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Australian house prices in 2010
There is a great debate going on whether property prices will continue to go up, or collapse in 2010. The recovery in property prices in 2009 has been nothing short of spectacular. In many areas, prices are now even higher than what they were in the last housing boom which peaked in December 2007. The property rally has certainly outperformed the stock market rally which to date has only managed to recover 50% of the fall from the last peak in October 2007. I would like to share our own experience with our property investment in the past 18 months or so and our views about where we think property prices are headed in 2010 and beyond.
Last week we sold another of our investment properties – a house in the outer suburbs of Melbourne. We tried to sell it in October 2008, in the midst of the global credit crunch but the best offer we could get was about 10% below what we paid. Thanks to low interest rates, the first homeowner’s grant (FHG), and an unprecedented numbers of new migrants who chose to call Melbourne home, house prices came back up in 2009 and we were able to sell it for roughly breakeven, after taking into account buying and selling costs. We decided it is a good time to sell because interest rates are on the rise again and the FHG is coming to an end so we are not so confident that home prices will continue to rise in 2010.
After having gone through the unpleasant experience of being “underwater” i.e. where your mortgage is more that the value of your property, I have very mixed feelings whenever I hear of my friends buying what I feel are over priced properties. House prices are so high that they are really becoming unaffordable to the average wage earner. A few weeks ago, a couple I know who are in their forties had to take a 95% loan to buy their house, even though the husband has a well paid job. I congratulated my friends on getting a new home as I was happy that they can now live in their own home instead of renting but at the same time I felt worried for them as it would only take a small drop in house prices for them to be “underwater”. All it takes is one foreclosure to cause the price of a whole neighbourhood to fall. Many people are so stretched that it won’t take much to fall into mortgage stress. Being “underwater” is not a problem if you can afford the repayments but if you were forced to sell for any reason, you will lose your down payment (which could represent years of savings), your roof over your head, and probably still owe the bank money as buying and selling costs are substantial, especially in Victoria. Unlike many states in the US, our home loans are not “non-recourse” loans which means the bank can go after your other assets if the proceeds of the sale of the property is insufficient to repay the loan in full.
After what we have seen happen to property prices first in Japan, and then the US, the UK, Ireland and Spain, and knowing what we know about demographic trends (see my Oct 6 post on Australia’s Spending Wave and other articles in that series), I think it is very risky to be buying property at these lofty prices. Additionally, according to Bill Zheng from Investors Direct, a prominent mortgage broker, residential mortgage lending has become more difficult for both the borrowers and the mortgage professionals as well in recent times. Lenders have asked a lot more questions and put on a lot more restrictions on just about all areas of the assessment, everyone has to work harder but still with less chance of getting a loan. This is because a very large percentage of the residential mortgages in Australia is money borrowed from the international market using a process called securitization. Since the Global Financial Crisis, the securitization market is almost closed or too expensive for just about any lender to raise more money. Even if there is demand for housing due to the current shortage of housing in Australia, people cannot buy houses without credit.
Both Kingsley and I feel relieved to have sold another investment property. Since early 2008, we have been steadily reducing our property portfolio by selling off the worst performing properties and reducing our overall loan to valuation ratio (LVR) from 70% in 2008 down to less than 50% today. Kingsley used to think I was too negative about Australian property but now agrees with my outlook after reading Harry Dent’s book The Great Depression Ahead. I know living in a rental property is not as pleasant as living in your own home and property prices which are high now, can go even higher so it is very hard for me to know what to say friends who are looking to buy property now, especially if they are new migrants who dearly want to have their own home. All we can do is share our views through avenues like this blog and encourage them to read some of the information that we have found useful to us, and then let them make up their own minds. We forwarded Harry Dent’s July newsletter to one of our friends who is a very successful property investor and after reading it, he promptly bought the book as well. After reading the book, he is re-considering some of his intended property purchases.
Of course there are also reasons why Australian home prices may not collapse. Greg Atkinson from the Shareswatch blog wrote two blog posts to represent both sides of this debate in March 2009. The points raised are still valid today so I will let you read his views for yourself.
The Australian home prices debate Part 1: Why prices may fall
The Australian home prices debate Part 2: Why prices may not collapse
7 Jan 2010 update: Another excellent discussion by Steve Keen, an Australian economist to help you come to your own conclusion on where house prices are likely to go in the future in Australia.
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I enjoyed reading your article, a very prudent analysis that you have undertaken. Only before the GFC, analysts and ordinary people were saying the same thing about shares, that they will continue to go up.
Watch for developments in China – the government is readying itself for a major slowdown in property development. When this happens, the amount of raw materials purchased from Aus will fall, which will have repercussions for the economy here.
Something is going to have to give in the end. A property market on steroids will eventually go into an overdose.
Hi Jeff
I can’t agree with you more, especially about China. I feel the winds of change starting to happen as China prepares to exit from stimulus mode. I think we will see who is right about the direction of property prices quite soon.
Christina
[...] to buy houses. We may have a housing shortage and plenty of buyer demand but as I mentioned in my Nov 23 post, people cannot buy houses without credit and credit is tightening. Just over a year ago, 100% or [...]
How about peak oil? Some experts are predicting by the end of the year OPEC will have 50% market share in oil exports around the world. What will the future of the world’s economy going to look like in the recent years ahead, let alone the long-term. I believe Australian house prices at the moment are unsustainable along with the level of the world’s GDP.
Peak oil? I don’t think I know enough about oil to comment.
I agree with you that we will see some things in the next few years that perhaps we have all not seen in our life time so far. I have been reading this book This Time is Different which gives us a really comprehensive analysis of financial crises. The authors show us what happened in over 250 historical crises in 66 countries.
An unsustainable rise in asset prices and credit precede banking crises. Banking crises tend to be followed by sovereign debt crises and it could take up to 10 years to get back to pre-crisis level. I think the financial crisis that started in Oct 2007 is still playing out and it will be quite a few years more before we see the end of it.
I was not really worried about house prices in Australia until late last year/early this year. I don’t think Keen is right as such, more of it is a case that the Government was wrong to prop the market up via the first home owners grant while the RBA was cutting rates at the same time.
I am not a housing market will crash sort of guy, but I do get the feeling it is getting a little too hot for comfort at the moment.
Hi Greg
Agree that government action helped pushed up prices. Relaxing the property ownership rules for foreign investors in Mar 09 probably did more than FHOG as locals have to contend with cashed up foreign investors who can borrow at low interest rates overseas. According to this article, 40% of sales were to Chinese investors in some suburbs. I live in one of the south-eastern suburbs of Melbourne and I see exactly what they mentioned in the article happening around me. Lower loan volumes locally also support the view that a lot of the property purchases are by foreigners. Three interest rate rises has not dampened the appetite for higher end property but has caused mortgage stress to first home buyers. If the Chinese government continue their tightening, it won’t just be our mining companies who will get impacted.
Hi Christina, that is a good point about the relaxed foreign investment rules. I wonder how the Government figured that would help local home buyers?
Beats me Greg. I don’t understand many things this government does. They say they are worried about the aging population problem but they cut the voluntary super contribution cap by half and propose higher tax on super contributions. How does that help people save more for their retirement?
Christina well they are raising the retirement age so I guess it means they don’t want people to retire at all! Amazing how Rudd and Co don’t see the irony in making changes to super whilst leaving the politician’s overly generous pension scheme untouched.
AS long as we have governments ie political parties who put lawyers or others who don’t have any idea on the effects of low top taxes ie 47% tax has brought us into recession mode, 35% has brought the US into a depression. Our best tax for wage earners and small business, and the economy was back in the 1950-70, where our economy was tops and everyone had a good existence. The treasurers since 1970 have been playing god with stupidity, and have ended up now just teetering on the edge of the precipice of the recession. When they bring back the 66.6% tax like we had back then, you will notice the hugh benefits.
I am 80 years old, back about 35 years ago the government gave housing grants and the real estate or developers increased the prices of the homes by an amount equal to the grant, and the same is happening now. Of interest to you could be that the prices of new homes about the same as new homes costing around $500,000 today, cost only about $20,000 back in 1970, not from normal inflation though. The obscene increase in the cost of homes, food and all other goods and services has been caused by the governments over the last 40 years, reducing the top tax from 66.6%, allow ing those people unfettered by other means ie Arbitration court decisions, have increased their salaries or other income, causing the hugh costs in the goods or services that their company delivers. Wages, low salaries and small business can not keep up with these obscene prices, so you have a recession and if it goes as in the US, you have a depression – The economy goes backwards.
I suggest that anybody wanting to invest in the house market should first look at the history of where inflation and bad economy come from. Look in the internet at scources of the history, remembering that Australia, the UK and the US also had recessions in the 1930’s and 2006 on, although the US is more in the throughts of a depression, their economy is going backwards. While people are buying homes as an investment, the prices they are getting are probably only keeping up with inflation or little more, and when sane parliamentarians come into action???? the bubble will burst, but those people who have bought homes to live in will be better off and be able to keep thei homes, unlike now. History has shown that because of much human greed, the top tax has to be 66.6%, the lower top taxes since 1970, have proved that. Get on your internet, and check “tax history of Australia” unfortunately it won’t tell you much before 1960 bu go to “Tax history of the US” which will take you from the 1930’s recession to the 2007’s depression, then look at “Taxes around the world” and you will see why there is a “Global economy, it is caused because the treasurers or whoever is handling the taxes is responsible.