Australian housing bubble

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lazytrader
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Australian housing bubble

Hi All,

I'm considering selling my 2 bedroom villa which is by the beach in a nice area (which I currently live in) I'm not married, early 30's etc so I'm fancy free in that way. House prices are way over inflated here in my opinion and if I can sell I will have a fairly large sum of fiat in my hands as the villa is largely paid off.

What to do? I think house prices can only go down and don't want to be kicking myself in two years when I could buy one of these places for half the price. If I do sell I will have to factor in renting a place and where to put all that fiat. Go all in Gold/Silver keep a little cash. Buy miners etc

The main reason I want to do this is to increase my wealth so I have more freedom to surf, spend time with family,  etc. all these things are hard to fit in in a 50 hours week and then spend the weekend cleaning/DIY/finishing off work related stuff.

Hmm I want to get ahead and a can see there maybe an opportunity

Ps I have also considered using my equity in my home to invest in more metals

Opinions peeps?

Edited by admin on 11/08/2014 - 06:06
Babstar
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BOE calculation

I sold two properties last year, debt free and couldn't be happier.  Stick the money in the bank & accumulate gold & silver on a regular basis.

As a BOE (back of envelope) calculation, try this:

"Housing doubles every 7 to 10 years" (Aussie real estate agents spruik)

The "rule of 72" then says property has to  do between 7 & 10% per annum to double in the stated time frame.

Average AU income ~ 60k  times 2 for a couple = 120k

Bank - repayments max 30% gross income = $40k

Therefore 40k (interest only) @7.5% interest = 533k max mortgage.

The average AU house price is around surprise surprise 500~550k depending on city.

So for our average house to double to 1000k by 2021, with the same interest rate, repayment would have to be 75k per annum, which reversing the calculations, the same couple would need an income of 250k or annual increase in income of about the same rate, 7.5%.  Can you see the average income increasing by this rate for the next decade?  I couldn't, and once I figured out that what was unsustainable won't be sustained I bit the bullet & sold out completely from the market.  We haven't even discussed negative gearing & investors continuing to pick up a loss with weak capital growth, or even worse, a capital loss.

Steven Keen has done some good work over at debtdeflation with some excellent charts of debt to GDP ratio's going back to the 80's to cement the notion that it is credit growth that has driven prices over the last 25 years in AU land.

Another link: Sydney's Housing Disaster Part 1, Part 2

I can't explain the feeling of not having the bank constantly breathing down your neck, it's brilliant, especially converting 30% of it to PM's!

Just my 0.02c worth, hope it helped.

lazytrader
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But gut says sell. My brother

But gut says sell.

My brother bought two properties in Port Hedland for jam in the early 00's, he sold a few years later and is set up for life now. He made a serious amount of money in the shortest period of time ala Mike Maloney. I see an opportunity right now.

I'm very well aware of Steve Keen! he lost the bet and climbed Mt Kosciuszko in his jocks or something! he said prices would fall 40% they didn't and went up but of course timing is everything.

I don't have the bank breathing down my neck as I only pay 50 bucks a week interest only.

Having all my money in the bank or Ag/Au is a little scary though.

I think I will list my property and see what happens, I will use my equity to by more metals as I'm worried about hyperinflation kicking in while I'm in the middle of selling.

Cheers

Babstar
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Port Headland is a very

Port Headland is a very special market, I have seen the massive boom first hand, having passed through Broome, Headland & Karratha for the last 8 years.  The growth in the traffic in and out of these airports (not to mention Perth) has been phenomenal.

If you are talking NW WA, different kettle of fish to the rest of the Australian market, highly specialised, high risk, high reward.  If the boom stops, the liquidity in these markets will dry up rapidly.

Where Steven Keen went wrong is that he is a academic, & did not anticipate the political response (first home buyers boost).  My instinct is that he will be proved correct.  BTW, the bet was twisted from "house prices will fall 40% over a number of years" to "house prices will fall by 40% in one year" during an ambush at a press conference IIRC.  I believe that Keens outlook (deflationary spiral in paper dollars) is wrong, as it fails again to anticipate the "print print print" response from those in control of the system.   However, he makes many valid points, with many good pieces of data.

You could say, that when viewed from the perspective of gold, we are in a deflationary spiral, however, when viewed from paper dollars perspective, it appears to be an inflationary spiral.  Just a question of perspective,  in that sense Keen is correct.

asymptote
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For me, the answer was to

For me, the answer was to sell, and buy. I'm in Leichhardt, Sydney. I sold. A typical 3br townhouse here is selling for ~800-1m. I bought for 500k so I'm pretty happy renting now. I bought a small 2.5br place up in the mountains as a 'doomstead' and put up an elderly family member there for her retirement. Worse case scenario, we can move in later if Sydney gets messy.

Apart from that, put the rest in PM's. 

My opinion on the property market here is that the income:house price ratio of 1:9.5 is not sustainable. In order for the houses to continue increasing in price (needed to stop all those yuppies dumping thier tax offset properties) we need continue wage growth OR continued interest reductions. My view on this is that the RBA\Gov\Banks are well aware of the situation and like the US will attempt to keep the meltdown contained as long as possible. Our banks have 70% of their assets in residential property alone (not counting commercial). Based on rough guess I would say they could withstand at most a 20% drop, based on the timing of the 2008 government savings account guarantee. Due to all of this, I see ONLY rate reductions + jawboning and 'concern' over inflation (followed by IRR).

The property market will not grow overall moving forwards IMHO, and will be protected from falls by lowering of rates. As the rates lower the spec carry traders will pile out, and the AUD will readjust downwards. This will have a mild positive effect on the economy making us more competitive for commodity exports, but also lowering the profits of exporters.

The big risk is our great levitator, the Chinese, without which we would have suffered GFC along with the rest of the world. I think a slowing china is out most major risk. A risk that will CRUSH western australian property first, and second hit the Sydney financial sector(Where I'm employed) and property, with flow on effects from there.

Since China shows no -clear- signs of a slowdown right now (though ZH hints constantly) then I would say you are safe to not sell today. Selling today however -to me- would be selling at the top. (accepting that I don't know where you are, so you may be in an area that may have one last hurrah).

My suggestion. Sell. Property only has strong downside potential, and any upside from an income to price ration of 1:9.5 will be weak at best. Any increase will be the slow first home buyers led to the slaughter with more stimulus and grants or the greedy buying in with lower interest rates. Ask yourself this. Who can safely buy your home, and commit to a 30 year mortgage in the current world environment?

Will you find better sucker now, or later once the 'recession' gets airplay... 

I like renting today. I know the owner increased leverage last year, as he had to get an bank inspection to increase the loan size. I'm glad I'm not holding the bag. :0

As for the future price. If banks collapse or are nationalized and we're in a depression, people will view loans like they do in the US where even 0% can't get people to commit to a 30 year liability. I see two futures, first, prices reduce to 'cash price'. This is nirvana. Buy a house for a few oz of gold. OR, the RBA drops rates to 0%, (with a 2.5% bank spread), and people only start investing once the overcorrection return to mean drops prices to ~1:4'ish, giving a 60% reduction in price. 

BTW, here are two non bank vaults. One in the inner west, in camperdown, run by kennards after they bought an ex bank property. The other is in Brisbane. Alternatively, you can take a really cheap flight to Singapore or Auckland. I would suggest a combination of many of these sites. 

A good site for discussing these issues further is silverstackers.com.au . Lastly, like babstar above I'm debt free and agree that it's a great feeling. I actually set aside a total of 60% of my income now. Since I own a minor propery, I can move there if I lost my job in an instant and just do nothing... I can move anywhere I need at any time I want. THATS freedom you can't get with debt. 

Best of luck. 

lazytrader
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Australian propert bubble

Thanks for the replies

My area has already hit it's top and has gone down quite a bit. I'm on Perth's northern beaches.

I have never rented before so this will be new to me, I have this thing in my head that only poor people rent! I bought my place when i was only 20 years old. I need to feel better about renting.

Thanks for your replies

Stormdancer
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Seems pretty unanimous

Seems pretty unanimous lazytrader :)   Sell it while you can.  It's a financial decision that has nothing to do with being rich or poor but just might keep you from becoming the latter in the future :)

Nothing wrong with letting someone else worry about paying the rates and fixing the busted water heater for a few years.  I was pleasantly surprised to read this thread.  I've spent the last five years trying to expose the dangers of Australian real estate and had almost no success.  I thought 2008/2009 was going to burst the bubble and to my amazement the average income/average home price ratio dropped to about 7, leveled off for a few months and headed north again!  You can bet it's going to pop some day though.  Australia got a grace period...not a free pass.

Edit:  Take note that that historically that average homeprice/average income ratio has hung out around 3 to 3.5 in healthy real estate markets.  The US real estate markets imploded when that ratio was about 5.3.   Our ratio is extreme by any measure, whether compared to history or other nations.   There's a long, long way to fall....

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the_Pete
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I did this last year!

Wow... this is sooooo close to my own reality, it is not funny!

Last year (Jul 10) I had an epiphany that housing market needed a significant correction as Aust prices were getting off the charts compared to incomes.  I decided to sell the family home in Melbourne due to a work move, rent for a few years and invest the proceeds in the meantime.

Initially I was looking at real estate opportunities, but I kept coming back to my initial epiphany.... the housing market is overpriced & that even a high yield would not offset the capital risk.  Then I "found" PMs..... holy crap!  My investment mentality over the last 12 months has completely changed.

IMO, I am now postured for whatever financial chaos the system will experience and on the other side, I will buy a new home without the need for a mortgage, a broker or any other financial shackles.....  I now sleep well at night and am prepared to wait until 2016 if it takes that long for the shift to occur.... I seriously doubt I will be waiting until then though wink

Mike
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I sold my apartement here in

I sold my apartement here in Sweden 2009 and put everything into gold and silver related assets.

Prices were very high here as well. I think they have started to come down now and will probably have a long way to go.

That is what I did and I haven´t looked back with regret. Ofc I moved to my girlfriend in another city so that helped.

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A prudent man foresees the difficulties ahead and prepares for them; the simpleton goes blindly on and suffers the consequences. Proverbs 22:3

asymptote
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Update: Recent report

Update:

Recent report indicated that the Australian Property market was not of by 6% from highs of 2 years ago, so it looks like I sold out fairly close to the tip (maybe 9-12 months before). I copped a lot of stick from friends. One however have followed my 'go debt free' advice (or as close as you can get), and significantly downsized.

Further:

My wife was always annoyed hat others seem to be 'doing better'. She didn't say anything, but I could tell that it annoyed her. Over time, month by month we hear more and more reports of those 'well off' top of the range audi q7 driving friends being 'on the ropes' financially, 'near collapse', or having moved to a suburb, even I wouldn't contemplate move to just to maintain some level of heir former lifestyle (private schools, expensive cars). It's a slow painful collapse, and vindication has taken FAR too long IMHO from my original comments that "I suspect our well to do friends are up to their eyebals in debt. These 'small business company cars' are almost certainly leases. Those 2-3m aud house HAVE to be mortgaged way up. If not where did all the cash come from?" Slowly, too slowly, our bubble is bursting. But it is... 

chinaussiedoll
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I have my eye on a small farm

In an area I'd like to live in not too far from Melbourne. The property went on the market at $1.3M six months ago - this week price dropped to 950000. Australian prices are definitely moving in a southerly direction!

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