/enterprises) we have a long term market. This low unemployment underpins housing demand and prices.

I can still see housing prices sliding back 10% over the next year to 18 months but there is an underlying string of fundamentals which should stave off a collapse.

I hate to be the pessimist but, until 30 months ago, if you replaced "Australia" and "Australians" with Ireland and "Irish" in that post, it would have described the Irish situation almost perfectly. We have one of the highest levels of home ownership, no property tax (although that's coming because of the current shite we're in).

Property here was probably undervalued until about 2001 which is when fundamentals started to be disregarded and property addiction kicked in. From 1995 to 2001 property values rose about 100% but exports, jobs, wage levels and immigration were rising to keep pace. From 2001 to 2008 values rose another 200% purely on the belief that they would always rise, nothing else. In the last 2 years they're down 50% - 70% depending on location/property type. There are 100,000 new dwellings in this country that will very likely never be sold.

At the peak about 25% of the Irish workforce was involved directly or indirectly with property development.

However I'm not overly familiar with Australian fundamentals, of course there are differences, you have a much bigger population and access to exportable resources. Your interest rates are higher than they were here when things really went nuts.

If there are lessons to be learnt, it's not a good sign when the government starts incentivising property developers to build more property.

When every taxi driver you meet tells you about his house/apartment in Spain/Bulgaria/Cape Verde that's the time to get out.

[adic88]

Man fudge me. Prices for homes in aussie are crazy. And i thought Malaysia was nuts.

AUD$500k = RM$1.75 mil

If you had 1.75mil here in Malaysia, you would get a damn swanky house in a Top 5 neighbourhood here in Kuala Lumpur (not the top 3, coz properties there all start at 5 mil minimum).

But still, from the article, it seems that 500k will only get you an average home in Australia.

Guys, bring that money over here and spend it here -- you'll get an amazing house for the same money (even at our current, imo, inflated property market).

[adic88]

Median prices ONLY 9 times the average australian wage?

That's nothing, rob.

In Kuala Lumpur, the average executive salary is 3,000.

A house, bare bones in a decent area, (house not apartment), 1 hr distance away from the city (any closer than that and you need to be a millionaire to afford a home), costs RM$750,000 at minimum.

It takes us 30 YEARS to pay off our mortgage.

[adic88]

Having said all of this, my parents lived in Dubbo, NSW for many years, and now live in Nowra, NSW.

Property prices didn't SEEM to be that high there considering what they got for their buck.

The home in Nowra is HUGE, and i think they paid only AUD$500k for it. Like 10 minutes away from the town and the hospital (where my dad works).

Large front lawn, enormous garden space at the back for mom to keep busy, 2 car garage, double storey, large kitchen, several living areas, etc.

Is it prices in the big cities that are crazy in Australia? Outside the major capitals, things are much more rational?

[El Presidente]

I hate to be the pessimist but, until 30 months ago, if you replaced "Australia" and "Australians" with Ireland and "Irish" in that post, it would have described the Irish situation almost perfectly. We have one of the highest levels of home ownership, no property tax (although that's coming because of the current shite we're in).

Property here was probably undervalued until about 2001 which is when fundamentals started to be disregarded and property addiction kicked in. From 1995 to 2001 property values rose about 100% but exports, jobs, wage levels and immigration were rising to keep pace. From 2001 to 2008 values rose another 200% purely on the belief that they would always rise, nothing else. In the last 2 years they're down 50% - 70% depending on location/property type. There are 100,000 new dwellings in this country that will very likely never be sold.

At the peak about 25% of the Irish workforce was involved directly or indirectly with property development.

However I'm not overly familiar with Australian fundamentals, of course there are differences, you have a much bigger population and access to exportable resources. Your interest rates are higher than they were here when things really went nuts.

If there are lessons to be learnt, it's not a good sign when the government starts incentivising property developers to build more property.

When every taxi driver you meet tells you about his house/apartment in Spain/Bulgaria/Cape Verde that's the time to get out.

Agreed Ryan. The market should have tanked. It has boomed since 2003 and barely stopped for breath.

We are at the top of the cycle currently given lending resrictions and wages just can't support higher median house prices.

Our luxury appartment market is in collapse but that is property "investment" product. Bricks and mortar homes remain stable.

The difference between Ireland and Oz is the economy. Ours is sound and has been well managed over the 12 years of the Howard Government and the current labour government understands that if the economy sours they will be blamed.

The big threat is commodity prices. If they collapse then so will our house of cards. Trillions of dollars are generated by digging holes and putting coal/bauxite etc on ships for China, India, Japan. We also have the worlds largest stores of natural gas. Billions is being exported and invested in new finds/pipelines.

We have tied our ship to China. Our economic future rests with them.

[El Presidente]

Having said all of this, my parents lived in Dubbo, NSW for many years, and now live in Nowra, NSW.

Property prices didn't SEEM to be that high there considering what they got for their buck.

The home in Nowra is HUGE, and i think they paid only AUD$500k for it. Like 10 minutes away from the town and the hospital (where my dad works).

Large front lawn, enormous garden space at the back for mom to keep busy, 2 car garage, double storey, large kitchen, several living areas, etc.

Is it prices in the big cities that are crazy in Australia? Outside the major capitals, things are much more rational?

Supply and demand. That same house in Dubbo in the late 90's would have been $150-$225K. Regional Australia prices have gone through the roof particularly in mining towns. Dubbo is a regional hub and commands good pricing.

A 4 bedroom house in Karratha (1600km north of Perth) will set you back 1 Million dollars. It is an outback mining town. However in the main, the closer you are to a capital city centre the higher the price.

This country use to ride on the wool of a sheeps back. No more. It rides on minerals and gas.

All our eggs in one basket

[El Capitan]

Straight across the road from us a tiny and I mean TINY 2 bedroom Victorian with no yard front or back and no parking sold for 850k early this year! It's a horrible dark little piece of crap and the new owners are renting to their tenants for $650 a week.

Something has to give in Melbourne as most of the houses that sell each weekend are just not worth it.

[dicko]

Great call by RA about house ownership being in the oz DNA.

Everyone I talk to, and basically have ever talked to, mostly younger people like myself, all have the same life goal of "own my own home".

Options for house ownership are: get rich, inherit, or work as a slave to the mortgage for ^n years. Tricky trading on the equity of several properties (negative gearing etc) seems another option for the adventurist.

I hope to own my own home one day. Perth is ridiculous for house prices (big boom town), so I think I'll take Aizuddins advice and buy overseas (atleast to start).

[Cig]

Wow! That story is amazing. I've been to the major classic car car auctions here in the states and seen what people are capable of when bidding against one another. Things can get pricey very fast. I wonder if they serve cocktails before the home auctions like they do here at the car auctions. Nothing like a little alcohol to get the bids flowing!