Could be close to a tipping point here, it will be interesting to see. I'll have to start following this more closely again.
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Australian housing bubble thread
- Thread starter m22au
- Start date
more and more i think there is a decent chance AU property is setup for HK style 70% fall.
I give it 20% chance at present. here is the scenario:
EURCHF tanking to new lows as euro troble escalate. this will put lots of pressure on interest rates, yields etc.
Interest rates, attractive enough for the risk taken will attract cash.
There will be less cash elsewhere globally.
This will push rates higher globally causing additional failures.
This will trigger recession.
Less jobs or better 'phoney jobs' will evaporate.
In non-minig au cities this will cause rents to drop, less people employed, higher rates, property lobby on a temporary strike.
that should do.
I give it 20% chance at present. here is the scenario:
EURCHF tanking to new lows as euro troble escalate. this will put lots of pressure on interest rates, yields etc.
Interest rates, attractive enough for the risk taken will attract cash.
There will be less cash elsewhere globally.
This will push rates higher globally causing additional failures.
This will trigger recession.
Less jobs or better 'phoney jobs' will evaporate.
In non-minig au cities this will cause rents to drop, less people employed, higher rates, property lobby on a temporary strike.
that should do.
I think the Aussie market is overvalued. And I think we will won't see any capital growth for about five years.
I don't think we're more than 15 - 20% over valued. The reason I say this is houses are not likely to fall below their replacement costs. In Australia, it costs about $280K to build a normal 4 bedroom house.
So that leaves the land value to change. $400K blocks may fall to $300K.
This would take the average home cost from about 580K to 480K.
As typically happens in Australia, if people can't sell at a profit, they tend to not sell at all, which restricts supply and brings house prices back up.
Banks are now much stricter on loan amounts also, so less people have access to easy money.
We will not see 70% falls. That is wishful thinking. But it won't happen.
Runningbear
I don't think we're more than 15 - 20% over valued. The reason I say this is houses are not likely to fall below their replacement costs. In Australia, it costs about $280K to build a normal 4 bedroom house.
So that leaves the land value to change. $400K blocks may fall to $300K.
This would take the average home cost from about 580K to 480K.
As typically happens in Australia, if people can't sell at a profit, they tend to not sell at all, which restricts supply and brings house prices back up.
Banks are now much stricter on loan amounts also, so less people have access to easy money.
We will not see 70% falls. That is wishful thinking. But it won't happen.
Runningbear
I strongly agree with your first paragraph about overvaluation and no capital growth for 5 years.
Although I also don't think there will be a 70% decline, it's still an outside possibility.
If you combine a slowdown in China with high unemployment, there may be a lot of forced sellers (particularly of "investment" properties which are held for the Aussie tax advantages), despite your 'replacement cost' argument. This is particularly true if potential buyers find it hard to get loans due to tighter credit conditions that may exist in such an economic environment.
Although I also don't think there will be a 70% decline, it's still an outside possibility.
If you combine a slowdown in China with high unemployment, there may be a lot of forced sellers (particularly of "investment" properties which are held for the Aussie tax advantages), despite your 'replacement cost' argument. This is particularly true if potential buyers find it hard to get loans due to tighter credit conditions that may exist in such an economic environment.
Quote from Runningbear:
I think the Aussie market is overvalued. And I think we will won't see any capital growth for about five years.
I don't think we're more than 15 - 20% over valued. The reason I say this is houses are not likely to fall below their replacement costs. In Australia, it costs about $280K to build a normal 4 bedroom house.
So that leaves the land value to change. $400K blocks may fall to $300K.
This would take the average home cost from about 580K to 480K.
As typically happens in Australia, if people can't sell at a profit, they tend to not sell at all, which restricts supply and brings house prices back up.
Banks are now much stricter on loan amounts also, so less people have access to easy money.
We will not see 70% falls. That is wishful thinking. But it won't happen.
Runningbear
sorry, was not clear enough. why i think 70% fall is a swelled possibility: because of large recent immigration. 200K per year or so , i believe. This is 1m people in 5 years mostly located in Sydney and Melbourne. Most of these people are in cash and will pack they coffers and leave back home if no jobs.
0.5 m people less in a bad times say in Sydney spells trouble as so many rely on rental income to pay mortgages....
0.5 m people less in a bad times say in Sydney spells trouble as so many rely on rental income to pay mortgages....
Housing is imploding there and looks to be taking the economy with it. If commodities continue to cool, Oz is in serious trouble. Aussie may be the short of a lifetime right here - could hit $0.90 in a month if things get moving on the downside.
Sadly, options on the currency are thinly traded and expensive. Only way to do it is an outright short.
Sadly, options on the currency are thinly traded and expensive. Only way to do it is an outright short.
Most of the damage will occur to the first home buyer house and land package couples in the new outer suburbs that have a excessive amount of their weekly income linked to mortgage payments.
Gen Ys that have never lived through a high interest rate cycle.
They will be the forced sellers. But good properties within 15km of the cbd will retain more value.
Gen Ys that have never lived through a high interest rate cycle.
They will be the forced sellers. But good properties within 15km of the cbd will retain more value.
An alternative scenario is that we are in the later stages of the bubble but there are still 2-3 more years to go. A few reasons supporting this theory:
1. We are still fairly early (2 years) into a global economic expansion. Bubbles usually burst when the global economy has wobbles. Typical cycle lasts 4-5 years, so it is not a great odds play to bet on the bubble bursting now, out of synch with the rest of the 1st world.
2. Australian house prices are not yet in true bubble valuation territory. Typical bubble rental yields are half the 10 year treasury yield, for blue chip prime location property. Treasuries yield 5.4% at the moment, so bubble territory would be rental yields around 2.7%. Yet we see rental yields more in the 3.5-4.5% area. So they are expensive, but not yet bubble prices. Compare to Ireland, where rental yields fell to 2-3% for prime location. Ditto for Hong Kong in 1997, or Miami condos in 2006-07.
3. The commodities correction is a normal correction in a secular bull market, not the beginning of a secular bear market. Apart from silver, we did not have the kind of market action that is normally associated with LT tops and trend reversals. Underlying demand from the developed world is a trend that is still intact. So, there will likely continue to be demand in 2012, 2013 etc for the resource sector, which should pump Australian asset prices even higher.
So, IMO it's not exactly a slam dunk to short Australian housing here as a long-term play. There is a short-term trend down in AUD and commodities, but nothing more just yet. I would prefer to watch and wait for more conclusive evidence either way.
1. We are still fairly early (2 years) into a global economic expansion. Bubbles usually burst when the global economy has wobbles. Typical cycle lasts 4-5 years, so it is not a great odds play to bet on the bubble bursting now, out of synch with the rest of the 1st world.
2. Australian house prices are not yet in true bubble valuation territory. Typical bubble rental yields are half the 10 year treasury yield, for blue chip prime location property. Treasuries yield 5.4% at the moment, so bubble territory would be rental yields around 2.7%. Yet we see rental yields more in the 3.5-4.5% area. So they are expensive, but not yet bubble prices. Compare to Ireland, where rental yields fell to 2-3% for prime location. Ditto for Hong Kong in 1997, or Miami condos in 2006-07.
3. The commodities correction is a normal correction in a secular bull market, not the beginning of a secular bear market. Apart from silver, we did not have the kind of market action that is normally associated with LT tops and trend reversals. Underlying demand from the developed world is a trend that is still intact. So, there will likely continue to be demand in 2012, 2013 etc for the resource sector, which should pump Australian asset prices even higher.
So, IMO it's not exactly a slam dunk to short Australian housing here as a long-term play. There is a short-term trend down in AUD and commodities, but nothing more just yet. I would prefer to watch and wait for more conclusive evidence either way.