Be alarmed and alert.... but don't panic

Very interesting ABC interview posted in this thread:
Why Australia really IS different

Thought I'd repost it:
Extended interview with Chris Watling

One comment that really resonated with me was, 'many things can prick the housing bubble'. And as much as we'd all hate to see that (as owners) and alas some here would even get burned badly, it can happen.

I follow a much bigger bubble (Hong Kong and Singapore) as closely as I watch Melbourne and Sydney. And these bubbles have been pricked. Economies with roaring GDP of 3%+, unemployment of 3%, mortgage rates of 1.5%, even today.

Previously thought of as impossible to burst, no one thought the HK/SG bubbles could ever be pricked. But - a few dumb and arrogant government policies (yes, Bill) and a few external shocks (hello China, oh and US, and Japan, and Europe) - and wham! Down 15% minimum already between October and now, if not 30-40% in some cases. And mind you, they still have mortgage of 1.5-2.0% interest rates.

Not saying I think the 'bubble' is going to burst, but the bigger the bubble gets, the more cautious we should be. Be alarmed, very alert, keep your gearing low. It's all an artificial game, so play it smartly.

 

Good post and very relevant examples and as Chris Watling said negative gearing could be the reform that pricks the bubble. Historical similarity (I have posted on Bill shorten poised to take negative gearing.) exists with USA 1986 as both the motivation and reforms that constituted TRA 1986 are very similar to what is being discussed in the political echelons here. The significant difference being the rate of inflation and corresponding interest rates (very high in 1986 in USA). If indeed so (we cannot be sure till policy crystallizes) there should be some effects from USA 1986 that should be replicated in the economy here.

The HK and SG bursts are relevant, with regard to similarity of the economic conditions prevailing in Australia. Unlike USA 1986, HK and SG are not in a very high inflationary environment and have very low interest rates but low interest rates do not appear to have mitigated the downturn. I was hoping that low interest rates in Australia should attenuate some of the impacts of policy changes, but skepticism is growing now as our unemployment (even official) is also relatively high.


What strategies are people employing / have employed to

1. Mitigate the effects of burst.
2. Profit from the burst

 

This has been discussed in several threads. Many have deleveraged, sold up taken profits, paying down debts, huge buffers in place, borrowed as much as possible siting in offset accounts before it's harder to obtain credit which has already occurred.
Personally I have done all of the above except borrow as much as possible and sit it in offset, doing that now.

 

Thanks Barny. All these strategies are relevant but can be classified as mitigation strategies.

I am trying to suss out the opportunities that the changing economy would present. Hence the interest in USA 1986, as some would have definitely made money when economic changes hit. I am still trying to research, but not getting much headway.

There was good advice from sash as well but am not too sure about the rents going up. Why will the rents go up ? US 1986, rents went down. But if the property prices and rent both drop, the drop differential may throw up some positively geared properties at bargain prices.

Going forward, will the investors here be more inclined to manufacture equity rather than buy and hold ?

 

What have you come up with? Have been discussing this of late.

 

I've done the same. Sold down, delivered, hold USD.

Realistically my gearing's probably below 40% now. I'd like to get it another 15% or so lower and have some dry powder for some of these cities whose bubbles have bursted.

 

I think the policy is very dangerous....they would be a one term govt...as resi is keeping the economy a float. Any changes here will also drop demand as uncle Malcolm says....that would be a disaster!

As supply gets removed...rents will go up. A lot of people have an aversion to new builds....so if the 30% of the demand reduction eventuates. And investors turn away..in a matter of 1 year there will be significant rent increases.

 

How is supply removed? The property didn't just disappear into thin air!

 

yeah, I havent quite figured out that line of thought either.

 

Not absolute supply, but supply to the rental market. Less investors will be buying.. which means a higher % of purchases will be by owner occupiers.. hence less properties for rent.

 

Same number of properties, same number of households. If more renters become owners, then fewer rental properties equals fewer tenants. Hard to see how this will increase rents.
Marg

 

Hard to know how it would play out but the numbers are not fixed, for example many young people now leave home much later while saving for their first property. Slightly lower prices due to less investors and banks offering better deals to FHB could encourage more to buy a place much earlier.
Due to high prices in Sydney and Melbourne extended families often live together for many reasons and then there are students room sharing while working part time and studying.
Then you have a percentage of the population who will always rent and could never save for a deposit or even qualify for a loan.

All these groups make lifestyle decisions based on affordability, where one group wishes to live and could afford to buy are not necessarily in the same location. This could lead to oversupply in some locations and under supply in others putting upward market pressure on rents in those locations.
All these groups are not fixed entities and as the market changes demand changes.
The only thing that would be certain is that the status quo would change.

 

HK and SG - Did they have increasing population? Decreasing household size??

 

Right, so fewer renters and more owner occupiers. This results in downward pressure on rents, not an increase.

 

Nonsense. The policy is designed to encourage investment in new stock. How does investment in existing stock do anything for the economy? Alternatively, every dollar invested in new builds returns eight dollars to the economy as a result of the multiplier effect.

People only have aversions to new builds because everyone pumps the existing stock market by encouraging everyone to pile into property "because it's close to the CBD".

 

Of course

And a lot rapidly than any western country on house size and household size. Ever seen 20sqm apartments for $1m?

 

+1 All we're doing is playing pass the parcel when government keeps pushing out incentives for establish properties

 

What about FHBers? Live at home til you buy someones investment property as your PPOR. One less rental, same number of renters.

 

There have always been FHBers, just as there have always been households forming and dissolving. You would need a fair increase in new households to make much of a difference to the ebb and flow of rental demand.
Marg

 

Here is an article I found on HK's population growth rate.
"Hong Kong has experienced its slowest decadal growth in at least 70 years, according to the results of the recently released 2011 census. Between 2001 and 2011, Hong Kong added only 5.4 percent to its population, a decline of more than two-thirds from its 1991-2001 rate. "
Property prices were down around 2004.
Please don't post false facts.