Is Melbourne in A Real Estate Bubble?

freakatronic on 29/12/2016 - 16:52
Last edited 02/01/2017 - 13:21

Happy New Year Everybody. Yes it's two days away.

Now, I thought I'd throw the question to the OzBargain audience. I got some good points of view last time I asked, so I expect more of the same. I could only be bothered looking for Melbourne information, as if I looked for other cities I'd have 700% more work to do for a forum post when I'm supposed to be working.

Reasons why I think we're in a real estate bubble:

  • Low to no wage growth ABS Data
  • Inflation similar to wage growth RBA Data
  • House price growth doubles inflation and wage growth on the most conservative measure, quadruples it on the real growers REIV data

So what I see, and correct me as I know you will if I'm wrong, is that the only improvement in earnings for average Melbournian comes from inflation. While at the same time, housing prices were bid up at 4x the rate of wage growth. I'm going to vote "yes", it's a bubble. The largest determinant of price is the market's ability to sustain those prices. We're not all doctors and lawyers, and most of us can't afford a place in Melbourne anymore. I just can't see how this is sustainable.

Go on then, educate me.

EDIT We've got some excellent thoughts from well educated people so far. Thanks to everyone who's weighing in, and to anyone else - feel free to lay it on me.

SECOND EDIT Thanks for all the useful opinions everyone. I fear people missed my point and started arguing about whether property is affordable or not. Yeah, I know it's not affordable. There are plenty of things that aren't affordable, and their price isn't going to change much regardless of the fact. It's $244k for one share of Birkshire Hathaway, but that's no bubble.

Poll Options

  • 161
    Yes
  • 46
    No
Home & Garden

Comments

  • nbagame on 30/12/2016 - 09:05

    If you can afford it, do it

    most important is you can survive when "the bubble" bursts
    (Honestly, even if it bursts, i trust Melbourne's recovering speed)

    thinking over and over wont stop properties going north
    indeed you are losing the opportunity costs such as capital growth, rents (going to landlord/agent instead of your pocket), less and less first home subsidy…etc, which i forget since when this topic was raised.

    get something with land is better, house, unit, townhouse, whatever if possible

  • tonka on 30/12/2016 - 09:19

    Is there any evidence that housing bubbles have ever existed in our major cities. Sure we have periods of slow then fast growth and on occasion slight market corrections which catch themselves up very quickly.
    Any slumps tend to be caused by interest rate rises. I would think a bubble would need to be defined as an overheated market with the same market forces.

  • wanga1983 on 30/12/2016 - 09:40

    Melbourne's urban population is expected to double by 2030. So long as demand for housing continues to outstrip supply, we will see upwards pressure on prices. If you are young and able bodied, and banks are willing to lend to you, I reckon go for it. If the market actually crashes then we as a country will have much bigger problems than you or I notionally dropping on valuations.

    • Tyrx on 30/12/2016 - 11:51
      +1

      The amount of cranes building residential housing in Sydney, Melbourne and Brisbane exceeds what you would find in all the major U.S cities put together…

  • payless69 on 30/12/2016 - 09:52
    +2

    just a "late" fallout from the Opium wars…..

  • daleyboy79 on 30/12/2016 - 11:51
    +1

    My view is that low to average quality units are quite possibly in a bubble and could have price drops of upto 30% in the coming years, not so for good quality units though, and especially not for houses (aka land).

  • [Deactivated] on 30/12/2016 - 13:03
    +7

    Just some more data to look at:

    https://au.finance.yahoo.com/echarts?s=AUDCNY%3DX#symbol=AUD…
    CNY has dropped from 6.8 to 5 over the last 5 years

    https://au.finance.yahoo.com/echarts?s=AUDUSD%3DX#symbol=AUD…
    USD has dropped from $1 to 0.75 over the last 5 years.

    This represents a drop of ~25% in our currency valuation.

    If you look at the median house prices for melbourne:
    http://www.reiv.com.au/property-data/median-prices

    you can see that for the last 5 years the median house price has gone from ~$550k to ~$725k, and median apartment prices have gone from ~$450k to ~$550k (A little hard to see from the graph)

    So if you convert those figures, you get a roughly 25% increase for houses and 20% for apartments over the last 5 years.

    This means that while we think shits been going crazy here, for foreign investors the market has pretty much been flat. If they sold their investments and brought the money back home, they would not have much of a profit.

  • BigBirdy on 30/12/2016 - 13:09
    +5

    There is nothing special about Melbourne, or Australian property. In the medium to long term, the price of property in Melbourne will return to its long term historical relationship to income, both income in terms of rental return (~5%), and income in terms of the affordability of buyers (ie relative to wages). Prices are currently way out of whack due to a perfect storm of historically low interest rates (reflecting an unhealthy world economy), unhelpful taxation policy (NG, CGT discount, exclusion of home from pension assets tests, etc), and a govt fearful of a property crash particularly when property is the only consistent positive in a flat economy. A property crash would be disasterous for the federal ("its Labors fault") govt.

    To return to its long term historical relationship will require property prices to fall around 30-50%, or those two income categories (rent and wages) to rise 50-80% (rough guesstimate). The govt hopes the adjustment is very slow while they're in power, and very fast when they aren't. Interest rate and inflation rises will likely kick off the readjustment process. I wouldn't be buying now.

    • Reveal55 on 30/12/2016 - 16:11
      +5

      I guess you can always look at the glass half full or half empty.

      We were told by everyone to not buy into Melbourne market four years ago due to this so called bubble.

      Four years later we recently sold our house at a 50% profit after associated costs of buying and selling.

  • [Deactivated] on 30/12/2016 - 13:20
    +2

    I came back from the US prior to the GFC. I didn't have knowledge about the sub-prime housing crisis looming, but I did tell anyone who'd listen that credit was out of control over there. The product being advertised wildly at the time was student loans…not for actual academic costs, but extra living and partying expenses. I really don't think Australian Banks and other financial institutions are presently bingeing on credit/debt the way the US was 10 years ago with sub-prime lending and beer loans for students.

  • glassyan on 30/12/2016 - 14:31
    +2

    No, housing prices are increasing at a higher than inflation speed, but certainly well within tolerance level. For those who think Melbourne is expensive they should go to other international city like New York and Hong Kong.

  • c0balt on 30/12/2016 - 15:48
    +7

    Poor O.P.

    He came for a whinge and wanted an echo chamber of validation, but the angry idealist views were mostly slammed by realist thinking community members.

    Population grows and land is finite - OFC there's a high demand for land in metro areas with decent amenities. There ALWAYS will be.

    I wish a crash would come though - I would put up everything I have as collateral and purchase all these bargain homes that the doomsayers are hoping for. Poor doomsayers though, it's like they lack the foresight to realise there would still be a lot of competition and still be priced out by others if a crash was to happen. I know a fair few people who would be jumping on bargain investment properties a lot easier than the waiting doomsayers if there was to be a crash.

    • freakatronic on 30/12/2016 - 20:07
      +3

      I'm pretty sure I made it clear at the opening of this post; I'm looking for people's points of view. Thanks for yours, but keep the snark ;)

    • c0balt on 30/12/2016 - 16:27
      +1

      "The buyer was a cocky-looking 35-year-old with slightly bleached hair — he looked more in place shopping for surfboards than multimillion-dollar inner-suburban properties."

      This is some of the evidence that Adam Schwab has for the banks lending too much money?

      Adam is an extended relation of mine. He could afford to service a loan on that property at 35 himself. I guess that's crickey.com.au journalism though.

      https://au.linkedin.com/in/adam-schwab-64b439a

      • greatlamp on 01/01/2017 - 10:43

        He is rich therefore he must be stupid. Also a criminal.

        • crickey.com.au
        • c0balt on 01/01/2017 - 15:23

          He's an incredibly smart guy - also generous, well liked and straight as an arrow (from what I know). I was pointing out that he could have got that property himself at 35, so why use that as the starting argument that we are in a bubble because the banks loan money that they shouldn't? Because it riles up the echo chamber, feeds that positive feedback loop that if you already thought it, then well by golly it's a manifestation of the bubble right in front of his eyes that a 35 year old was able to get a nice place in a very in demand area.

          I don't disagree with the facts that he posted. I disagree with the omissions of more important factors than just property price vs median income and low interest rates; such as availability of land, population growth, people desiring to live in good areas (IMO the most important factor), people's willingness to be a lot more frugal with other expenses today than they used to be in order to purchase a property, and how other worldly city hubs have an even worse income vs house ratio and have had for a lot longer than Melbourne or Sydney yet are not considered a bubble. I believe that the massive increases in prices are a reflection of what the market actually is and that we are adjusting to be in line with the rest of the world. Supply vs demand.

          By pointing out that I mispelt 'crikey.com.au', is that supposed to discredit my argument? Here's the front page headline on that website right now "Year in review: denialism and demonisation in an anus horribilis". It's a sensationalist, pessimistic, idealistic, heavily editorialised tripe of a publication.

        • greatlamp on 01/01/2017 - 21:55

          @c0balt: no you misunderstood. I was writing their next headline for them.

          Typical of moden journalism they don't present facts, they spin an agenda

          I didn't even realise if you misspelled anything

  • Pauli95 on 30/12/2016 - 17:26
    +4

    Just had a read and found this post fairly amusing.

    I think the real question being asked here isn't whether there's a housing bubble. Its more of a question of where the sheer amount of money that's fueling these price rises is coming from. If you understand the process around how money is created within Australia, and the sheer amount being created, the answer becomes fairly clear.

    • freakatronic on 30/12/2016 - 20:05

      That's insightful. See? I'm glad I asked, cause people here know things.

      What do you think the end-game is then? Inflate the money supply until the little people's purchasing power evaporates entirely? But how do they benefit from that?

      • tonka on 30/12/2016 - 20:24
        +1

        They get their heads lopped off in a revolution of course.

        • thewhip93 on 30/12/2016 - 20:36
          +5

          From the academic perspective. I'm an economics honours students. Most academics unanimously believe it's incredibly overvalued, particularly in Sydney and Melbourne. Money supply, the amount of Australian dollars has more than doubled in the last 10 years or so, mostly from debt. Banks are willing to lend more as, more lending = higher profits, as you can clearly see on their balance sheets. The RBA'S willing to largely support this as higher asset prices leads to the wealth effect which increases consumption. More money furthermore leads to more goods and services being purchased, largely through the multiplier effect. The banks, largely through real estate lobbyists, also have extensive lobbying power in Canberra to ensure that bad and inefficient taxes such as negative gearing continue. Whether it stops depends largely on people's willingness to borrow large amounts of money to buy non-productive assets with negative Cash flows. From an investment perspective, we can look at One of Buffets favourite investment strategy. A book called intelligent Investor by Ben Graham

        • thewhip93 on 30/12/2016 - 20:39
          +5

          Essentially. The investment advice to avoid bubbles or overvalue assets is to look at an assets intrinsic value. Essentially it's Cash flow. In this case: rent minus expenses. Whenever an asset significantly departs from its Cash flow or projected future Cash flow, a bubble occurs. In this case, it's quite probable that a bubble may exist.

          If it doesn't crash in the next few years due to higher interest rates, higher unemployment or an unwillingness to speculate on housing. It most likely will as the older generation, the baby boomers enter their retirement years. Don't benefit from negative gearing, receive little Cash flow from rent and need some money to live comfortably. Thus, selling their investment properties, significantly increasing supply and reducing prices. Either that or another potential scenario could be the automation of jobs and end of the construction boom. This may lead to lower wages and far higher unemployment, as people in retail and transportation industries Etc. lose their job.

        • tonka on 30/12/2016 - 21:25

          @Paulie95: What is the view on the effect of automation and the new economy it would cause. Where does wealth and income then come from, I expect some industries like entertainment may be safe but then maybe only in the short term. My thoughts were at that point it may be that the control of assets, in particular property that can't be mass produced by robots may well become even more valued, perhaps even a point where the wealth divide again becomes about landholders and tenants.

        • thewhip93 on 30/12/2016 - 21:36
          +4

          Automation may lead to a universal basic income being introduced sometime next decade. Essentially a Payout to everyone living in Australia. There may be a control of assets, but if people don't have any money to spend on goods and services, or rent for that matter, there is less demand for rent (people start living together to save money Etc, live in small single bedroom apartments) and consequently the market reaches equilibrium at a lower price. The problem is tenants have to lease their asset (there Property) and if not many people demand it or can afford it, then they need to drop their prices to compete.

          Hence lower profits, lower Cash flow(net rent) and eventually lower prices.

        • goingDHfast on 31/12/2016 - 11:58
          +1

          @Paulie95:

          Around 30% of baby boomers have already retired by my estimates (their average age is 65). Also, what sort of assets would you like to own when you are retired? Me, I would like high yielding and conservative assets which is exactly what real estate provides. Why would I sell these assets at the exact time in my life when I am moving to fixed income and require consistent positive yield to support my lifestyle after retirement?

        • thewhip93 on 31/12/2016 - 12:45
          +4

          @goingDHfast:
          You guys amuse me and this posts losing popularity so I'll leave it with this. High yielding is a joke. The rental yield on Melbourne property is about 3%, net rental yield would be about 1.5-2%, you could get better returns in a savings account. As for capital yield, that'll largely rely on the greater fool theory for that one.

          And for the rest of those statements, I'll just leave it with this. If people make money out of thin air its called counterfeiting and its illegal. If accountants do it, its called cooking the books and its illegal. But if bankers do it, it goes by the name of lending. If you've taken out a deposit, as I'm gathering you have, essentially you've paid one of the banks for a couple IOU's on a computer screen.

        • DrDollar on 31/12/2016 - 17:09

          @Paulie95: You can get better rental yield than that in regional areas where house prices are far cheaper, you miss out on captial growth though. Although, that's not necessarily true, capital growth can be significant also if purchased at the right time. The decision on which is "better" cannot be simplified and is completely dependant on the person's financial position.

        • megadeth on 01/01/2017 - 06:59
          -2

          @Paulie95:

          ‘Cashflows being the major driver for price determination’ may be oversimplifying the price dynamics and may hold if considering only local property investors forming the core market.

          Local investors (by memory) are only 33% of the market, iirc. A large portion of the market is formed by the first home buyers (who won't be renting out), foreign (mostly Chinese) investors having access to vast/cheap money and upgraders.

          For some first home buyers, buying may already be cheaper than renting in several locations while for others cashflow becomes irrelevant after a few years of mortgage. The Chinese investors typically let their kids occupy the house in the short term who study in Australia as overseas students thus saving them rental anyway), so cashflows are probably irrelevant for this group in the medium term too.

          Moreover, other (intangible) factors like families wanting to live in a certain size house just for the sake of it (backyard size etc.) and thus the need for upgrade, also fuel the demand.

        • thewhip93 on 01/01/2017 - 07:22
          +5

          @quasims: Cash flow (and anticipated cashflow) from all accounts is the best way way to look at an investment. First home buyers largely don't exist. There about 10% of the market and reducing every year and will continue to do so. The only area where loans are growing is in investors. These loans to home investors have grown exponentially and now account for about 45% of All sales. Buying definitely isn't cheaper than renting in most locations. Particularly, Sydney and Melbourne, where property speculations gotten to the point where 5% of properties in Melbourne are left empty. Meanwhile, the banks including the big 4 (NAB, Westpac, Commonwealth Bank, ANZ) only care about increasing debt. More debt means that they can increase profits, as there essentially creating money out of nothing. For them to make a loan, it's a couple IOU's, and about 10% collateral. For example, for a $100,000 dollar loan, they only need $10000 held in the bank. The rest is essentially created through a clever system of IOU's.

          In terms of bailouts, the banks have such incredible government and media power that most of you wouldn't even know this. Approximately $120bn was provided to the big 4 banks because they went bankrupt during the GFC. Yet they have so much media power that they were able to keep this largely secret from the public and continue to do so. Just think about what else gets covered up. (http://mobile.abc.net.au/news/2014-11-10/verrender-bank-bail… )

          Now if you're a profit maximising business like a bank, you know if you run into trouble you'll be bailed out just like in the GFC and you can get people to pay interest on money that you can create for nothing.

          What would you do?

          The answer is increase the debt. Increase the debt, and then increase the debt some more. Get a little bit of herding mentality going on, collectively people in groups tend to act irrationally when investing and believe that the consensus view must be the correct one. They follow what everyone else is doing as its easier to be wrong with everyone than to be right and alone. Send asset prices, such as a house's price through the roof, load people up with debts up to their eyeballs (Australia has the highest household debt to GDP ratio in the world), and then hope that it can continue, so that they you can continue posting record profits.

        • megadeth on 01/01/2017 - 09:36

          @Paulie95:

          I agree with points you made above in saying that banks (and real estate agents for that matter) have a vested interest in fueling the asset price bubble, but this fact is universal in nature and should not be seen as a conspiracy theory IMHO. After all nobody is stopping anyone from not using their own money to buy so no borrowing is involved (in actual fact, most of us can't afford to buy outright though so banks come in the picture).

          The perception of an asset price bubble has always deterred people from taking the plunge, however doomsday scenario prophecies have also been proven wrong for more than a decade. May be we need to wake up to the fact that the prices are fairly real. Minor corrections in the market even out in the longer term if you are buying intending to live (not to speculate a perpetual growth). One has to understand that everything that goes up must come down and you cannot mint money perpetually just by speculating.

          If someone wants to buy to live in and wishes to wait out another decade waiting for a miracle, of course they must do the maths first to inform their decision (additional rental paid, price growth/escalation, foreign exchange rates etc.). These are just too many variables to be able to precisely modeled by an average individual. Considering current real asset prices in both OECD and developing countries with those in AU, my view is that our prices are fairly real.

        • thewhip93 on 01/01/2017 - 09:53
          +4

          @quasims:
          Doomsday prophecies? Like Steve Keen, the bloke who was portrayed as being an idiot simply because he didn't foresee that the banks would be bailed out through government intervention?

          And you're completely right, there are too many variables to be calculated by an average individual. That's why people continue to buy property. The facts I'm presenting have been researched for months for my thesis, all have been fact checked and all exist in reality. Theres no conspiracy, this is exactly how it all works. In terms of a housing bubble, it probably exists. If you look at household debt to GDP, house prices to income ratios and rent to house price ratios. You can clearly see that its overvalued. On all 3 metrics, we're at the top or not far off it in both developed and developing countries. Have a look yourself: http://www.economist.com/blogs/dailychart/2011/11/global-hou…

          In terms of real asset prices, the prices in Australia are significantly overvalued. Just listen to the international experts who get rubbished by the media for telling people what's happening, listen to the OECD who says that the debt poses a substantial risk to Australia's economy, listen to the IMF who is constantly issuing warnings about house prices and debt within Australia. All of these people don't have vested interests in Australian property. They try to tell people whats actually happening, and get rubbished by the Australian media, who have enormous vested interests in ensuring their continual rise.

        • greatlamp on 01/01/2017 - 10:46

          @Paulie95: I think we can look to Japan to see the future.

          Decades of flat or slightly negative growth.

          High cost of living.

          Very difficult to move out of poverty through 'hard work'

  • highdealer on 30/12/2016 - 17:29

    It's doesn't matter if Australian can't afford to buy right now. The demand for a house in Australia will always be high as long as our economy and living standard remain like now or keep improving. 2 million+ on a house is spare change for a lot of foreign investor.

  • Pauli95 on 30/12/2016 - 17:35
    +4

    Its not foreign investors that account for an increase in the money supply within Australia. Its a couple clicks of a mouse at one of the Banks. Every time you borrow a couple dollars from the bank, the bank does a couple fancy journal entries on both the credit and debit side, money supply increases and you end up paying a nice loan.

  • nobro25 on 30/12/2016 - 20:04
    +2

    Define Bubble. People are always comparing bubble with the 2008 US financial crisis or the Canadian housing bubble.

    There is no bubble in the Australian Housing market. A bubble would mean the investors would have no way of repaying their mortgage timely, and not just a investors, like a large amount.

    Also you have to think about who the investors are? Are they local or international? Since that you're saying prices are doubling more than the local Melbourne's salary then you're only constraining the sample pool to people who are doing a 9-5 job earning an average salary.

    There are still,
    International investors, large sums of cash
    Property flippers
    Retirees which own a monopoly

    • [Deactivated] on 31/12/2016 - 13:39
      +3

      You do realise mortgage delinquencies are at a 4 year high at the moment at the 'Lowest' interest rates we have ever had? Please do your research before making blind statements.

      • serpserpserp on 31/12/2016 - 22:19

        Yes and please tell use what the actual number is this year as opposed to 4 years ago.

        Think you'll find it is at a number that is nothing to be outraged about.

        • [Deactivated] on 31/12/2016 - 22:25
          -1

          http://edge.alluremedia.com.au/uploads/businessinsider/2016/…

          This chart is from Oct 15 so the SPIN number is higher than 1.5% right now according to the last articles I read on that measure, that is a number to be outraged about considering that peak was only reached in 2011/12 when interest rates were 5% (Not 1.5% like it is now), delinquency rates decreased after that due to a 2% cut in interest rates. Again please do your research.

        • serpserpserp on 31/12/2016 - 22:26
          -1

          @jared444:

          Not percentages, actual numbers…

        • [Deactivated] on 31/12/2016 - 22:28
          -1

          @serpserpserp:

          Couldn't care about numbers, best measures are in percentages. The debt market is bigger now so that even discredits your argument further if you were to base it on numbers.

        • serpserpserp on 31/12/2016 - 22:35
          -2

          @jared444:

          Just because a market value increases doesn't mean the participant rate is astronomically higher. Percentages are a measure but give no context to the point you are trying to convey.

          Please check these percentages against other similar OECD countries. You might be able to chill out a little when you look at it in a global context.

        • [Deactivated] on 31/12/2016 - 22:42
          -1

          @serpserpserp:

          Could you please tell me what % of loans are residential loans of all loans under Aussie banks now vs the 80s and 90s? And also compare that to the %s for banks of other countries?

          You like to compare countries? Ok.

          http://massland.com.au/wp-content/uploads/2015/02/w11.jpg

          Would be interesting to know what personal reasons you have that are making you go on the defensive when all I was doing is just correcting a fact.

          Have a nice new years! I'm going out.

        • serpserpserp on 01/01/2017 - 09:59

          @jared444:

          I wasn't getting defensive at all, just pointing out that the delinquency rate is nothing to get excited about.

        • [Deactivated] on 01/01/2017 - 18:39

          @serpserpserp:

          You are arguing a point without providing me any numbers proving the delinquency rate isn't a big problem. Back up your points with data instead of asking me to fetch them. Case closed.

        • serpserpserp on 01/01/2017 - 20:45

          @jared444: My point was really around your very inconclusive data. Saying something went up by x% (and a very small percentage at that) does not mean it is a problem we should all be worried about.

        • [Deactivated] on 02/01/2017 - 00:06
          -1

          @serpserpserp:

          Learn about a concept called the burden of proof. I made a statement, % increases of delinquencies IS a problem (A 1.5% delinquency rate at the lowest interest rates we've had), there are exceptions that are not common which is what you are proposing, you have to the supply the data to demonstrate it is that uncommon occurrence.

          Next you're going to say increases in interest rates aren't a problem because people aren't leveraged enough for it to be a problem and I should provide evidence to suggest that people are leveraged enough for it to be a problem. Sheesh.

          Can't be bothered with another post, you're crossing the line of trolling. The fact you don't provide the data shows that you are unwilling to change your perspective. You are debating with ideology and belief, not data, perhaps because you're leveraged. No matter what argument is proposed even with decent data, you will find a way to prick a hole in it just so you can hold your hands over your eyes. But this time it's different… sure.

        • serpserpserp on 02/01/2017 - 18:38
          +2

          @jared444:

          All I asked for was context for a number. Something that should be easy to provide since you are the expert on this one.

          Saying something has gone from 1% to 1.5% doesn't mean anything is a problem. It is kind of like saying a power station shuts down in Victoria while usage by the population increases 1%. Is this a problem? Maybe. It depends on the other factors involved. It is a problem if the grid is maxed out already by usage, yes. Is it a problem if there is plenty of capacity, no.

          Leverage is a factor that plays into the equation. But the underlying point here is that if delinquency rates go up .5% and that .5% is equal to say 500 loans, that isn't a problem because the system (banking and social) can handle it, if it is 50,000 then that could be a problem, but depends what the underlying systems or supply/demand can handle. In this market, if you can't pay your loan for cash flow reasons, you would probably most likely be (a) able to find a buyer for your property and (b) probably get a decent price for it, so what you might be out of pocket for would be drastically smaller then say what was seen in 89-91 etc.

          Not trolling here at all btw.

  • Butt Scratcher on 30/12/2016 - 20:45
    +2

    I get the frustration, 10 years ago you only had to save 2-3 years to buy a property. But now, it's 10+ years for the average person.

    I personally don't think the house prices will collapse on it's own, but I do think house prices are way overvalued. For those of us who live here, renting will always be affordable. So as long as there is demand, prices aren't going to suddenly drop. In saying that, I do think an external shock to our economy could be a catalyst that will burst the bubble, and when that happens it's going to hit us HARD (much harder than the 2008 GFC).

    If trump does anything drastic about the increasing debt in the states, that could very well be the catalyst.

    I think canada's situation would be worth keeping your eyes on. Their housing situation is 2-3x worse than ours because they've changed their immigration policy and basically welcomed Chinese millionaires in troves. This caused a situation where there's a huge disparity in the wealth of people who live there, and the house prices. I haven't read a lot into it, but from the looks of it they might be on their way down at the moment

    • Skramit on 30/12/2016 - 21:13
      -1

      I get the frustration, 10 years ago you only had to save 2-3 years to buy a property. But now, it's 10+ years for the average uni grad with a brand new iPhone, a nice car, parties every night, eats out 5 times a week.

      Fixed.

      • tonka on 30/12/2016 - 21:41

        I do think this is a thing.
        That was me, maybe 15-20 years ago, took more than 2-3 years though, you had to wait until you earned a normal income which would often be late 20's early 30's. Getting paid less than your older peers is not as much of a thing now(but not completely gone). But you rented a crappy old house or unit with 20 year old carpet and had crappy cheap furniture and shared a bathroom with 4 or 5 people. A new car was not even considered always 15 to 20 years old and second hand. No air conditioning. No mobile or internet or annual overseas holidays and Maccas was eating out. But eating out was only really special occasions. In general a lot of standards were completely different and a lot of stuff was Much more expensive, the trade off maybe was not having to save as long for a deposit. But when you did get there you were also paying a LOT more interest.

        • casho on 31/12/2016 - 14:38

          Depends how long it takes you to save $214,000 as the 20% deposit on a Sydney home…

          http://www.afr.com/real-estate/residential/eight-years-for-f…

        • tonka on 31/12/2016 - 14:54
          +2

          @casho: Sorry not subscribed to get that article.

          That million dollar home is the established house that you upgrade to in your late 30s and 40s. I don't understand why the current generations feel they should get to skip straight to it when no-one else did.
          My first home in Sydney, a 2 bedroom unit sells today for $350K. A 3 Bed house on 600m2 sold accross the road from me last week for $650K.
          And no I didn'tget to buy as close to CBD as my parents, same as my parents didn't get to buy as close as their parents etc. Exactly the same for all my friends I grew up with.
          Not sure does a first home owner really need 20% deposit?

        • knk on 31/12/2016 - 17:10
          +3

          @tonka:
          This exactly, my first house wasn't in the area I wanted to live in. Hell my second house is barely a step up in location.

          People btrch about not being able to ever own their own home, it's rubbish. Banks will lend with insane LVRs, you just need to be realistic about what and where you can afford to buy.

          Your average 20-25 year old can't set their sites on a 3 bedroom home in Brighton like they want to. (Melbourne example)

        • serpserpserp on 31/12/2016 - 22:21
          +1

          @casho:

          You forgot stamp duty.

        • serpserpserp on 31/12/2016 - 22:22

          @tonka:

          They do if you don't want to pay LMI.

        • tonka on 31/12/2016 - 23:13

          @serpserpserp: Sure LMI sux but with an investment of that size making sure you enter the market at the best possible time is more important than trying to avoid it. If the market continued at a normal rate and using the sort of numbers you are talking of. You would save around $15K LMI, but in the extra 5 years it takes to save 20% your purchase price would increase by $350K.

        • megadeth on 01/01/2017 - 07:07

          @tonka:

          Not sure but till a few years ago FHB LVRs used to be 90% (and considering FHOGs that used to come down even further… May be if the FHB wants to buy a house and also avoid the LMI then a 20% should be required…

      • Butt Scratcher on 31/12/2016 - 11:20
        +1

        If that was the case, I'd think it would take 20+ years to be honest… The average salary is 70-80k while the median house price is around 1 mil

        • [Deactivated] on 31/12/2016 - 16:54
          +3

          I'd argue people throw too much money on eggs on toast for $20 for brunch and then thousands on $12 beers at bars and travelling all the time.

        • knk on 31/12/2016 - 17:11
          +1

          @jared444:

          Basically, my generation are over entitled dicks.

        • [Deactivated] on 31/12/2016 - 17:40

          @knk:

          I'm in the same generation mate, I like looking at history but most like living in the moment without caring for the future. Roaring 20s all over again…

        • knk on 31/12/2016 - 18:32
          +5

          @jared444:

          Yeah I'm 26 now and on my second property, have mates who lived at home longer and managed to have their 3rd or 4th by this stage also. It's definitely doable if you don't overspend. Not glamorous properties by any means but I'm happy.

          I had to sit a family member(20yo uni student)down the other day and basically draw up a spreadsheet and scold them till they realized they shouldn't be eating out 3 or 4 times a week. Their response 'why do I have to give up the things I like'.

          Grow the hell up and learn some financial responsibility ffs. I don't understand where this attitude comes from, we weren't raised with a lot of money either…it baffles me.

        • tonka on 31/12/2016 - 19:50

          @knk:
          Sounds like you're on the right track. If things work well for you you'll be eating out every night of the week and telling your family member 'I told you so'.
          Maybe you could teach them how to stack coupons and eat out Ozbargain Style to ease them in to the frugal lifestyle.

        • [Deactivated] on 31/12/2016 - 20:06

          @knk:

          Keep on with it mate. People think short-term and when everyone starts living an awesome lifestyle everyone starts following and break even and when they can't live the lifestyle they start taking out debt. It's just the way the herd works.

        • Dogfight on 31/12/2016 - 20:58
          +2

          @knk:
          couldn't agree with you more.
          "You enjoy the shade from the tree you planted a long time ago".
          Our generation take a lot of things for granted.

        • serpserpserp on 31/12/2016 - 22:24
          +3

          @knk:

          Not everyone grows up in a stable home and gets the luxury of a free ride through uni mooching off the parents and then afterwards.

          Living at home to become a little landlord doesn't sound like growing up much either.

        • Butt Scratcher on 31/12/2016 - 22:53
          +2

          @jared444: MAybe i'm doing something wrong or maybe I am entitled, but I like to think that I'm not..

          I'm 23 now and have about 1 year left before i finish up my degree. I'm not a big spender (seriously I budget myself 100 a week, whatever is leftover I spend on myself, but only manage to do so because i live with my parents) and work about 15-20hrs a week. Looking at the state of the market (and hearing my friends complaining) it just seems like an uphill battle, every year it seems like the house prices are going up faster than what the average person is earning.

          I get told by a lot of my colleagues that I am stingy, and I am, which might be why I think it's an uphill battle. But maybe that stems from the fact that I'm not working full time and don't know what it is like to earn real money.

        • [Deactivated] on 31/12/2016 - 23:04
          +3

          @Hunga:

          100 a week isn't much you can do with if you were to save it. I'd enjoy my uni years while I'd still have them, best freedom is during uni days before you get into the workforce and only have 4 weeks of leave. I think that's a problem you should think once you have a full-time job.

          I know someone who had a lot of hurdles and what did he do? Work full time, still study a CPA and have another two part time jobs and bought an apartment. Life is what you make of it and it all comes down to willpower. Whether you have problems or not, you have the potential to fix them, some people have bigger hurdles than others but they are still fixable (Work smart, save hard and work more hours). We don't live in the states where you earn 7 bucks an hours and have no social healthcare system.

          Life is all about trade offs, I'd rather not have to work hard in my 40s or 50s and retire early than having to use housing commission because I spent it all on rent, alcohol and travelling. You could argue the same case for being married or being single all have it's trade offs and you have to choose what suits you best as a person and not dwell on what you could have but rather what you do have.

        • Butt Scratcher on 31/12/2016 - 23:11

          @jared444: I don't make 100 working 15-20 hours, fortunately i'm not a factory work in china xD. I budget 100 in spending and save the rest.

          Yeah, I guess life is a tradeoff. When I start working fulltime, I guess that's when I'll decide whether or not owning a house is for me. I personally do see benefit's renting. Buying a house just seems like such a put off when it could potentially put you in debt for a large part of your life.

        • [Deactivated] on 31/12/2016 - 23:15

          @Hunga:

          Ah right was trying to understand your sentence. Thought you may have had other expenses and that was left over and you spent it.

          It's up to you whether you save now or later. But you seem like a smart guy, keep on with it.

          And that about debt, I know what you mean.

          Whether you want to live with your parents or rent is a different issue. But you would save a tonne living with parents. Perhaps 300-600 a week.

        • knk on 01/01/2017 - 10:56
          +1

          @serpserpserp:
          FYI, I didn't live at home to become a landlord. Bought my first property and moved into it, went front there. We didn't have a free ride or anyone to mooch off, just barely a roof over our heads.

          My point was that even given that experience some still manage to have this stupid sense of entitlement.

        • greatlamp on 01/01/2017 - 11:02
          +4

          @Hunga: all rich people are stingy, forget about your colleagues attitude.

          Before you listen to someone else's opinion, have a look at what they have achieved, that is what their mindset has produced

        • [Deactivated] on 01/01/2017 - 18:46

          @rememberme:

          Something most people don't understand unfortunately.

          It's easily possible to save half of your money, but it's much less probable to double your wage unless you have the opportunity of changing professions.

  • Skramit on 30/12/2016 - 21:06
    +4

    Define bubble? Is growth high? Yes. But unless the "bubble bursts" and millions default on their mortgages then a bubble is not a good way to describe realestate growth.

    I just don't think you're asking the right question.

  • mrham on 30/12/2016 - 22:38
    +1

    As a great man once said it ain't a bubble, it's just a bit of froth.

  • darkchoc on 30/12/2016 - 23:31
    +2

    Australian cities have great metrics relative to other cities. Living here, we don't see it and look to other systems with rose tinted glasses.

    Melbourne has good schools, great weather with seasons, trains buses and trams, an international airport not far away, well planned city, good quality air, beaches not far away, countryside within reach, mountains within reach, very safe to walk and really low crime rates, English speaking, not too dissimilar time zone to Asia, education system that doesn't just produce rote learning exam passing, laid back culture, great food and coffee, very low socioeconomic problems. Melbourne and the other Australian cities are rightly ranked highly in surveys for expats to relocate to. Everyone can point to reach and every point and argue against them individually and we can look at the government's underinvestment in the areas. But as an aggregate, there are very few places in the world that have the whole package.

    So demand for housing in Melbourne is strong based on what the city offers for living and working here.

    If we examine the ratio of monthly household income to finance the house purchase, we would probably see some interesting trends. Now we have more double incomes as female workforce participation increases, lower interest rates meaning that the monthly payment is lower or a larger capital purchase will have the same monthly payment under the lower interest rate environment. So mortgage interest payments as a proportion of household income may not be as high as people argue.

    The third item is property investment. The tax rules have strongly favoured investment property purchases. As a result, investment property is favoured by mum and dad investors, smsf superannuation funds, seen as a passive income by people who have equity in their homes. This will have driven up prices considerably in certain sectors of the market. However, this will ultimately mean more competition on rental and push down rents for tenants. Which in turn makes the yield lower for an investor and so investors will seek a lower risk property for the same return. therefore only certain sectors will be really highly affected.

    Are house prices high? Yes. Is investment in property market pushing up prices? Yes. Are the monthly payments as a proportion of household (dual) income high? I don't know.

    Are we in a bubble? By definition, a bubble has to pop and it hasn't.

    Are interest rates low? Historically yes. Global rates are low. Pushing up interest rates will lower demand for capital for investments that drive the economy. So be prepared for a longer period with lower interest rates.

    I would be very cautious with purchasing property seeking speculative capital growth.

    If youu can rent in a suburb with good schools, transport to the cbd then do it! buy a place where you can afford and offers schools, transport and where rental demand is high so you own a home for the future but can rent it out if the bubble pops.

    • darkchoc on 30/12/2016 - 23:43
      +5

      Another way to look at interest rates is like this… Say mortgage interest rates fell 4% (from 8% to 4%). Monthly interest payments halved for the same capital mortgage. Or you could still afford to pay the interest on a house that is twice as expensive! House prices potentially double!

      Now home interest rates are at 4%, if they drop only by 2%, then the monthly interest payments halve again. House prices could double again if credit is freely available and deposits are available.

      So now we are in a low interest rate environment, a smaller rate cut had a bigger impact on how much people can afford monthly and so each rate cut can lead to a larger increase in house prices.

      This explains partially the accelerated house price growth recently as bank mortgage interest rates have been falling.

      • Architectonic on 31/12/2016 - 18:45

        And each rate rise…

        The USA just increased their rates for the second time in 10 years and say more rises are on the way.

        • darkchoc on 01/01/2017 - 21:47

          The USA was at interest rates of 0.25% so the only way is up.

          It will have a knock on effect globally if they start ramping up rates. Their economy is recovering, so I wonder what impact it will have locally for the USA and how far rates can go up without hurting their growing economy.

          But with trump… Anything is possible

    • [Deactivated] on 01/01/2017 - 18:51

      If you are proposing we are not in a bubble because it hasn't popped yet you have to argue we will not run into a recession in the next 5 years and interest rates won't rise and delinquency rates won't rise. I'd say that's an impossibility.

      Standards of living are just as good if not better in Scandinavia except for the weather.

      Regardless about whether the place you bought out is a good area or not, it doesn't really matter if you are 80% leveraged, which is what every first home buyer has to do unless they are maybe a couple. If you are out of a job and you are 80% leveraged, you are broke, simple as that, regardless if you rent it out because you still have to make the mortgage repayments in addition to the interest, the only option is living with a friend or your parents again.

      You know what happens when you declare bankruptcy in Australia? Can't get a loan for 7 years.

      • darkchoc on 01/01/2017 - 21:44
        +1

        Yes I do argue Melbourne is not in a bubble. Because a bubble is required to pop.

        Lending criteria has tightened, so they should contract price growth yet it hasn't done.

        The hypothetical situations you have given are actually all very real possibilities. But will they all happen at once like you suggest… Not likely.

        The Victorian (Melbourne) economy is not resources dependant. There is a significant amount of government infrastructure investment proposed (metro rail link, road widening, level crossing removal)… All of which will lead to the multiplier effect and boost the local Victorian economy.

        You mention Scandinavia as having better living standards. I agree wholeheartedly. In return, the cost of living in the capital cities such as Oslo was more expensive than Sydney. Also the investment and tax environment in Scandinavia is very different to here. Also, these countries do not have the same connections with Asia, nor do they have a significant population (similar to Australia). Between Australia, new Zealand, Canada, the Scandinavian countries, Switzerland and Austria, there are no cities in the world that are "better" as defined in my original comment.

        On a macro scale, if people in Melbourne do lose their jobs, there would be bigger problems than just paying mortgages.

        I think it is important to have a balanced view. I cannot see all the hypothetical situations happening as if we were to head into recession and inflation was low, interest rates would remain low. If the economy grows, then we'd have inflation and then the RBA would seek to raise rates. It's forecast that rates will stay lower for longer.

        To support your views, there is a lot of uncertainty in the future, so rates could rise quickly and jobs could go. it would take a very unpopular government to let both happen and lose the popular vote especially with retirees seeing their life savings decimated with destroying the economy.

        • [Deactivated] on 02/01/2017 - 00:14

          When did I say all of those conditions have to apply? One of those conditions will cause a collapse. They rose interest rates after the GFC from 2009 to ~5% from ~3% and delinquency rates started to rise, so they had to lower interest rates. If you buy that they had to lower it to increase inflation instead, good luck to you.

          'The Victorian (Melbourne) economy is not resources dependant. There is a significant amount of government infrastructure investment proposed (metro rail link, road widening, level crossing removal)… All of which will lead to the multiplier effect and boost the local Victorian economy.'

          Great… We have a Keynesian here…

        • darkchoc on 02/01/2017 - 09:37
          +1

          @jared444: I just have a different opinion to yours, which I feel I have presented with valid points.

          Only time will tell whether there is a bubble. So you may be correct, I don't dispute that. But it's only a maybe, not a certainty.

          I feel I presented a valid argument about the impact of the investment by the state government on the local economy, which you kindly dismissed with putting a label on me without any justification, reasoned argument or acknowledgment.

  • ozzieblue on 31/12/2016 - 08:31
    +7

    Cheap property has mostly got to do with cheap credit. Currently low rates mean our mortgage payments are relatively cheap in relation to rent so a lot of people have tried to buy. Low rates inflate all assets as there is more demand for assets relative to placing money in low interest deposits. Look at the share market.

    Our government also have many policies that support property investment over other investments. Scott Morrison himself used to work for the property council of Australia (an advocacy group focused on promoting property) and he demonstrates this by only supporting supply side arguments. The supply side argument is frequently pushed by advocacy groups because they become more profitable if government's release land, and promote property through tax incentives. I do agree Mr Morrison — it is partly supply…. i.e. a very large proportion of the supply is taken by investors (around 1/4 of all units are owned by investors). Let's make it fair. Property only attracts 10% tax in SMSF, capital gains tax benefits skew property investments and negative gearing makes it profitable to run unprofitable investments.

    Foreign investors also take a slice of the pie. They are allowed to compete in residential despite FIRB restrictions. Australia has a very large export focused education industry (around $20 billion pa) and around 50 thousand Chinese come in a year to study. A proportion of these students will acquire PR. Through parent funding they will then acquire residential property. Australia is an immigration nation. Through family networks money has come from offshore to fund and invest in property.

    So is Melbourne in a bubble. Yes of course it is, and so is Sydney. But while people remain confident in housing it will remain stable or come off slowly. There needs to be a liquidity event to deflate it - similar to the GFC (the GFC was caused by housing in the US).

    My prediction is that there will be either one of 2 scenarios that will occur (with variations around their themes).

    1) A large credit event in China (or somewhere else) that scares the markets and dries up credit similar to 2008. This will have large knock on effects in Australia. We export most of our goods to China.

    2) A slow continued growth cycle in the US which slowly raises US rates, effects our currency and causes our rates to slowly rise. This would imply higher defaults, lower credit facilities, and lower house prices.

    Stewing in the back of the cauldron are a number of factors:
    * Australia has lost 90000 permanent jobs over the year, yet unemployment remains high due to temporary job increases. (130k). If people start losing jobs, housing will come off.
    * Our interest rates are under pressure from
    rising rates in the US,
    our currency which has devalued around 3c in a month,
    higher funding costs generally from the trump inflation threat
    and our credit rating potential downgrade. If rates rise and defaults increase housing will come off.
    * A glut of apartments as developers have responded to the increase in property prices. A glut means more competition from suppliers driving prices down.
    * Rental incomes have started to dip off as the glut of apartments effects supply.

    We are not alone in our bubble. Look at Vancouver, London, Shanghai etc … Prices have risen dramatically all around the world. When it all starts going pear shape, there will be little solace from knowing we are not alone.

  • tomleonhart on 31/12/2016 - 09:43
    +3

    You think Melbourne is in a bubble ? Look at Sydney!

  • FittyFitty on 31/12/2016 - 10:25
    +1

    Short answer, yes; long answer, for sure.

  • DarkOz on 31/12/2016 - 10:45

    Is it a bubble? Yes, definitely. So is Sydney and some other major Australian cities.

    The important question is will it burst? There is a slim chance it might burst but I don't think it will. There is too much demand to that to happen. So the most likely scenario is a major correction for a few years.

  • lousy on 31/12/2016 - 12:33

    you haven't mentioned the key driver of house prices in your intro which is immigration stats and requirements for visa

  • Starcraftmazter on 31/12/2016 - 12:38

    Yes, according to objective measures like price to income ratios, price to rent yields - it is in a massive bubble.

  • [Deactivated] on 31/12/2016 - 13:54
    +3

    Yes we are in a bubble. There is no doubt about it and the people who reject that is because they either don't know how supply and demand works or they are in so much debt they are in denial and don't want to accept they made the biggest mistake in their life (If they got a mortgage in the last 4 years).

    Facts are:
    1. The amount of credit in the system has caused people who can't afford it in the medium to long term to be part of the market (Similar to the states, not as bad, but that's because we have been growing this bubble for 25 years, the US only took 7 years, so I'd say we are just as bad)
    2. Inflation is at it's lowest it has ever been, increases in inflation will eventually result in increases in interest rates if the RBA responds appropriately. Considering they are so low any external event (Like the oil crisis in the 80s) could cause it to grow significantly
    3. Retail banks are increasing their OWN interest rates and going tighter because they were making so much cash from selling loans they suddenly realised what they did was unsustainable.
    4. Interest rates are at the lowest they have ever been (This has caused prices to increase due to the amount of debt people could take out)
    5. Despite lowest interest rates we are at a 3 year high in delinquencies - http://www.afr.com/business/banking-and-finance/financial-se…
    6. We could be in a recession if GDP is negative this quarter.
    7. Chinese can only buy off-the-plan, this means it can still pop on the local side
    8. We have more cranes than ever and building approvals have tripled
    9. Chinese economy has slowed tremendously which means less money coming from abroad plus the Chinese government is making it harder to take money abroad

    This will pop and I'd say really really badly if one of these scenarios happen.
    1. Interest rates increase (Possibly due to inflation)
    2. We enter a recession, global recession again (Face it it has been 8 years already, corrections happen every 6-10 years) or unemployment grows
    3. Delinquencies continue to grow

    I would say any of these are good possibilities that will make the housing market crash (I'd estimate 40-70% based on whether it's prime real estate or not i.e. Eastern suburbs vs western suburbs in sydney).

    • [Deactivated] on 31/12/2016 - 14:36

      How would Australia be in technical recession if the current quarter is negative? What figure are you quoting for last quarter?

      • casho on 31/12/2016 - 14:44

        Last quarter GDP shrunk 0.5 % "Australian economy shrinks 0.5pc in September quarter, worst fall since global financial crisis"

        http://www.abc.net.au/news/2016-12-07/economic-growth-gdp-da…

        • [Deactivated] on 31/12/2016 - 14:46

          Focus economics: "The contraction was driven by a drastic fall in fixed investment, most notably in public investment, which had been boosted in the previous quarter by a transfer of assets from the private sector. Since this was largely a one-off impact, the dismal quarterly reading is unlikely to carry over into the final quarter of the year."

        • [Deactivated] on 31/12/2016 - 15:06
          +1

          @Frugal Rock:

          I can't be bothered arguing whether it's a technical recession or not, you could argue that US's GDP growth last quarter wasn't that great due to soy bean exports. But when it is a recession regardless whether it's technical or not people start to downsize because of negative sentiment.

          The mining boom is dead and debt keeps growing bigger and bigger. It isn't sustainable. You could argue that the government will get out of debt through privatisation and selling government assets and land, but that's a different argument. And in essence you are leaching resources and assets that will eventually disappear once it's all sold off.

    • casho on 31/12/2016 - 14:42
      +3

      Well said. Interest rates are already increasing. The unemployment rate is a joke. We have lost a lot of full time jobs.

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