Property Prices in The Major Cities

It has been a while coming. We went through a minor blib in the property market ending Dec 2019, with a recovery coming January. Now it looks like we are moving into the recession that we have never had.

I think it is pretty obvious we are heading for another house price correction where house prices will again align better with our incomes. I had a long email chain discussion with a realestate agent saying he is still experiencing houses selling for the upper end of his target (24th March). I do understand the supply will dry up but so will the demand, so don't see the rationale for people paying over the odds.

Surely there is very little upside to housing and we are at end of cycle:
a) house prices are VERY much related to interest rates and interest rates can only go up (albeit probably not for a couple of years) and house prices will then go down,
b) there are real dangers of companies closing down permanently, people losing their jobs, bad debts and defaults increasing,
c) our large pool of imported labour and students will reduce (hard to justify extra expense of studying abroad or importing labour in a recession) which will impact rental demand, driving rents down,
d) rental relief will cost investors

What do other people think?

Comments

  • +8

    Good properties in good locations will still do well.

    Not all buyers rely on interest rates, some are cash buyers eg downsizers or others who are in strong financial positions despite the negative sentiment that is happening.

    Speculators out there will probably decrease in demand for the time being, which allows more serious/qualified/strong financial buyers to get access to those better properties in better locations.

    Potential buyers who are more price senstive or reliant on substantial loans, I think will also sit on the sidelines for the time being and see how the market moves.

    • -3

      I cannot stress enough that property prices are mostly about rates and confidence(jobs & increasing prices). Lower rates = higher credit limits+lower repayments+higher asset prices, higher rates = opportunity cost of holding assets is higher + lower asset prices.

      • +2

        It's much much less about interest rates, and much much more about income.
        The government has reduced rates to pretty much the lowest margins in the world, and we have some of the lowest unemployment rates. YET, we still didn't see a ^recovery. And you know what, that is actually what was going to happen. This was due to the fact that we didn't get a rise in income. So the disparency between Buying Power and Purchase Cost is still too high.

        Then we were choked financially with the bushfires. Not to mention the droughts. Then a societal stall thanks to the quarantine. Plus our economy was slowly weakened since 2009. Not to mention, we can't hitch our economy to another nations like China or USA, as there is a Global Recession.

        So what does that mean?
        Where the affects of the Covid19 quarantine would have lasted 6-months, with the combination of our weakened economy, decline of reserves due to fires, and the 2020 Global Recession… it looks like the effects are going to last for 2 years.

        In a sense, this is a correction.
        Money and Non-essentials will lose value, while many "useless jobs" will be axed. Buying a house will no longer be a priority. That means people who have sheltered themselves by storing their finances, and producing required services/items with their useful skills will gain the advantage. Think of farmers. They suddenly have a bigger bargaining chip on the table, and those that were taken advantage of will get their fair shake.

        The pillars of society, aka most useful jobs, seems to be:
        Military: we can be invaded in a matter of hours.
        Waste Management: within days, hygiene could hugely diminish.
        Healthcare: within a week, mild illnesses can become life-threatening.
        Farming: within a month, stores of consumables will start to dry up.
        Infrastructure: within a year, things deteriorate and unfinished construction becomes liability.
        Teachers: within three years, lack of education becomes statistically significant in the Lowered IQ of society with problems in communication.
        Scientists: within five years, without the thinking men from across all science fields, no advancement is achieved AND we start losing the progress we have already achieved. That's in weapons development, tool making, pharmacy, horticulture, engineering, etc etc. So it directly affects the above categories, and then some more.

        ^few flash sales, but not trend-changing, despite what the Real Estate boards say.

      • I cannot stress enough that property prices are mostly about rates and confidence(jobs & increasing prices).

        Prices depend on demand vs supply. Its as simple as that.

        Rates and confidence is only 2 factors that affect demand. There are many other factors affecting the demand side.

        • +5

          Normally you would be right about supply and demand but housing prices here have always been determined by the availability of credit. When the banks open the taps demand goes up and when they tighten up, demand goes down. This year however we have to deal with extraordinary circumstances so all cards are off the table. I can't see property prices being sustained and some point the losses will go into double digits.

          • +1

            @EightImmortals:

            I can't see property prices being sustained and some point the losses will go into double digits.

            I kind of agree on this but unfortunately, I see this impacting more first home buyer area/city Appartements.
            TheMindsetTraveller said it nicely. Good properties in good locations will still do well.

            • +3

              @Indomietable:

              Good properties in good locations will still do well.

              I'll see you here in 12 months.
              And I'm confident ALL properties, regardless of quality and location, will be negatively affected.

              • @Bystander: 'Do well' in recession have different context than 'Do well' during boom time and I have no doubt that property price is due for correction.

                12 months is short period in property time - What do you think will happen to property price 10 years time?

              • @Bystander: It's a common falacy that good areas retain value. Good areas increase in value MUCH more than other areas so they are relatively more expensive and this premium declines quickly in bad times and increases quickly in good times.

        • Its mostly about rates. That's why the stock market and housing are both overvalued (stock market less so now, but housing is slowly deflating).

          Interest rates are the cost of money - a typical economic definition. When rates go down assets go up. Rates cannot go down anymore so assets are limited in their upside.

          Say you loan 400k at pre GFC rates of 9% and pay 3.2k/month, then at new rates of 3% this goes down to 1.6k. But lets say you can still can afford 3.2k, then this means you can now loan 750k on the same repayment.

          That means that you can afford to pay 750k for a 400k house which is approximately an increase of 87%, which is roughly how much housing has increased in australia. (A couple of hand waving motions as this is a bit contrived but I think you get the picture.)

      • +1

        property prices are mostly about rates and confidence

        You are correct.
        Interest rates have been the key determinant of real estate prices for many years (I only watch eastern capitals). We have the Feds allowing extremely high immigration numbers which soaks up available supply and ensures people at the lower and middle of the market pay the maximum they can afford. The amount you can spend frequently depends on how much you can borrow.

        However

        That was correct up until now. Moving forward the key indicator to watch is unemployment.

  • come on property crash….

    • +4

      *ahem'….correction

      Here's the span of One-Generation of House Buyers (eg GenX to GenY):
      2000: $180,000 (Median Prices) x 8.0% (Median Rates) / $28,000 (Median Income) = 9 Years minimum pay-off
      2018: $570,000 (Median Prices) x 5.3% (Median Rates) / $55,000 (Median Income) = 16 Years minimum pay-off

      So clearly the Buying Power has NOT kept up with the Purchase Cost.
      In relative terms, a full $1 dollar today is only worth about $0.56 cents, a generation ago. Or basically a $1 back then, is worth around $1.78 currently. Yikes.

      References:
      https://moneysmart.gov.au/home-loans/mortgage-calculator#bor...
      https://www.finder.com.au/historical-home-loan-interest-rate...
      https://thenewdaily.com.au/finance/property/2018/05/25/natio...
      https://thenewdaily.com.au/finance/finance-news/2018/06/08/a...
      https://www.abs.gov.au/AUSSTATS/[email protected]/allprimarymainfeatu...
      https://www.mentalfloss.com/article/533632/new-guidelines-re...

      PS: I don't know why every one blames Boomers, since clearly GenX has a lot of guilt (most?) on the economy. Whilst GenY/Millennials are new to politics and the economy, they don't have a stellar track record either. GenZ/iGen are still too young to make a direct impact. But I digress, culture wars gets a population nowhere fast.

      • +1

        ANd how much more will the dollar devalue now that govcorp have fired up the printing presses?

        • +2

          Hard to say.
          They know it's wrong, but they're essentially creating problems for future leaders to save their bacon in the here and now. And the rate they do so is hidden, there's no way to know besides either time-travelling or speculation. Not to mention that most other nations, including the likes of USA, Russia, China, and India are doing the same thing. Maybe not as severe, but I wouldn't put it past the Euro to do the same. I don't know much about Britain to speculate.

          So maybe the better question to ask is, how would we compare to the above mentioned six economies/currencies? If we are more restrained, then that will make a huge difference. As in the mid-term we would be less undervalued, and that would inspire confidence when it comes to trade. If we are just as bad, then our smaller economy has less to gain and more to lose. So the correction won't fulfil its full-cycle and we will still live with a bubble. That's negligible in the short-term, but in the long-term like High Blood Pressure, it can be disastrous.

          With that said, Australia is not as incompetent as Saudi Arabia, but we're not as resourceful as Taiwan. Our closest rival is Canada, and whilst we still have quite a few advantages over them, they still seem to be outpacing us. And they're not very competent to begin with. So we have A LOT of work to do. I think 101% of the reason is due to our poor education, and that's the fault of most greedy boomers, many greedy X'ers, and some greedy Millennials. It's like a monkey cutting a branch for some fruit, not realising he is cutting the branch that he is standing on.

      • Boomers/Silents are the most to blame, but rent seeking government policies enabled it

  • +7

    Banks are deferring loan repayments for 6 months so there won't be any forced property sales for another year and by then the recession, if there is one, might be over. There's a large pool of young people still living at home so there is still huge demand out there. I think a drop in property prices is wishful thinking as it has been for many years now.

    • +1

      1) young people need jobs to buy but yes there is still high demand 2) some of the areas I was looking in dropped 20% up to end of last year - but obviously there was low stock so not as easy to transact (within 15km of sydney cbd)

    • +1

      They are not deferring interest accrual though so your mortgage debt will actually increase if you have to defer payments. IIUC

  • +2

    The reddit /r/ausfinance sub discusses this everyday. The consensus being that there may be small reductions in blue chip suburbs, with potential large discounts as you move further out. The banks are giving 6 month loan holidays, so that will defer a large portion of potential distressed sales until later this year.

    Plus, with the elderly dying, estate sales will likely be up, looking for a quick settlement due to cash strapped beneficiaries.

    I’m no expert though.

  • I do understand the supply will dry up but so will the demand

    The thing about real estate is the demand doesn't go away. People need a place to live.

    • +2

      But if they can’t get loans they will have to rent.

      • Then rent goes up and property will be attractive to investors

        • Then the government reduces allowable deductions and negative gearing so the attraction to investors disappears. :)

  • +9

    Everything that is said in this thread is groundless speculation. Purely opinions as no one knows what is going to happen.

    My opinion:

    We have a 6 month parachute with deferred loan payments, which will allow the property prices to soften gradually, but really, in this climate, no one is really buying, so demand isn't there. Even with low interest rates and deferred payments we are going to see a gradual but large decrease in values.

    If the situation doesn't improve in the next 6 months (and from reading between the lines, governments are planning for 12-18months of restrictions, obviously it might not pan out that way), then deferred payments can't go on forever. People will start defaulting, and the market will be flooded, with no buyers.

    We are going to see a world wide collapse of property values.

    I think depending on how things pan out in the next few weeks, we are likely to see a worldwide (instant) depression, GDP -10%+. The world hasn't experienced economic conditions like this since the 1930s or a situation like this since 1919. It'll be a new world and no one knows the outcome right now.

    • +1

      I agree, this is all wild speculation. There might be a big event in the near future. Something like a treatment for the critically sick. If there's something that can slow down the rate of deaths, then it will be just business as usual. I don't think a vaccine will be the solution though.

  • +1

    More money printing. Who knows where that money will go in the end. Short term, down; medium to long term, up because of the Money Supply.

    More governments taking on debt too. The multiplying effects of $.

    The underlying, broken financial system is still there. I think people are forgetting this. It's no longer a system backed by gold, it's a fiat system that can be manipulated into infinity by applying keynesian economics.

  • If you would take on the 6 month repayment holiday - how might this affect future credit and ability to refinance?

    If no consequences, better to have the money in the offset account in case of emergency.

    • But to take the six month holiday you have to prove hardship, which usually means showing that you have no ability to pay the mortgage eg no money in the bank.

  • If money is devalued, then I general tangible assets such as property will increase in price. However, that might be even out by other factors that can crash it (eg supply demand)

  • +1

    AirBnB has been utterly smashed to evaporation
    Plenty of investment properties are being or about to be sold

  • Property crash will depend on the number of mortgage defaults and if banks start to take over assets. If govt prevents defaults and banks dont take over assets prices can be sustained for few months.

  • We have a Black Swan event - it's a risk-off environment. People have lost their jobs or are in the process of losing their businesses and jobs, people are dying and 40% of the population around the world has been either asked or told to stay at home. The smart money is monitoring the situation and positioning themselves by stalking opportunities but they're waiting to scoop up bargains and certainly not getting excited about paying current prices for 'upper end' properties.

Login or Join to leave a comment