Housing bust?

[LordAnubis]

I'm not a fan of news.com.au but in any case there's an article on there by some random guy saying the Australian housing market is going to pop like the American one did. What do the Aussies on here think of that prediction? What do you non-aussies have happening in your home country?

My personal opinion; housing will never go down until the Australian unemployment rate sky rockets, and we have mass emigration. To me it's all about supply and demand. We have reasonably high paying jobs, so we have money, and we want land so we buy houses. But since everyone is in the market to buy a house, the price goes up and up. Is this too simple an approach?

[JohnS]

I read that article today and I believe the common consensus of most Australians is one of denial. However, prices can't keep rising forever like they have in the past 20 years, there has to be a correction at some point.

I believe one of the reasons for the high market prices of houses is the high urban density in mainland cities. As you know Mus, Australians nearly all live on the coast, and in big cities like Melbourne and Sydney the demand for housing is more than the supply, hence the larger prices.

[LordAnubis]

It might not rise, but it wont go down... if it does it will be a very short period of lower prices!... take gold for example... it always goes up... yes some years it has closed out at a lower price than the previous, but it always bounced back!

[Bulldog4]

i cant speak for the land of oz but here in vancouver we have always ranked in the top 5 for most expensive cities in the world wages are higher but still an avg single family home is a million dollars now a 2bed 2bath wood frame condo is 600+ even renting here is starting to get high. Here tho its mostly from foreign markets we dont have a tax for foreigners buying land here so alot of people outside of canada are buying up land most noticeably asian market. i think as long as the Asian market is booming we will continue to increase housing priceses. that being said if interest rates go up even 1 or 2% you will see a huge crash(correction) people are so in debit or mortgaged to the hilt.

[Ryan]

I haven't been following the Australian situation but people here were denying that there would be a property crash, then between 2008 and 2011 house prices fell 60%-70%.

Two things to look out for,

Have the banks changed their lending policies?

For a long time here, banks here offered 80% of a house price, i.e. the buyer needed to have 20% saved. Then the bank would offer 2.5 times the main income plus 1x a second income. 15-25 year mortgages.

In the years before the price crash here, banks were offering 110% mortgages at 5 times a combined income, over 40 years, with interest-only options.

The second thing, do property developers have a strong government lobby there? i.e. does your banking regulator look like he's asleep at the wheel?

People here were encouraged, by government, banks and developers to buy beyond their means.

[Guest rob]

Good post, Andy.

How has your market changed since 2011? Has it recovered to pre 2008 levels?

[LordAnubis]

Andy, so what you're saying is that what led to property prices going down was the over reaching of home buyers and subsequent foreclosures on those properties? Is that similar to what led to the crash in America?

I like this sort of stuff, i find it interesting, but i hate economics

At the end of the day though, what drove the home buyers from being able to get a loan and pay their debts, to not being able to pay their debts and lose their house? Loss of employment or raise in interest rates?

Also if the property prices are low now, who is buying all the properties? Someone must have the money and be buying up?

Reminds me of the crash in the ASX in 2008. I was the exact definition of a CUB (Cashed up Bogan) back then and bought a good wad of shares whiel everyone else was selling.... made a very handsome profit from that year.

[Jeremy Festa]

All very interesting! I think the Aussie scene is apples, and news.com.au is ****.

I work with over 500 real estates throughout SE Qld and things are actually improving at present.

Keen to hear your further thoughts Andy on Ireland. We are back again for six weeks come end of July. We are considering getting a place up near the wife's family farm next year. Should we wait or go for it this year?

Also, be awesome to catch up in Dublin if you're about!

Sent from my iPhone

[Bulldog4]

Andy, so what you're saying is that what led to property prices going down was the over reaching of home buyers and subsequent foreclosures on those properties? Is that similar to what led to the crash in America?

I like this sort of stuff, i find it interesting, but i hate economics

At the end of the day though, what drove the home buyers from being able to get a loan and pay their debts, to not being able to pay their debts and lose their house? Loss of employment or raise in interest rates?

Also if the property prices are low now, who is buying all the properties? Someone must have the money and be buying up?

Reminds me of the crash in the ASX in 2008. I was the exact definition of a CUB (Cashed up Bogan) back then and bought a good wad of shares whiel everyone else was selling.... made a very handsome profit from that year.

im the same mus always interested in how the world turns and how other countries learn or don't learn especially when it comes to economics

[foreese]

Andy is correct Mus, however, everyone who has the sense that the price levels are un sustainable are probably correct. There was a another factor in the US housing bubble and that was irrational exuberance on the part of investors who ultimately turned a blind eye to deregulation and the easy availability of cheap monies to previously unqualified borrowers.

My advice, if you own a home you bought years ago and have a good chunk of equity, sell it and rent for a while. Although I saw the bubble coming I didn't react fast enough otherwise that's what I would have done.

I bought my place for~170 20 years ago, at the peak of the boom it was work ~500, lost more than 1/2 equity during bubble burst. Just now getting back , but will likely take 20 more to get back to original high.

[Ryan]

All very interesting! I think the Aussie scene is apples, and news.com.au is ****.

I work with over 500 real estates throughout SE Qld and things are actually improving at present.

Keen to hear your further thoughts Andy on Ireland. We are back again for six weeks come end of July. We are considering getting a place up near the wife's family farm next year. Should we wait or go for it this year?

Also, be awesome to catch up in Dublin if you're about!

Sent from my iPhone

Would be great to see you in Dublin. Absolutely keep in touch.

House prices have started to go back up in Ireland, though not back up to 2007-08 levels yet.

It's not a bad time at all to buy in Ireland.

The construction industry here collapsed in 2008-09, helped by the collapse in US banks. At the time about 15% of the workforce here was in construction.

Of course that led to a lot of people out of work and unable to pay their mortgages.

Another thing that helped cause Ireland's crash was that we do not have control over our own lending or interest rates.

Since we joined the euro, interest rates are now governed by the ECB (European central bank). European interest rates were kept low to stimulate the economy on mainland Europe. With low interest rates here, people borrowed more than they should. Normally a government would raise interest rates to slow inflation, Ireland couldn't.

Also, with Europe doing well at the time and low interest rates, Europe's banks were looking for places to invest. Investors/banks saw a construction boom in Ireland, from 2001 to 2007, and pumped money into the Irish banks to lend out.

So the Irish banks were awash with, what was at the time, cheap money and wanted to lend more of that out. They did so by relaxing lending rules again and again, until 110% interest only mortgages at 5-7 times joint annual income. All this with a regulator encouraged by government to let it go as more people were working (in the construction industry). It drove itself to destruction.

Where is your wife's farm?

It's hard to say where property prices are now compared to 2007. In parts of Dublin they are back up to 70-80% of what they were in 2007. In most of rural Ireland they are still probably at 50% of what they were in 2007. The economy is picking up here though.

Just yesterday it was announced that unemployment is back under 10% for the first time since 2011.

[Jeremy Festa]

Would be great to see you in Dublin. Absolutely keep in touch.

House prices have started to go back up in Ireland, though not back up to 2007-08 levels yet.

It's not a bad time at all to buy in Ireland.

The construction industry here collapsed in 2008-09, helped by the collapse in US banks. At the time about 15% of the workforce here was in construction.

Of course that led to a lot of people out of work and unable to pay their mortgages.

Another thing that helped cause Ireland's crash was that we do not have control over our own lending or interest rates.

Since we joined the euro, interest rates are now governed by the ECB (European central bank). European interest rates were kept low to stimulate the economy on mainland Europe. With low interest rates here, people borrowed more than they should. Normally a government would raise interest rates to slow inflation, Ireland couldn't.

Also, with Europe doing well at the time and low interest rates, Europe's banks were looking for places to invest. Investors/banks saw a construction boom in Ireland, from 2001 to 2007, and pumped money into the Irish banks to lend out.

So the Irish banks were awash with, what was at the time, cheap money and wanted to lend more of that out. They did so by relaxing lending rules again and again, until 110% interest only mortgages at 5-7 times joint annual income. All this with a regulator encouraged by government to let it go as more people were working (in the construction industry). It drove itself to destruction.

Where is your wife's farm?

It's hard to say where property prices are now compared to 2007. In parts of Dublin they are back up to 70-80% of what they were in 2007. In most of rural Ireland they are still probably at 50% of what they were in 2007. The economy is picking up here though.

Just yesterday it was announced that unemployment is back under 10% for the first time since 2011.

Wife's farm is up in Monaghan just outside Clones. I am familiar with what has happened in and since '08. We left London at the end of '08 and lucky we are now in the position to get a place back 'home' seeing we spend 1/10th of the year there! Just trying to anticipate the right time.

Good to hear things are on the up. In a way.

Although selfishly we hope we time our plans well enough to make the most of it.

Would be a stretch to do it after the EOFY but is possible. It's an amazing little place with a view of the Finn.

Will PM you details for a catch up once we firm up our itinerary. Will book a night off for myself this time to come down to Dublin.

Sent from my iPhone

[Ryan]

Will PM you details for a catch up once we firm up our itinerary. Will book a night off for myself this time to come down to Dublin.

Sent from my iPhone

Do, we'll organise a get-together. Looking forward to meeting up again.

I presume you've seen this site.

http://www.myhome.ie/

Click on "advanced search" to narrow it down to what you're after. Good luck.

[manelson05]

I live in Tennessee and the 2008 impact was negligible if even noticed here in middle Tennessee. Homes are being built at breakneck speed anywhere the greedy developers can find property to buy, most of the locals I know here have moved elsewhere away from the sprawl, my family is planning to do the same. Many folks are moving from higher placed states such as California or up north and coming to this market with cash, the homes they are purchasing are 30-50% more than they were 10 years ago and some over 200% increase as far back as 15-20 years ago, its insane. The projected growth for the 10 county region here in middle Tennessee is expected to grow 900k plus in the next 25 years. Currently infrastructure is overwhelmed yet people keep flocking in. My gut tells me that there will be another impact this time it will be felt and the Have will rapidly become the have not's. As an example one acre was on average 10-15k in 2008 now the average price is 125-175k that growth in 8 years is unsustainable.

[muzz]

The government is dying to scrap negative gearing and save themselves a fortune in tax returns. When this finally happens the bubble will burst as there will no longer be any point in putting up with tenants and their grubby ways. The only upside to this is that i think rents will increase as people drop the investment properties and move their money to the only place left for a tax credit, fully franked shares...I guess they will take this away from us next. If we swap to the ALP then the timeline decreases but stays the same.

That said I still love property

[GasGuy82]

Andy, so what you're saying is that what led to property prices going down was the over reaching of home buyers and subsequent foreclosures on those properties? Is that similar to what led to the crash in America?

I like this sort of stuff, i find it interesting, but i hate economics

At the end of the day though, what drove the home buyers from being able to get a loan and pay their debts, to not being able to pay their debts and lose their house? Loss of employment or raise in interest rates?

Also if the property prices are low now, who is buying all the properties? Someone must have the money and be buying up?

Reminds me of the crash in the ASX in 2008. I was the exact definition of a CUB (Cashed up Bogan) back then and bought a good wad of shares whiel everyone else was selling.... made a very handsome profit from that year.

Buy when there's blood in the streets, even if the blood is your own...

[Orion21]

What's different today in the US vs 2008 is the banks are underwriting the loans. No more fog a mirror money with no proof of income. What worries me are the FHA and VA loans that only require 0-2.5% down. You should have skin in the game if you want to borrow hundreds of thousands of dollars.

[sengjc]

I read that article today and I believe the common consensus of most Australians is one of denial. However, prices can't keep rising forever like they have in the past 20 years, there has to be a correction at some point.

I believe one of the reasons for the high market prices of houses is the high urban density in mainland cities. As you know Mus, Australians nearly all live on the coast, and in big cities like Melbourne and Sydney the demand for housing is more than the supply, hence the larger prices.

I think you may find that we have had a few corrections since the GFC: Perth and Sydney for instance with dips in prices but have since recovered. Likewise, Melbourne experienced some "corrections".

Our corrections are not very drastic (ie. crash) since the banking industry is more regulated here, unless something catastrophic occurs.

Certainly the foreign investments and the superannuation investments help to provide additional balance and stability.

The fact that the young ones are increasingly being priced out of the market, well, that is a different issue altogether. But if they choose to live further away from the CBDs that may not be the case.

[El Presidente]

Couple of things here:

Why it won't crash

1. The banks are strong. Really strong with 30% of cap to be held in liquid assets (by legislation).
2. Over 60 % of Apartment purchased are Asian buyers living offshore and/or with children studying here.
3. Favourable tax treatment of Australian housing making.
4. Historical Australian love affair with owning property.
5. Stable "ish" unemployment rate.

Why it won't grow.

1. No real wages growth.
2. The vast majority of employed Aussies are at their debt ceiling.
3. Interest rates are at an all time low. Times won't get better.
4. Rents have hit their natural peak (affordability).

How it can crash

1. Inflation spike leading to interest rate spike.
2. Unemployment above 7.5% (at 6.3 now and relatively steady).
3. Sustained recession. Currently 1.8-2.2% growth.

It is unlikely to crash while wages, inflation and growth are in check. If we see a shaking of those pillars, all bets are off and a 20% correction can happen quickly.

[Jeremy Festa]

Couple of things here:

Why it won't crash

• The banks are strong. Really strong with 30% of cap to be held in liquid assets (by legislation).
• Over 60 % of Apartment purchased are Asian buyers living offshore and/or with children studying here.
• Favourable tax treatment of Australian housing making.
• Historical Australian love affair with owning property.
• Stable "ish" unemployment rate.

Why it won't grow.

• No real wages growth.
• The vast majority of employed Aussies are at their debt ceiling.
• Interest rates are at an all time low. Times won't get better.
• Rents have hit their natural peak (affordability).

How it can crash

• Inflation spike leading to interest rate spike.
• Unemployment above 7.5% (at 6.3 now and relatively steady).
• Sustained recession. Currently 1.8-2.2% growth.

It is unlikely to crash while wages, inflation and growth are in check. If we see a shaking of those pillars, all bets are off and a 20% correction can happen quickly.

Sometimes I forget you were in banking. Well put. And easy to understand.

Sent from my iPhone

[Jeremy Festa]

I think you may find that we have had a few corrections since the GFC: Perth and Sydney for instance with dips in prices but have since recovered. Likewise, Melbourne experienced some "corrections".

Our corrections are not very drastic (ie. crash) since the banking industry is more regulated here, unless something catastrophic occurs.

Certainly the foreign investments and the superannuation investments help to provide additional balance and stability.

The fact that the young ones are increasingly being priced out of the market, well, that is a different issue altogether. But if they choose to live further away from the CBDs that may not be the case.

I recall the day, not so long ago, a few primo locales on the Sunny Coast and Brisbane woke up to a 15-20% correction. In particular, places around Noosa, especially Sunshine Beach. They've recovered now. Not quite all the way. But the southward swings are always exaggerated in the high end suburbs.

Sent from my iPhone

[Duxnutz]

Thoughts from a current Sydney-sider and owner of US property.

We went to a couple auctions on my street recently and the 'mood' of buyers literally borders on hysteria. Two bedroom terraces that sold for $700k 3 yrs ago are all above a million now. Surely at some point these prices will exceed people's ability to pay.

Reasons I think it'll bust.

1- Loans are averaging much higher than the traditional 3.5-4x income ratio, with many 6-7x. What happens when interest rates go up or your on one income for an extended amount of time???

2- Loans here aren't fixed for any solid amount of time. The US market collapsed but at least many of those mortgages were a fixed 30yr loan. It's gonna get ugly here when the increases come, even if it's 10 yrs down the road.

3- My wife and I can't afford to buy a house in Sydney and we're both on pretty good incomes with no kids. Saying that, we've been offered loans of 1.2 million plus wtf?

[Jeremy Festa]

Thoughts from a current Sydney-sider and owner of US property.

We went to a couple auctions on my street recently and the 'mood' of buyers literally borders on hysteria. Two bedroom terraces that sold for $700k 3 yrs ago are all above a million now. Surely at some point these prices will exceed people's ability to pay.

Reasons I think it'll bust.

1- Loans are averaging much higher than the traditional 3.5-4x income ratio, with many 6-7x. What happens when interest rates go up or your on one income for an extended amount of time???

2- Loans here aren't fixed for any solid amount of time. The US market collapsed but at least many of those mortgages were a fixed 30yr loan. It's gonna get ugly here when the increases come, even if it's 10 yrs down the road.

3- My wife and I can't afford to buy a house in Sydney and we're both on pretty good incomes with no kids. Saying that, we've been offered loans of 1.2 million plus wtf?

Interesting angle Valid points.

Sent from my iPhone

[GasGuy82]

I recommend surveying some people who work in different aspects of the industry and have seen more than one cycle and ask what they think.

I can only give you my experience on the U.S. Market. Our family has been doing RE Development in California for 50 years. As early as 2005 we stopped buying new inventory for development and by 2006 we were waiting for the end, starting to see the cracks develop. The reality was that the economics no longer made sense. Sure the home builders kept buying at stupid prices, but when we would put together pro-formas for marketing lots, you were looking at $140k in permits and fees before a foundation went in, not including the land.

[bambam]

Rob,

Some of your 5 reasons for why it won't crash don't make sense to me. They are reasons to support current prices but not reasons to prevent a crash.

2. 60% of buyers are foreigners. What if they decide Australia is too expensive and start sending their kids to another country like the US because it is cheaper? The West and East coast of the US is seeing that now with Chinese buyers. When the Chinese market corrects, I suspect the Australian real estate market will feel suffer greatly. I still remember the Japanese bubble in real estate back in the '80s here and suspect the same thing will happen with the Chinese.

4. Australians love affair with real estate. The US said the same thing right before our crash. Sentiment can shift. Millennials in this country now favor renting vs. buying. Huge demographic shifts do happen.

5. Low unemployment. This is why things are good now but If this changes, it will cause problems for real estate. In our case, it was the collapse in housing that lead to higher unemployment not the other way around.

I admit I know very little about your real estate markets. Most metrics seem stretched but not in bubble territory yet. It does seem that you do not have a lot of the factors that led to our correction like low down loans, flipping, and over building in many parts of the US. Prices can stay high for very long periods of time.

Corrections happen when you least expect them.