Australia's unaffordable housing - but for how long?

RacerJace

A new report, the 4th Annual Demographia of International Housing Affordability Survey 2008, co-written by a chap named Wendell Cox has been publicised in the Australian news today. It cites most of the major cities in Australia and New Zealand as the majority of the most unaffordable housing prices in the world (market size of 227 locations worldwide).

When hearing this on the news I immediately thought ... 'if housing here is so unaffordable, like they keep telling us, then who the hell is buying it?'.

Interestingly Dan Denning of the The Daily Reckoning Australia, suggests it may well be coming from stock market investors and boomer superannuation funds that are pouring their money into tangible assets ahead of the market meltdown inflicted by the US (and world wide) credit crisis. As Dan alludes, if this indeed is what is continuing to elevate the housing prices then those meek Aussies such as myself will have to wait out a while before enough mortgage defaults bring some reality back into the prices.

Getting back to the report by Wendell Cox, he also interestingly points out that it is 'urban consolidation planning' and other government initiated and controlled constraints on housing that has caused the housing supply to be constrained and thus caused prices to inflate more intensely with demand fueled by low interest rates (similarly to the US).

So far Australia has not seen the rampant mortgage default rates that are apparent in the US. There have been fewer of the ninja loans (no income no job or assets) here in Australia. There have, however, been an alarming number of teaser rate loans and special packages including zero deposit and rent compensation for newly built houses in the exurban development zones. Default rates are definitely on the increase and have reportedly tripled since 2001 in the state of Victoria.

So if the 'constrained housing markets' have boosted artificially high prices due to tight supply and easy money demand then as credit dries up and, if the government intervenes and opens up development, I see some bad things happening....

1. More cheap exurban land will be developed with little or no infrastructure support... and I believe this will eventually become zombie land.

2. Those that were able to dig deep and get finance for an inflated price property will suddenly find themselves upside-down in their mortgage. Servicing a debt that is bigger than what is ever likely to be recovered on a sale of the property.

So I think the government will find themselves between a rock and a hard place as mortgage defaults continue to rise, stock market and boomer money dries up and the outer burbs (and country towns) become slums and ghost towns.

Still I dream of a day when I can flick a couple of 1oz gold coins into the hand of a desperate land owner and take title of whole city blocks (as was once allegedly done in Berlin in the hyperinflationary late 1920's).

Something that amazes me to this day is how stoically many Australians hold onto the belief that house/property prices never (ever) go down. That may be about to change quite dramatically I believe.

RacerJace

Anyone have anything to add to my two points of concern (ignor the zombie comment if you're less doomer inclined).

The thing that gets stuck in my craw is that two years ago I was planning for a housing bubble crash here in Australia to coincide with what has come to be in the US. Some of the news and reasoning in the report and articles mentioned above suggests that I will have to wait a while longer (who knows, maybe years) before prices come down here in Australia, if ever.

My plan, which commenced two years ago, included selling my house and investing the equity in the stock market. It worked well and I have made over 30% gains before pulling out of the stock market six months ago before the downturn. I now have cash ready to put back into property but alas the property prices are still too high and inflation is whittling away at my money.

What to do..? Sit tight all cashed up and wait for house prices to crash. Jump in and buy now before my cash evaporates and risk being upside down in a mortgage when it does eventually crash. Or spend my money on other tangible assets (examples anybody?).

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Lighthouse · Light Sweet Crude Joined: Mar 02, 2006 Posts: 1458

You are not seriously asking for sound investment advice on PO.com?

This board is full of people who are waiting for the end of the world and hoping and praying we will hit the wall by tomorrow. People who see money and our existing economical system as the root of all evil.
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RacerJace

Tyler_JC

Micki

A big question is of course how hell bent RBA will be on raising interest rates.
Especially now that US once again shown that inflation is preferable to deflation. Living costs (food, energy) will keep going up and I would be most surprised to see salaries follow. That means even less money to spend on housing.

I am still expecting a pullback in RE down under but it might not be a spectacular crash. Alternatively, RE will remain flat whilst other things go up.

Tedbit: I know several people on the canals in SE QLD and they have nice houses on the market for $1.2-2M. Comparing with what else is on the market they are reasonable priced, but they don't get any descent offers from interested. Some of the properties I know of have been on the market for nearly a year now.
It suggests that interest in higher end market definetly cooled off compared to say 2 years ago.
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It's not a bailout, it's a buy-in" - Nancy Pelosi

alokin · Intermediate Crude Joined: Aug 24, 2007 Posts: 799

I think compared to Europe the houses still are affordable. Depends what you want. We wouldn't live in our own house with garden in Germany and houses and units tend to be much smaller.

I think part of the problems is that housing companies try to build dream homes with four or more bedrooms, two or more bathrooms (in poor quality however and mostly ugly) but don't focus on people with average income who would be happy with a two bedroom house.

Maybe there are lots of families who soon won't be able to pay their mortgage, because of rising food prices, they may have bought their cars on loan as well, simply not the matching lifestyle for their income.

I guess house prices here (Brisbane) will rise further but then slowly coming down. There are still many people who want to come to Australia, especially when times are getting harder in Asia.

skiwi

Now Here’s a Real Bubble!-Yarns from Down Under...Part 1
The Greatest Bubble of All!

Uridashi! The Bubble Buster
Yarns from Down Under, Part 2

This is going to be so exciting Laughing

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We have tried with our first creatures but we could not make them venerate us.
So let us try to make obedient respectful beings who shall

Cornelian

As for point 2, I know an awful lot of people who are currently sitting on big mortgages with houses worth 50-100,000 les than what they paid for them. Or ... in the past week, have seen 3 people put their house on the market with such vast personal debts that they will clear nothing from the sale.

The ABC ran an article a couple of days ago in which an economist predicted a subprime-like crisis here very shortly.

So, just from anecdotal evidence, yes, people in the Australian mortgage belt are starting to hurt badly.

alokin · Intermediate Crude Joined: Aug 24, 2007 Posts: 799

I looked for house prices in our area. They really went up 25% last year, however, I think they're much harder to sell.

There are still so many people coming to Australia, which makes a big difference to the US, however the factors mentioned above could undermine this.

Micki

There's talk about another 2 to 4 RBA rate hikes.
I am having a really hard time understanding how everyone thinks this won't lead to a noticable slowdown.

Inflation is largely imported (global energy/grain/metal prices) and the only way to get these down locally is not by slowing down economy but by strengthening AUD and this can be achieved by raising interest rates. That wayhowever the exporters, which are currently holding up the economy will suffer.

I think we'll see a classic example of central bank raising rates too much and then backing off once the recession is in full bloom.

What opinions do you have on possibility of RBA stopping further hikes if USA and Europe go further into recession and Australian consumer spending/credit usage remains high????
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It's not a bailout, it's a buy-in" - Nancy Pelosi

alokin · Intermediate Crude Joined: Aug 24, 2007 Posts: 799

We're suffering and ping 8.25% mortgage, in spite our mortgage is very reasonable I don't feel comfortable having one.
But I am very convinced that a currency must be strong even I don't have not much of an economic understanding.
The only thing I know, that in Europe governments (well some) always tried to do so and I think the economy is much more stable. (Well there are other reasons as well).
What I think that people simply have to learn to dave money and not spending their spare time in shopping centres.

Micki

Not spend spare time in shopping centres..... well that's how you start off a recession. Less consumer spending and higer interest costs with flat to falling housing. Before you know it, it hits the employment figures.
Oil, food and commodities remain high as they are appreciating globally and will become even more expensive as the AUD starts to drop.

Just personally I think RBA should leave it at this level. Economy will not keep growing as it is cooling down overseas. Even Asia should see period of slowing growth. AUD will remain strong or go stronger agaist USD and EUR as they lower interest but dollar strength would be less than if RBA further hikes.
Housing, like was said, seems to be slowing down in quantity even if prices haven't come down. That is how US downturn started. If they hike too much now we may find ourselves in similar situation and we won't necessarily know until months after the rate increase.
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It's not a bailout, it's a buy-in" - Nancy Pelosi

skiwi

Melbourne recession fear as property hit