Australia’s Property Crash

[Guest The Pom Queen]

They have said this for years and that property is going to take a dive. In fact I think they have said it for the last 15 years.

THERE’S no relief in sight for Australian property owners as experts warn house prices will continue to tumble well into next year. 

According to Morgan Stanley’s latest forecast, property prices could plummet by up to 15 per cent — meaning we’re now facing the biggest drop in decades.

In fact, the organisation’s forward-looking housing model has dropped to the lowest level ever recorded.

“We struggle to see improvement in any of our components over the next year, with pre-existing headwinds of net supply, an RBA on hold and sustained focus on lending standards, all independent of potential negative gearing/capital gains tax changes,” Morgan Stanley said in the report.

“We now see a 10-15 per cent peak to trough decline in real house prices, from 5-10 per cent previously, which would mark the largest decline since the early 1980s.

“This downgrade largely reflects the downturn’s extended length, as we expect the relatively orderly declines to date will continue.”

Some of the drivers behind the trend are an oversupply of new apartments thanks largely to the “East Coast apartment boom” as well as a drop in net migration, which have combined to cause supply to outstrip demand.

But it’s not just Morgan Stanley making a grim property prediction.

CoreLogic figures released earlier this month found values had dropped by 2.7 per cent across Australia in September, with Sydney home prices down 6.1 per cent and Melbourne down 3.4 per cent.

Last month, ANZ announced its predication that house prices would remain weak into 2020, while in June, ANZ and Macquarie both predicted a Sydney house price fall of 10 per cent.

And NAB’s newly-released Quarterly Australian Residential Property Survey also found confidence in the market among real estate agents had “dipped to new lows”, predicting the house price would continue over the next 18 to 24 months.

Starr Partners chief executive Doug Driscoll told news.com.au Morgan Stanley’s prediction was not “inconceivable”.

“As much as I don’t want to see that happen, it’s not inconceivable that it could happen,” he said.

[Guest The Pom Queen]

At the beginning, house price falls were isolated. Perth was having trouble, but that was the mining boom’s fault. Then Sydney had a month where prices fell. Soon it had two months of falls. Eventually other cities joined in too, and the prices started registering as not just lower than a few months ago, but lower than a year ago.

Now it is really official. The Australian Bureau of Statistics, which moves slow and does not exaggerate, reports that on average Australian property prices are now lower than they were a year ago. Not by a lot — just 0.6 per cent lower. But the falls don’t look like stopping yet.

At the moment, we see medium-sized falls in the price of the most expensive homes. Posh suburbs have falling prices while for the rest prices are still getting more expensive, slowly.

The question is where gets hurt the most. And that depends on how bad the falls are.

SCENARIO ONE: STATUS QUO

Maybe prices fall gently for a few more months. But they hold steady for a few years after that — not falling, but not rising much either. That would be a pretty good scenario for the economy, with housing getting more affordable — slowly — as wages start to increase.

Very few people default on their home loans, but houses remain expensive.

SCENARIO TWO: SLOW TO LOW

House prices might just keep slowly falling, Perth-style.

Property prices in Perth have been on a slow downward slide.Source:Supplied

This could eventually force some people to default on their mortgage. The people most at risk here are the people who are already in severe mortgage stress, which is mostly the very well-off who took on great big loans.

“Stress is not limited to the batters or fringe of our cities — in fact the more affluent suburbs are also registering stress, thanks to big income but also big loans and (interest-only) loans and multiple investment mortgages,” says Martin North, who runs property consultancy DFA analytics.

While mortgage stress is widespread in the less fancy suburbs, severe mortgage stress is highest in suburbs with lots of highly paid professionals. Think of Lane Cove on the north side of Sydney Harbour. And suburbs like it all over Australia. The kind of places where a BMW glides into the double garage and parks by a Range Rover, but you’re not sure if they’re bought on credit. Places like Miamin on the Gold Coast, Wembley in Perth, Brighton in Melbourne, or equally Brighton in Adelaide.

Some of these people have apparently taken on great big loans, and they could suffer. With luck though, these losses are not widespread, and the hit to the economy is not so severe.

SCENARIO 3 — OH NO

You sometimes hear certain young people wishing for a really big housing crash. But when house prices fall far enough they spill over into the rest of the economy. What you get is a really big disaster.

Housing market analyst Martin North says there is a 20 per cent chance that house prices could fall by 40 per cent in the next few years.

Will they really? North was challenged to a bet on that by another economist and didn’t want to put his money where his mouth is. Most economists think being willing to back your forecast with money is the only real way to prove you believe in it. (Are economists bad people for wanting to bet on these sort of things that could drive families to the wall? Maybe.)

Is North right that the risk of an imminent big crash is 20 per cent? I think the chance is lower.

But it is still worth thinking about, because the downside is high. If it comes to the bad scenario, you get a feedback loop from the price of houses to spending in the economy. If people stop spending, that affects employment and incomes. If people lose their jobs their ability to afford their mortgage gets even worse.

In this scenario, the RBA would cut interest rates to reduce mortgage pressures, but it might not be enough. Pressure on mortgages would spread beyond the wealthy suburbs that are already under severe mortgage stress. It would hits the battler suburbs first.

Martin North has data on which suburbs have the most widespread mortgage stress (albeit not yet the severe kind), and they are those battler suburbs. Not Range Rover suburbs so much as Commodore and Falcon suburbs. We’re talking about Campbelltown or Moorebank in Sydney, Frankston and Pakenham in Melbourne. Places where unemployment is no stranger. You might also think of Ashby, Wanneroo, Clarkson, in Perth, or Ashby, Mount Lofty and Rangeville in Toowoomba.

If the big housing crash ScoMo has been talking about comes to pass it will be ordinary Australians in ordinary suburbs who bear the brunt.

https://www.news.com.au/finance/real-estate/selling/our-weakest-link-australian-suburbs-most-at-risk/news-story/c78fd92339e27b27ffff70e936b01fe9

[Marisawright]

Even 15% isn't much.   Homes in parts of Melbourne have risen by over 40% since we arrived two years ago.   So the only people who'll be hurt by such a fall would be people who bought in the last year or so.  

[desreb]

I’m biased towards the bearish side on the market. We visited Newport last year, and were told at prices had come off 10% at that point. At the time there wasn’t really a consensus that it was anything other than a temporary blip, but in a year sentiment has gone from that, to whether it’s a major correction or even a crash.

I get the impression prices are off further than anyone likes to admit. You have all these measures to prevent people admitting actual sale prices - auctions passing through, houses selling under private treaty before auction, prices being quoted in a range, official stats having a lag due to moving average values.

I read Propertychat forums a lot, and they point out that the Corelogic figures are a 12 month moving average trend, so if they say prices are 10% below peak, that means they were that perhaps six months ago, and it sounds like things have steepened downwards since then.

I for one intend to sit things out for another year. That will allow time for the moving average stats to be fully digested, for investors and new buyers to have come to terms with things and start to have made their moves, for the federal election and any initial market response to a Labour win, and also mean less distance to fall from whatever prices are by then, to the long term average in relation to wages growth - if we assume that’s a fairly hard floor unless things really go pear shaped.


D

[Guest]

I do not wish negative equity on anyone (of course!) and I do feel sorry for those who are trying to sell in this market.

However, having kept an eye on property prices in Brisbane, Perth and Melbourne over the past six to eight years I do think this was a necessity. The prices were ridiculously high. Mostly unwarranted overinflated and bloated. Perhaps a drop will settle into a more accurate range, perhaps not, who knows.

I was speaking to someone very experienced and knowledgeable about Australian real estate and they said over the past 15 or so years they had seen over and over again people's attitude had moved away from 'house is our home for 10/15/20 years and up' and changed to 'buy now, sell in the near future for a big profit'. What can I get for this in 2 or 3 years sort of attitude. Fair enough, in the boom times there was this type of profit to be made, why would you not!

Lots of our friends bought houses around the 2001/2/3 mark and paid around $250,000. They're mostly still living in these houses. Even with a drop, if they decided to sell, and did sell,  they would most likely still receive profit. Plus the benefit of paying off mortgage for so many years (unless they took interest only loans, I've never asked and won't of course).

I think things in life are cyclical. Let's see where this drop goes.

The big question is, if you're looking to buy now, would you in this market? Sure there are low prices to snap up, but where is the bottom.

If I was seriously looking, I probably would buy. But with the idea of living in our family house for 10+ years hopefully.

[desreb]

There was recently (last week) a 7.30 series of stories about the market. Interestingly, the conclusion at the end of episode 3 was that Australia may need to accept the cultural change to a nation of renters, rather than suggesting that the market needs to crash down to the previous trends.

Interesting perspective from an ABC show.

[ramot]

50 minutes ago, Ozzie said:

I do not wish negative equity on anyone (of course!) and I do feel sorry for those who are trying to sell in this market.

However, having kept an eye on property prices in Brisbane, Perth and Melbourne over the past six to eight years I do think this was a necessity. The prices were ridiculously high. Mostly unwarranted overinflated and bloated. Perhaps a drop will settle into a more accurate range, perhaps not, who knows.

I was speaking to someone very experienced and knowledgeable about Australian real estate and they said over the past 15 or so years they had seen over and over again people's attitude had moved away from 'house is our home for 10/15/20 years and up' and changed to 'buy now, sell in the near future for a big profit'. What can I get for this in 2 or 3 years sort of attitude. Fair enough, in the boom times there was this type of profit to be made, why would you not!

Lots of our friends bought houses around the 2001/2/3 mark and paid around $250,000. They're mostly still living in these houses. Even with a drop, if they decided to sell, and did sell,  they would most likely still receive profit. Plus the benefit of paying off mortgage for so many years (unless they took interest only loans, I've never asked and won't of course).

I think things in life are cyclical. Let's see where this drop goes.

The big question is, if you're looking to buy now, would you in this market? Sure there are low prices to snap up, but where is the bottom.

If I was seriously looking, I probably would buy. But with the idea of living in our family house for 10+ years hopefully.

Bought ours on the Sunshine Coast 15 years ago when we moved here. Love it and hope to stay as long as is practical. Lots of buyers from Sydney and Melbourne buying up here, pushing up the prices.

[can1983]

20 hours ago, Ozzie said:

I do not wish negative equity on anyone (of course!) and I do feel sorry for those who are trying to sell in this market.

However, having kept an eye on property prices in Brisbane, Perth and Melbourne over the past six to eight years I do think this was a necessity. The prices were ridiculously high. Mostly unwarranted overinflated and bloated. Perhaps a drop will settle into a more accurate range, perhaps not, who knows.

I was speaking to someone very experienced and knowledgeable about Australian real estate and they said over the past 15 or so years they had seen over and over again people's attitude had moved away from 'house is our home for 10/15/20 years and up' and changed to 'buy now, sell in the near future for a big profit'. What can I get for this in 2 or 3 years sort of attitude. Fair enough, in the boom times there was this type of profit to be made, why would you not!

Lots of our friends bought houses around the 2001/2/3 mark and paid around $250,000. They're mostly still living in these houses. Even with a drop, if they decided to sell, and did sell,  they would most likely still receive profit. Plus the benefit of paying off mortgage for so many years (unless they took interest only loans, I've never asked and won't of course).

I think things in life are cyclical. Let's see where this drop goes.

The big question is, if you're looking to buy now, would you in this market? Sure there are low prices to snap up, but where is the bottom.

If I was seriously looking, I probably would buy. But with the idea of living in our family house for 10+ years hopefully.

Why would you not buy a home to live in with your family irrespective of what the market is going to do?

Our current rental is a pile of crap. 45º in the summer 5ºC in the winter. No loft insulation which is super cheap to install but we cant do it. Constant minor maintenance issues which never get fixed.

We're in the process of buying. Its twice the size in a better area and because we have just sold in the uk and have a large deposit it will cost less pcm than the rental.

Quite frankly I wouldn't hold off buying hoping the market will drop further when its somewhere to live.

People forget how horrible it is living in the rental, you can't put a picture up, solve niggling problems, have to deal with real estate blah blah 

[Toots]

52 minutes ago, can1983 said:

Why would you not buy a home to live in with your family irrespective of what the market is going to do?

Our current rental is a pile of crap. 45º in the summer 5ºC in the winter. No loft insulation which is super cheap to install but we cant do it. Constant minor maintenance issues which never get fixed.

We're in the process of buying. Its twice the size in a better area and because we have just sold in the uk and have a large deposit it will cost less pcm than the rental.

Quite frankly I wouldn't hold off buying hoping the market will drop further when its somewhere to live.

People forget how horrible it is living in the rental, you can't put a picture up, solve niggling problems, have to deal with real estate blah blah 

Totally agree with you about the state of some rentals.  Put me off landlords and rental agents for the rest of my life.  Once you manage to buy your own place you also feel far, far more settled.  I would have thought that the appalling condition of some rentals would have greatly improved over the last 30 years or so since we rented but apparently not.     ........................  and it's not as though some of those places are cheap to rent either.

 

Edited December 17, 2018 by Toots

[can1983]

30 minutes ago, Toots said:

Totally agree with you about the state of some rentals.  Put me off landlords and rental agents for the rest of my life.  Once you manage to buy your own place you also feel far, far more settled.  I would have thought that the appalling condition of some rentals would have greatly improved over the last 30 years or so since we rented but apparently not.     ........................  and it's not as though some of those places are cheap to rent either.

 

No renting is very expensive, especially in Hobart. buying will save us $350 pcm which will easily cover the council, water and insurance costs which as an owner you take on but as a tenant the landlord pays.

Last year we paid $2000 for electricity. The current owner of our new place showed me her bills which were $1000 a year and the place is twice the size

[Guest]

3 hours ago, can1983 said:

Why would you not buy a home to live in with your family irrespective of what the market is going to do?

 

It purely comes down to personal circumstances, some people may want a family home but may be unsure about length of time in one place.

[desreb]

It purely comes down to personal circumstances, some people may want a family home but may be unsure about length of time in one place.

Like many of us here :-)

[Guest]

Yes

Edited December 17, 2018 by Guest

[Paul1Perth]

A lot of people getting caught in negative equity are speculators and buy to let. I've no sympathy for them. The people buying because they like the house and suburb and want somewhere to live long term shouldn't worry so much about negative equity. They aren't paying rent any more, hopefully like the place they bought and just have to worry about whether they can pay the mortgage. They haven't bought just to make a profit.

 

[s713]

House prices in Perth are lower than in 2008, apart from a few suburbs.

[Toots]

13 minutes ago, s713 said:

House prices in Perth are lower than in 2008, apart from a few suburbs.

Was 2008 during the so called mining boom?  I remember a docco on the TV about WA and it's extortionate rental costs and the big hike in house prices during the boom.  It also showed some folk in their very expensive cars and over the top lifestyle.  I wonder if they managed to keep hold of their cash and lifestyle. 

[Skani]

This interactive website is quite interesting:  it shows the changes in median house values for each suburb/area in the capital cities for each year since 2008.

https://www.abc.net.au/news/2018-12-10/how-hard-has-australias-property-downturn-hit-your-suburb/10588960

[Paul1Perth]

1 hour ago, Toots said:

Was 2008 during the so called mining boom?  I remember a docco on the TV about WA and it's extortionate rental costs and the big hike in house prices during the boom.  It also showed some folk in their very expensive cars and over the top lifestyle.  I wonder if they managed to keep hold of their cash and lifestyle. 

Luckily never got into the FIFO or mining boom bust lifestyle toots. Always lived within our means and most of the stuff we enjoy is free and 5 mins down the road. We bought our house in 92 and were worried whether we could afford it back then☺

[Guest]

1 hour ago, Toots said:

Was 2008 during the so called mining boom?  I remember a docco on the TV about WA and it's extortionate rental costs and the big hike in house prices during the boom.  It also showed some folk in their very expensive cars and over the top lifestyle.  I wonder if they managed to keep hold of their cash and lifestyle. 

Huge sensationalism. The percentage of those earning huge bucks involved with mining were actually quite low against general population working 'normal' jobs etc. Most people had a 'normal' job, car, house....life. I had heard many people involved in the mining were there for the job and back to where they had came from/off to another boom elsewhere in the world (re the percentages - I did read a balanced news report at some stage but can't remember where - will look). The problem was, housing, eating out, 'things' became overinflated and bloated. Many people were still on the same salary and it became harder and harder to make ends meet due to the massive rising costs.

Edited December 18, 2018 by Guest

[Paul1Perth]

41 minutes ago, Skani said:

This interactive website is quite interesting:  it shows the changes in median house values for each suburb/area in the capital cities for each year since 2008.

https://www.abc.net.au/news/2018-12-10/how-hard-has-australias-property-downturn-hit-your-suburb/10588960

That's an interesting site and it's strange that the news is all doom and gloom but taking a look at Sydney on the site shows how prices have boomed over the last few years. Don't need to be a financial wizard to know that can't carry on.

[Paul1Perth]

3 minutes ago, Ozzie said:

Huge sensationalism. The percentage of those earning huge bucks involved with mining were actually quite low against general population working 'normal' jobs etc. Most people had a 'normal' job, car, house....life. I had heard many people involved in the mining were there for the job and back to where they had came from/off to another boom elsewhere in the world (re the percentages - I did read a balanced news report at some stage but can't remember where - will look). The problem was, housing, eating out, 'things' became overinflated and bloated. Many people were still on the same salary and it became harder and harder to make ends meet due to the massive rising costs.

Price of beer in pubs has yet to catch up with normality. No wonder kids sit at home with mates getting cheap booze down them before going out. If they dropped the price of booze in pubs I reckon they would stop a lot of the exvessive drinking and anti social behaviour.

[s713]

Xmas drink from work last week, Bob's Bar @ Print Hall. $17 a pint. Craft beer BS.

[starlight7]

That's why so many young ones turn to drugs- cheaper than booze!  

[gafuk]

I have been reading the hype how bad things are in the Perth property market and now I am in the New Home Sales industry it is agreed by most people I have met who are experienced professionals that things are as bad as they have been and the turn is coming or may have started. I have just taken on a sales role for a large building company ( BGC ) and my friends said I was mad due to the terrible market. We are new to Australia and came over on a 143 contributory parent visa, on our previous several holidays we spent weeks in the display homes with our migration in mind and  selling homes for a living always appealed to me. Now we are here in this terrible time? but still everywhere I look there are new homes being built. The deals are great from all builders and the developers are discounting land to make things happen. The established market I admit looks to be a harder arena but even there the houses sell eventually.  If you're intending to stay in Australia and paying rent you can't lose buying with prices as they are now, unless things get much worse. If you are speculating and hope to make a killing , as every economy in the world there are no guarantees so you may as well play the markets. But if you're here for the long haul surely it's barmy to keep paying rent if you're in a position to buy?. We have bought a block of land and our build starts shortly and I am confident our money is spent well building us a home and not just an investment.   I have started a topic

Buying / building a house in Perth

I hope to post our progress and update on each stage of the process.

[desreb]

They do talk about “markets within markets” in Syd/Mel as a warning that in effect only the undesirable/investor-centric areas are dropping heavily, and the N Beaches / E Suburbs are unscathed, but I do wonder...

There was an ABC website feature the other day on “what I wish I knew as a first time buyer”, and the author noted that the bank happily offered him a mortgage with repayments that were twice what he could afford to pay, despite having performed an affordability assessment. This was recently, during the APRA tightening and royal commission into the banks’ lending practices.

At the same time, a rental forum I follow is grumbling that APRA are killing the market and economy by restricting Interest-only proportions and enforcing strict affordability criteria. Corelogic, whose stats led to the headlines of huge drops last month, also blamed primarily “lack of credit” for the drop, rather than “cautious buyers not wanting to lose money”, as if people should keep borrowing $800,000 for an average house.

Hang on... isn’t this Prudent behaviour? That is literally their middle name! Why let people borrow what they can’t afford?

I’m seeing posts about the stability of the Aussie housing market overall pointing out that most homeowners are owner-occupiers and couldn’t really care how rich their house makes them, as they just live in it and call it home.

On the flip slide, I’m also seeing posts about this irresponsible lending, the tip of the iceberg, 1.4% drops this month and a current rate of decline of 20% a year (in Sydney, extrapolating this month’s data, rightly or wrongly).

Whichever you subscribe to, most seem to be playing wait and see for a year, including us. If prices do drop another 10%, that’s $100,000 loss on an average $1m home.

So, we’re currently paying $52,000 a year rent on a $2.2m home, and we get repairs, rates, maintenance, etc included.

If we wait a year and the above 10% drop happens, we’ll have $50,000 more in assets than we would have had, and be able to afford a slightly larger house when we do buy.

D