Housing Bubble ?

[GrahamL]

http://www.news.com.au/money/propert...-1225861377051

I was wondering what others think on this , as my wife and I have a
quite large deposit and have been thinking of taking on our first mortgage.

House prices have gone through the roof locally over the last 12 months or so, I can even think of a few properties that were for sale around
x- mass that have still not sold but carry an 80 k price jump.

Much as I try not to read into doom and gloom to much
the mans credentials and what hes saying does seem credible .

any thoughts ?

please no rants on politics as you don't need to convince me
as I disslike all of them

[Lismore Bloke (Paul)]

Honestly Graham, if it was me I would be having a chat to a local accountant or bank loans officer and ask them about the local real estate conditions. They are more likely to give you unbiased advice than a real estate agent, who are only trying to sell you something. They could also go through some financial options, factoring in the rises in interest rates that will probably continue to happen. It is also better to take out a loan before you get too old, as there is pressure on trying to pay it off before retirement. We are hammering our loan to get rid of it as quickly as possible.

[Jeffkop (Jeff)]

On the right hand side of that article http://www.news.com.au/money/propert...-1225861515696

So the local bank dude thinks its not so. I would say as long as you didnt over extend yourselves all will be OK.

[casstony]

Long term history suggests that housing prices are about double what they should be. The US market has been in freefall for the last few years and Japan had a similar housing bubble and bust in the 80's/90's. Our government, banks and real estate agents are complicit in propogating our bubble but sooner or later they will lose control, sentiment will change and we'll begin the downhill run for housing prices.

This doesn't necessarily mean that prices will stop rising soon, with the seemingly endless pool of greater fools happy to enter into debt slavery. In many states in the US owners can throw the keys back to the bank if the house becomes less valuable than the loan, only losing the house itself, whereas here the bank gets to take everything you own, so there's no way out of the slavery.

The world economy is at a precipice due to decades of excessive economic activity funded by debt. Recently extra debt was employed to prop up corporations, now extra bebt is being generated to prop up nations. To understand the risks simply imagine what happens to a household if debt is continually refinanced and expanded - eventually you lose control and you lose everything. If the world governments lose control (debt default) we'll have economic devastation for years along with the potentially severe social implications. If they keep control through use of more debt we'll have a moribund economic lanscape for decades, labouring under a mountain of debt and interest payments.

This all means that today is a very risky time to take on new personal debt. On the other hand, I'm probably wrong so don't worry, be happy

[casstony]

Originally Posted by Jeffkop

On the right hand side of that article http://www.news.com.au/money/propert...-1225861515696

So the local bank dude thinks its not so..

Every bubble has it's spruikers claiming "it's different this time".

[Nesti (Mark)]

A good thread. Very important issues.

I have only recently come up with a few simple rules which is purely for my own benefit.

1. Our current global situation has never been seen before, so take expert advice and history's lessons with a grain of salt. Nobody is an expert today, and if you listen to some of the best financial advisers out there, they will say, don't go after profits in this climate, just make sure you don't lose, don't look at historical data, just run with logic and your gut feeling.

2. Play it safe. Today is all about minimalizing risk...that includes de-leveraging (off-loading as much debt as possible).

3. Go in the opposite direction as the masses so you can take advantage of supply and demand. I mentioned in another thread, that sub-division of land/property is so wide-spread that what's becoming rare is bigger blocks with a single house. Supply and demand will dictate that things like this will be highly sought after, and of course demand higher dollars.

4. If the property bubble bursts the banks won't reduce your mortgage repayments or the principle. So if the property bubble does burst (and many experts say it is inevitable) and we lose 40% value overnight like what happened in Florida, then your 60% LVR turns into 100% LVR and you've effectively lost every cent.

5. The banks are marketing towards Mum & Dad investors why is that? Why are banks greeting you and offering you mints at the door these days? They've not done that for 30 years, so why now? Have they lost somewhere else (think about the GFC).

6. Loose credit is dead. Banks are now going back to branch managers which have asset/liabilities on their own books and less through the mortgage brokers. And because they're doing that, liar loans have ceased to exist. So banks are now able to qualify every place that their money goes out to.

7. Your property is only worth what the next generation are able to pay. It's that simple, and the Australian property market bubble actually needs overseas investor money to stay pressurized, otherwise, it's deflate down to what the next generation can pay.


Will Australia have a property bubble burst? Many experts say yes and that it's inevitable. I personally don't know, but I do know one thing; if ever there was a time to sell-up, it's now, just before the new legislation on foreign investing (visas) comes into play, because scaring-off foreign investors could easily trigger a sudden deflation in the property market bubbles.

These are only my personal opinions, they are not right, nor are they wrong.

[supernova1965 (Warren)]

My wife and I have just last week payed off all our debts our car and credit card are all now free and clear. We are renting a very nice house I for one have very grave doubts about going into debt at this time to buy a house I think that those who don't have to worry about debts in the present climate are much better off because I believe that there may be more pain to come in the financial markets. I am no expert in financial matters but it is just a gut feeling I have.

[DavidU (Dave)]

We have some Pommy friends here in Melbourne and they are looking at returning to London as Melbourne has become unaffordable.
The financial burden here is becoming extreme.

[xelasnave]

I was in the real estate business and law before that and I think it boils down to one thing really..buy only what you can afford and build in an interest rate rise which you can expect will come in the future..3 or 4 % rise seems impossible but it can happen..should not happen of course but if it does you need to be able to manage higher payments than you expected when you purchase.
Home ownership is a great thing and is worthwhile pursuing.
alex

[Nesti (Mark)]

Originally Posted by xelasnave

I was in the real estate business and law before that and I think it boils down to one thing really..buy only what you can afford and build in an interest rate rise which you can expect will come in the future..3 or 4 % rise seems impossible but it can happen..should not happen of course but if it does you need to be able to manage higher payments than you expected when you purchase.
Home ownership is a great thing and is worthwhile pursuing.
alex

In the 1980's rates peaked over 20%...how much of Australia would be wiped-out if those times came back? The average Australian citizen cannot afford a rates spike, we owe twice to three times as much as we did back in the 80's in proportion to income. Most of our middle class would become extinct within months. That's why I say deleverage as soon as possible and as much as possible.

Supernova, wise, very wise indeed.

There really is only one choice for this government in this [high leveraged] modern society;get rates up as high as you dare progressively to allow a controlled deleveraging process, keep employment figures high, keep the economy strong (includes exports) and keep rate there for as long as possible. Reduce deficite spending and roll-over into a surplus economy.

[mithrandir (Andrew)]

Originally Posted by Nesti

In the 1980's rates peaked over 20%...how much of Australia would be wiped-out if those times came back? The average Australian citizen cannot afford a rates spike, we owe twice to three times as much as we did back in the 80's in proportion to income. Most of our middle class would become extinct within months.

I remember those days. Fortunately half my loan was capped by law.

Most of the reason Sydney prices keep on skyrocketing is the laws of supply and demand. This morning it was said it is now cheaper to build a 2 bedroom inner city appartment than a 3 bedroom house in the burbs.

There is something of the order of $100K in government fees and charges on a greenfield site.

My mortgage is in credit, just waiting for us to pick the next set of renovations to wipe it out again.

[space oddity]

I reckon now is NOT the time to buy. Bubbles induce people to buy because they think the prices will just go up and up and they will never be able to afford to get in to the market. In the short term this will push the prices up, but it is not sustainable in the long term, which leads to the inevitable collapse. Governments of late have sought to prop up the bubbles, as it is politically unwise to let it pop(too many people bankrupted and not very happy), but there is a limit to how long this can keep going. Interest rates are going to continue to rise, so prices SHOULD be easing. Australian real estate prices are quite obscene considering our population and areas of cities.
THE BUBBLE MUST BURST sometime, and then, when everyone else is bailing out, you( and sleazebags like me) can pick up the pieces of the broken dreams to build up our real estate portfolios.
At some stage, the money in the bank will be a very useful thing indeed.
For all those other IIS members-knock off your debts so that when the crunch comes, you will not lose everything.The problem will lie in what is likely to be a flood of properties on the market when too many people are squeezed to the limit.
Nesti has pointed out some very important points, which do point to a hold out situation.

[Nesti (Mark)]

Originally Posted by mithrandir

Most of the reason Sydney prices keep on skyrocketing is the laws of supply and demand. This morning it was said it is now cheaper to build a 2 bedroom inner city appartment than a 3 bedroom house in the burbs.

Supply and demand works just fine if everyone pays cash or borrows the capital when individual bank branches had all assets and liabilities on their fiscal books (keeping the branch manager honest), but over the last 20 years we've slid into this moral hazard situation where loose credit isn't even on the bank's books; it's been laundered through affiliates of affiliates, and each one taking their cut too!

All of this is now unraveling at a million miles an hour...don't be surprised to see the entire Mortgage Broker industry wiped-up in 5 years time...it must go back to branch managers and internal reconciliations again to keep bank lenders happy/safe.

We're back to basics again, save, save and save some more, then borrow as a last resort. Now the banks have wised-up, done a 180, and are kissing the proverbial buttocks of Mums & Dads on TV commercials in some vane attempt to undo the last two decades of commercial greed while ignoring the S&L market(Savings and Loans).

Phew...can't help getting all bitter and twisted on that issue!

People who are trying to leverage-up (excluding first/new home owners) are fooling themselves. The reality is if China sneezes (not the USA), we will catch a cold. This means leveraging up amongst global instability and currency instability is nuts.

[Nesti (Mark)]

Originally Posted by space oddity

THE BUBBLE MUST BURST sometime, and then, when everyone else is bailing out, you( and sleazebags like me) can pick up the pieces of the broken dreams to build up our real estate portfolios.

Yeah, as Peter Schiff says "allowing entities to go bankrupt simply frees-up assets, which then flow naturally to the people who can properly control them"...a great opportunity for first home buyers I say; breathing space and an opportunity to actually get into the marketplace.

Space oddity really hits the nail on the head here, "point to a hold out situation". That's the worst thing that could happen, a second artificial inflationary period where everyone thinks it's nice and safe and leverages back up again. A George Foreman Rope-A-Dope for the Australian citizen.

[GrahamL]

Thanks for the replys

we did have a mortgage broker come visit us last night and go through some lending options .. We are not at an age or income level to take on a largeish loan no matter how much the bank says we can.

Though cheapish properties do come on the market now and then
they are few and far between these days.

If i'm reading right 40 % of home lending on existing homes is for investment as opposed to 8 % not to long back, while new home building hasn't risen much behond demand in 40 years.

That 8 % used to declare a profit of around $ 400M
Most of the 40% now right down a loss into the many billions ? That to me seems a worry if your typical husband /wife has sold of some existing equity in a property to take on debt to make loss ??
Looking into the rental market again I notice while vacancy rates are
small overall the higher priced homes are now become more common while demand for more affordable ones is getting really tight.

I guess corrections happen inevitably , sadly kids with a lot of debt and
maybe the investers might where some grief .

thanks for your thoughts , I think I'll wait a little and save some more ,
it cant hurt to have the cash in the bank earning reasnable interest
in the short term.

graham

[Nesti (Mark)]

Just to add to that Graham. By Federal Law, primary residences are protected however, if a contraction within the marketplace occurs, then those with an investment property are open to banks foreclosing on their investment property IF their LVR exceeds what the banks deem to be reasonable. This means that equity may be taken through a foreclosure of an investment property, leaving only debt within a primary residence.

Worse than that is when equity in a property is used as security against shares. Thousands of investment property owners had the LVRs go through the roof when the stock-market collapsed two years ago. This allowed the banks force owners to sell-up their investment property in order to pull the LVR back down to a manageable level of risk [for the bank].

The property market in Aust gained buoyancy quite quickly, but it's not stable, certainly not rock solid.

Any property price hike in the near future would be totally unwarranted and more than likely Primary Industry based. This of course doesn't help the girl serving me coffee at my local cafe in getting into the property market which could inflate yet again, meanwhile her boss certainly won't increase her wages anytime soon. So there's economic forces trying to split the economic into two divided classes, both industries and citizenry.

This splitting is called a dual economy, and is what the Australian Government is tackling right now.

If you're wandering what this new tax on Primary Industry is all about (Super Profits Tax), it is exactly that. Rudd's trying to put a handbrake on a possible upcoming rift in a single economy from forming a dual economy. He's doing a good job of keeping things together if you ask me.

[bojan]

Originally Posted by xelasnave

I was in the real estate business and law before that and I think it boils down to one thing really..buy only what you can afford and build in an interest rate rise which you can expect will come in the future..3 or 4 % rise seems impossible but it can happen..should not happen of course but if it does you need to be able to manage higher payments than you expected when you purchase.
Home ownership is a great thing and is worthwhile pursuing.
alex

I totally agree...
My philosophy re this was even more conservative: We bought a house for which the loan repayments could have been serviced from the dole - because, I simply refused to think/hope I will stay employed through the whole time before I get rid of the loan.
In good times I was putting $2000 as repayments.. (bank required couple of hundreds.. lower than average rent), just to minimise the interest and finish as soon as possible.
The result of this is, my home is not the shiniest thing in the world (in hindsight, I could have afforded much bigger and better, and in a better area.. because I was employed through the whole period of repaying the loan and finished it 10 years earlier.. Bank was not happy about this of course), but it is mine now after 12 years and I owe nothing to anybody
And I saved ~$30.000 in interest, at least.

[Nesti (Mark)]

Originally Posted by bojan

I totally agree...
My philosophy re this was even more conservative: We bought a house for which the loan repayments could have been serviced from the dole - because, I simply refused to think/hope I will stay employed through the whole time before I get rid of the loan.
In good times I was putting $2000 as repayments.. (bank required couple of hundreds), just to minimise the interest and finish as soon as possible.
The result of this is, my home is not the shiniest thing in the world (in hindsight, I could have afforded much better, and in a better area.. because I was employed through the whole period of repaying the loan and finished it 10 years earlier.. Bank was not happy about this of course), but it is mine now after 12 years and I owe nothing to anybody
And I saved ~$30.000 in interest, at least.

That's using your head Bojan.

At the right time (ie young enough to recover and coming into the boom), we leveraged up on four mortgages and peaked at $1.8 million, all the debt was leveraged against business profits and we worked our butts-off ($14k a month in repayments...that's stress!!! ). When the time was right (9mths ago when buoyancy returned to the market), we off-loaded $1.4 million in debt, and we'll off-load the reminder soon.

In this way, we let the bank's money work for us rather than just having it work for them.

Crazy numbers and somewhat risky I know, but we did our math and homework and were prepared to succeed or fail equally...and suffer the consequences in the case of failure however (important), the benefits are certainly married-in with the bubble, if you can accept the risk in a controlled and calculated manner.

The name of the game in the property market now has swung back to how our grandparents did it: to sit on a property and do-it-up progressively without any debt and without any rash moves. If the market contracts and so long as you are without debt, who cares, you effectively lose nothing as all properties are [theoretically] affected equally (there's a caveat here).

[avandonk]

When a tiny workers cottage goes for one million dollars in a former struggletown suburb of Richmond in Melbourne we have all lost the plot.

We buy a house to live in, not as an investment. If you only own one house even outright you are just treading water as far as investment is concerned. If you sell the 'profits' are illusory as you will have to pay the same exorbitant price for another.

The tens of thousands in real estate agent's fees and stamp duty to change houses are another cost that you face if you sell and buy.

I fear for the younger generation as they have no hope of buying even a modest house without help from their parents.

The current real estate market is in my opinion even far worse than any Ponzi Scheme. In a Ponzi Scheme people are driven by greed, in housing it is a simple need to have an affordable roof over your head.

I hope that the market collapses as it does not matter what your house is worth if you want to live in it.

Those with more than one house relying on negative gearing would be in deep trouble financially.

There are many factors at work driving up house prices in Australia. In the USA they have fallen by about a third to a half depending on location. That is because unemployment has risen due to the GFC. The GFC has not hit in Australia yet.

My father said to me many years ago "I do not care what my house is worth. What I do care about is if I could not afford it now there is something very wrong with our societies values.'


Bert

[DavidU (Dave)]

I got wiped out in the late 80's collapse and got wiped out last year with the GFC. I have no hope of affording a house now.With rent's the way they are we may have to move to some small country town.Very disappointing.