Property and Investing, is it anyone’s Guess?

Buying and investing in real estate.

It was once the conversation of choice for latte sipping Sydneysiders a decade ago, comparing notes on which suburbs were the next to “take off,” and in Queensland the same thing. Which next waterfront tower to buy an investment apartment? Likewise in Melbourne’s Southbank, and especially in the mining boom times of WA where house prices were escalating in value threefold per annum.

All this has changed in the space of the last ten years.

Two or three years ago, those that we may consider to be reasonably well-off, such as home-owners with an investment property, were being encouraged to use the equity in their primary dwelling, as well as any equity in their investment property, to use as funds for further investments.

In 2005 to 2007, when the stock market was growing at a staggering rate, it seemed like a no-brainer. Who would want to miss out on such incredible returns?

Investors that used their equity to invest in shares were then encouraged to borrow against the value of those shares, to wait for it, buy more shares.

Of course, the rest is history and it all turned to custard.

Now we are seeing properties in once affluent suburbs being significantly discounted as the once “well-off” are now having to sell-up to meet repayments on loans for share portfolios that are now worth a fraction of their original market value.

Prior to 30 June 2007, the Howard government also relaxed Superannuation contribution limits – effectively allowing people to contribute up to one million dollars to superannuation before this date.

This strategy was actively promoted by the Howard Govt and financial advisers as a way to pay less tax and save for future retirement. I wouldn’t like to be one of those people now.

Funny how Peter Costello, the World’s Greatest Treasurer hasn’t been asked to comment since about this “brilliant strategy”.

Depending on who you listen to, house prices are about to collapse by some 20 – 30% as predicted by Professor Steve Keens, or now is actually a really great time to buy with interest rates at record lows at house prices pretty much stable or declining slightly.

Of course the real estate industry will always say “now is a great time to buy (or sell)” and their latest survey touts this once again.

“House Prices to Drop to 2002 Levels!”

It’s the best time in seven years for first home buyers to get into the property market, the survey says.

A combination of static house prices and low interest rates have improved housing prices, according to the Housing Industry Association-Commonwealth Bank housing affordability index.

The index for first home buyers rose 22.3 index points in the March quarter to 175.8 points.

“This took housing affordability to levels not seen since 2002,” said the report, published today.
The index was 69.9 points higher than in the March quarter of 2008, an improvement of 66 per cent.

‘Never a better time to own’

HIA chief executive Chris Lamont said despite the current economic conditions, “there has never been a better time to enter home ownership”.

Mr Lamont said the boost to the first home owner grant, when combined with significant builder discounts on house and land packages, had increased the number of people entering the new home market.

“The grant has been highly successful in creating and securing jobs in the residential construction sector,” Mr Lamont said.

“It is also assisting in boosting the supply of housing which we know to be grossly short of the nation’s
requirements.”

But is now really a good time to buy property? Sure low interest rates are attractive, but they will inevitably rise again. Have we seen the bottom of the housing market in terms of prices, or once the FHOG lapses will prices fall further…?

Is it just anyone’s guess??

Was Steve Keens a nutter to sell his Sydney apartment..?? (hint: yes.)

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37 Responses

  1. I’m selling as I believe that there could be a second shock on the horizon and the recession has yet to bite!

    I really don’t care if the price goes up or down as my next purchase will be for a place to live, not an investment as if I want to generate wealth I will work for it!

    I wouldn’t take too much notice of HIA or the MBA because they have a duty to promote their members’ interests, I’m a member of the MBA.

  2. I’m buying a nice holiday house.

  3. Good grief. From the Oz: MALCOLM Turnbull today accused the Rudd Government of using the global financial crisis as cover for an ideological war on aspirational Australians.

    Aspirational??? These days most Australians are aspirational about hanging onto their jobs and aspirational about paying the bills.

    Mal..’aspirational’ is sooo 90’s.

  4. But Scaper, if you sell now, you’ll be slugged with agents fees on your selling price and then stamp duty on your next place.

    I guess if you think prices are going to fall further than the sum total of those two costs then it’s worthwhile, but it seems like quite a gamble..

  5. Reb, I’m intent on buying a cattle raising property so I have to rearrange my affairs.

  6. I see now scaper..

    I thought you meant you were selling because of the economic conditions.

    Naturally if you have lifestyle objectives that are driving your decision to sell, then that’s a totally different situation altogether..

    🙂

  7. Keen is a goose. His predictions will never come to reality unless there is a total meltdown of the Australian financial markets. That is most unlikely to happen.

    The Aussie banks are among the strongest in the world and their lending practices do not reflect what happened in the USA.

    And Tom, how can you buy a holiday house on your income?

  8. Tom at his holiday house:

    Here’s reb’s little Tuscany getaway.

  9. Miglo, I’m surprised that you didn’t notice that the house looks more like one in Umbria than Tuscan villa.

  10. Just getting a little serious here for a moment. I was feeling really sorry for myself this morning in the car (not a taxi or tuktuk) on the way to work, until I saw families who sleep on the footpath. We should always remain thankful for the priviledged lives that we lead.

  11. Tom, I thought you were asleep.

    Have to choof now. When Port win I watch the Winners and On The Couch. Starting soon.

  12. I slept on the floor after the budget reply. I blame Reb and Turnbull.

  13. Miglo did you see my comment on the footy thread?

    Just in case you missed it –

    I think the Port vs Richmond game did generate a sense of mutual respect, particularly between the supporters.

    The Richmond people left the ground thinking “those Port guys really know how to dress”.

    The Port supporters were impressed by the skill of the Tigers mob at stringing together innovative combinations of obscenities.

  14. Well, it’s certainly relevant to me as we’ve figured out we need to move out of this house and get something a little more suitable – and closer to work and public transport. That means the new place will cost a fair bit more than the old one (assuming the bank will lend us the cash, which they should).

    So do we sell this one at whatever we can get for it, even if it’s a loss? Do we wait for a drop in the prices of more expensive places and rent in the meantime? Do we try to keep this one as an investment property (far more dicey…)?

    Haven’t really finished the current house’s internal cleanup yet, and no idea what we can get for it…so it’s all a bit theoretical so far.

  15. Miglo did you see my comment on the footy thread?

    Tom, thanks for warning me. Knowing that you’ve posted on the footy thread is a good enough reason for me not to go there.

    Where else have you posted?

  16. I hate to say this, but I think Keen may be closer to the truth than even I’ve given him credit for in the past.

    High levels of personal debt, poor personal savings, and expensive housing relative to earnings. Add the prospect of high unemployment and the fact that banks according to a recent report our banks have over-lent and the prospect for a major slump in housing and pricing is becoming increasingly likely, in my opinion.

    http://business.smh.com.au/business/firsthome-buyers-most-vulnerable-20090518-b82e.html
    Academics, such as University of Western Sydney professor Steve Keen and Australian National University economist Quentin Grafton argue the slumping home prices will continue to ripple through the entire domestic housing market.

    Professors Keen and Grafton expect double digit falls in house prices over the coming years, as the full impact of the global recession is felt in Australia.

    Such falls would mimic the plunge in home values seen in the US and UK, where overvalued house prices deflated by 20 per cent last year.

    The record level of lending we’ve seen in the past is also due to slow considerably so that our banks restore a sensible the balance. We can’t keep sourcing larger amounts of money form foreign sources than we already have , if our banks don’t have the deposits necessary to back it up, surely?

    ANZ CEO Mike Smith recently “voiced the view that Australian banks were “over lent”
    http://business.smh.com.au/business/savings-grace-to-be-found-in-this-recession-20090517-b7bl.html?page=-1

    Throughout the 1970s and ’80s the in-flow of deposits largely kept track with the outflow of loans. But this all began to change in the early 1990s, as first, home ownership financed by mortgages, and second, lending to business, accelerated after the last recession.

    The peak in the LDR was reached in 2007 at 220 per cent – the banks had lent out $1.7 trillion but had only taken in just over $750 billion in deposits to help fund their loan books.

    No surprises, therefore, in the sources of the rest of the money.

    With the advent of the GFC and the so-called flight to quality, in which customers sought the safe haven of banks they perceived to be strong, cash has rushed into the banks. But this slather of new deposits has only reduced the sector’s LDR to 190 per cent.

    That means $1.76 trillion of loans are outstanding, of which housing accounts for $999 billion, business $620 billion and personal $145 billion. Deposits in the meantime have grown to a smidgen under $1 trillion.

    The point here, says Citi, is that many banks worldwide with similarly high LDRs fell over or had to be rescued by their governments because suddenly their outside sources of funding – the global credit markets – had frozen as a symptom of the GFC.

  17. John, from the Australian Property Investor Feb 2009 came this:

    The tabloid media’s harbinger of doom has been Associate Professor Steven Keen who’s predicted Australian house prices will fall 40 per cent.

    Macquarie Banks’ Rory Robertson says a 40 per cent drop in house prices is extremely unlikely and would require a meltdown of our financial system.

    Former RBA governor Ian Macfarlane also told the Lowy Institute he thought a 30 to 40 per cent fall in house prices was highly unlikely.

    ANZ chief economist Saul Eslake, Steven Koukoulas from TD Securities and Chris Richardson from Access Economics are among the other economists who’ve dismissed Keen’s headline-grabbing predictions, which also include the unemployment rate hitting 20 per cent and the RBA’s cash rate dropping to 0 per cent in 2010.

  18. Just buy a holiday house and enjoy your real estate.

  19. Migs

    I’m not in complete agreement with Keen, although I’ve done some research into his theories. He rightly, in my opinion, looks at the impact of increasing debt and its role in creating instability in the financial system and real economy.

    The system is obviously out of whack and like him, my thinking is that in order for stability to return we need desperately to address our obsession with debt financing. The key questions are ‘when is enough, and when is too much?’

    The central issue has been the financing of housing, and it was the securitisation of mortgages in the US – and the decrease in quality of lending that’s brought the entire finance and banking system to it’s knees. We only have to look at the rapid appreciation of housing prices here and the corresponding personal debt levels and depletion of savings/deposits to realise their are real limits to lending and borrowing.

    The boom in lending is over and the question about housing is whether we’ll see a dramatic drop in housing prices, a gradual decline or a combination of both with prices stagnating for prolonged periods.

    It’s important to realise that our record debts need to be paid down and our personal savings boosted. This will lead to significant decreases in consumer spending and lending until some kind of sensible balance can be restored. Until then, we can expect volatility in the stock market, housing markets and real economy.

  20. Migs

    …I agree, Keen takes an extreme position, and I think much of it has to do with the media attention it gets. However, if significant declines do occur, lets say 20% in housing, and a 12-14% unemployment rate then he’ll be well on his way to having the bragging rights to say ‘I told you so’, even if his extreme positions on price declines and unemployment aren’t realised. And in reality, even I’m not that pessimistic to think he’s right.

  21. Two good posts John.

    While I consider Keen to be an extremist, I do admit that he’s got people thinking. And “thinking” is a prelude to “doing”.

    In the back of one’s mind a little voice whispers “what if he’s right”. In my opinion he isn’t, but I must say that he’s encouraged me to look at a Plan B – just in case.

  22. Migs

    It’s worth remembering that it’s the increasing reliance on debt financing from foreign sources that led to this whole mess. Now our banks will have to cut lending and start consolidating their positions in relation to their terms of lending and potential losses due to bad debts.

    Most bets are off in casino economy
    http://www.theaustralian.news.com.au/story/0,25197,25502851-7583,00.html
    REMEMBER those “toxic assets” that were clogging the US financial system a few months ago?

    Well, despite all the billions in government bailout programs, they’re mostly still there.

    And in trying to clean up the system, the Obama administration has actually created a new category of toxic assets that banks desperately want to get off their books, namely the US Treasury’s forced infusions of capital.

    We’ll look at these unintended consequences of the bailout, but let’s start by reminding ourselves how the toxic assets mess began. These were bundles of loans that were packaged into securities and then sold off in different slices that supposedly carried tailor-made risks and rewards. But it turned out the credit ratings on the bundles were unreliable and investors began to fear that they couldn’t trust what was inside the wrappers.

    The panic began with subprime mortgage-backed securities, but spread to other securities that were backed by student loans, vehicle loans and the like. These asset-backed securities, as they were known, couldn’t be sold – or even valued reliably – and the big banks that held them began taking huge write-downs, which pushed them towards insolvency.

  23. John, have to start work now. Will visit you again later tonight.

  24. PS John. Couldn’t agree more about foreign financing. I was in the finance industry when our dollar slumped in the 80s and those businesses who had borrowed cheaply from Europe (in particular Germany) went down overnight.

  25. Thanks Migs,

    I’m not trying to start a panic, I’m just seeing whats happening and its concerning. Being aware of the potential worst case scenarios is wise Migs. And I’m sure you’ve been doing your homework and have a back-up- ‘once bitten, twice shy’.

  26. (joni, on May 18th, 2009 at 7:29 pm

    Much fun, it isn’t…Slumdog Millionaire’s child star homeless after shanty torn down…also doubtful in the much fun stakes…Two million flee fighting in Pakistan)

  27. Miglo- “John, have to start work now. Will visit you again later tonight.”

    Miglo has obviously started his new job. He would never have shown such self restraint in his old one.

  28. I see the RBA is in a positive mood at the moment, does Stevens really believe that if there is a rate cut the banks will pass it on?

    The banks have become a law unto themselves and the government won’t be altering that!

    http://www.theaustralian.news.com.au/business/story/0,28124,25505483-5018001,00.html

  29. If the RBA continue cutting Scaper, I wouldn’t expect the banks to follow, they’ve got problems of their own. The RBA should know this.

    http://business.smh.com.au/business/investors-look-to-new-season-20090513-b3cu.html
    Essentially, the big four have taken a much bigger slice of an increasingly mouldy old pie, because if you delve beneath those flashy headline numbers, a disturbing story of distressed borrowers – business and personal – begins to emerge.

    The Commonwealth Bank’s quarterly update yesterday pretty much backs up the experience of the other three, all of which reported their first-half profits in the past fortnight.

    Bad debts are on the rise, not just with the captains of industry at the big end of town, but down in the economy’s engine room; small to medium-sized businesses.

    At a personal level, too, defaults on home loans, personal loans and credit cards are heading higher as rising unemployment makes it impossible for some borrowers to meet their commitments.

    CBA’s boss, Ralph Norris, described conditions as “challenging” and noted a “slowdown in the domestic economy”. And this from the bank that has emerged as Australia’s most profitable lending institution.

    Even some so-called bright spots in CBA’s results have a vaguely uneasy ring to them.

    As is usual in a recession, banks concentrate on retail operations – home loans and personal lines – to cover earnings shortfalls as big business loans evaporate.

    For the Commonwealth, this has been a bonanza. Home loans are up 22 per cent, way above the industry average of 5.9 per cent. And guess where a huge chunk of that business has come from? First-home buyers, spurred on by government grants, have accounted for almost a quarter of this new business.

    Young, inexperienced borrowers lured with artificial sweeteners at a time when interest rates are approaching zero, amid rising unemployment. Not exactly encouraging!

    It’s worth remembering – despite the major differences
    in our banking systems – a similar lending spree in the US caused a housing bubble that led to all these tears.

  30. Our banks have certainly been pushing the lending boundaries.

    Banks risk AA rating unless lending crimped
    http://business.smh.com.au/business/banks-risk-aa-rating-unless-lending-crimped-20090519-be2a.html
    May 19, 2009 – 6:06PM

    Australia’s big banks will join Canada’s major lenders in the single A credit rating ranks and risk copping higher wholesale funding costs unless they pare back lending.

    Analysts say Australia’s major lenders will lose their coveted AA credit rating – shared by only five other retail global banks – and slip down a notch if their high proportion of loans to deposits is not curtailed.

    The recent bank reporting season revealed how the big four have grown their home loan books while also competing aggressively for household deposits to reduce their reliance on short-term wholesale funding.

    Commonwealth Bank (CBA), the nation’s biggest home lender, lifted its market share by 2.15 per cent over the last 12 months to 24.3 per cent, partly by offering the lowest interest rate on standard variable mortgages of the big four.

    But CBA chief executive Ralph Norris said this would be short-lived, with the bank needing to claw back margins to meet its peers for the mortgage business to be sustainable.

    According to Citi, the expansion in banks’ lending outpaced deposit growth and left local banks with higher loan to deposit ratios than banks in the United States, United Kingdom, UK, Europe and Canada.

  31. John, any future RBA cuts will not be followed by the major banks. That’s my sneaking suspician.

  32. I think you’re on the mark Migs, they’re all going to be desperately seeking to maintain margins. My main concern now is their treatment of struggling mortgage holders etc. I call it ‘DRM’ Debt Recovery Mode. We could see an acceleration of foreclosures simply because banks want to recover their debts in cases where house prices are likely to fall into to negative equity territory.

  33. That’s a frightening scenario John, yet a good reason as to why they perhaps shouldn’t lower their rates any further.

    We need the banks to be making a profit, or better still, getting a good return on their equity.

  34. Migs

    In the Sydney Morning Herald this morning. At least a balance is being restored.

    http://www.smh.com.au/national/home-affordability-dramatically-better-than-five-years-ago-20090519-bear.html

    A TYPICAL home is worth a little over four times the average household’s annual after-tax income, down from almost six times five years ago, Reserve Bank figures show.

    Strong growth in incomes and a period of more sluggish median house price growth are working in the interests of would-be home buyers. “This is a dramatically better picture on Australia’s housing affordability,” the chief economist at UBS, Scott Haslem, said.

    But housing still remains expensive by historic standards. In the 1980s, it took just three times the average annual disposable income to afford a median priced home.

    Australia remains one of the least affordable countries in the world. In Canada the multiple is less than four. In the United States it has remained at about three times annual disposable income for the past two decades and precipitous house price falls in some areas of the US has reduced this even further.

  35. As unfunny as the economic news is, I’ve got to admit Michael Pascoe’s take on ‘Biggles’ Stevens is funny

    Biggles goes for the bone
    http://business.smh.com.au/business/biggles-goes-for-the-bone-20090520-beln.html

    With only two 50-point cuts left before the RBA hits the margin it wants to keep above the US, UK and Japanese ZIRP (zero interest rate policy), it looks to me like the bank has reached for the jaw bone.

    The May board meeting minutes appear to be doing their best to talk up our economic prospects. They begin with a gruesome litany of deteriorating economic news, but there’s an attempt to spin that into something positive by observing the rate of the world’s economic plunge might be decreasing.

    Hard-core bears might observe that a falling body eventually reaches terminal velocity beyond which it will not increase. Hey, we’re not going down any faster, let’s celebrate!

  36. Sorry for joining late Reb, housing prices falling fast? In some cases up to 20% declines in asking prices (it seems everyones sniffing for bargains – and that’s the way the entire market seems to be heading), Prof Keen will no doubt be keeping a keen eye on what’s happening.

    Walrus,

    Stuffing ourselves to the point of vomiting? Great piece. Completely agree.

  37. Worth noting:

    http://www.theaustralian.news.com.au/story/0,25197,25532509-601,00.html
    THE average loan size for first-home buyers has risen by $52,000 – or 23 per cent – in the past two years, raising fears that government incentives for young buyers are artificially inflating the market.

    A report commissioned by Brandmanagement, a market research firm specialising in the finance sector, says the average size of loans being taken up by young home buyers is jumping by an “unsustainable” amount.

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