Headwinds for the housing markets especially Sydney/Melbourne

if they didn't overextend then for sure but quite a few jumped late in the cycle and bought beyond their means. It'll be a looong time before their mortgage starts looking smaller by any measure. Besides if they are just making minimum repayments then most mortgages don't make a dent in the first 7 to 10 years anyway.

Yield reduction followed by price reduction will have a much larger impact than average inflation and wage growth.

 

Agree.
Banks, and the financial services industry in general, don't directly contribute to growth or improved living standards.

 

Actually good wage growth smashes debt over time, especially for mortgages, which should see more and more poured into the principal of the loan over time
Take for example someone earning around $80,000 in 2012, that has seen wage growth hit a brick wall since that year , in a year or two(2020/2021) they are probably looking at almost $15,000 annually missing from their wages, and that number will continue to get bigger and bigger as each year passes with really low growth.
Thats actual money that they should be either spending in the local economy or putting into their mortgage,as opposed to an valuation on a piece of paper .
Its the compounding effect of wage growth that allowed banks to continually write out bigger and bigger loans with the expection that after 5 or so years the loan becomes easier to service and the risk to the bank decreases .
And being of a slightly older generation , we could easily pay off houses every 10 years , then move on to the next.

 

Source: ABS

Wage growth has been poor since 2013. After taking income tax and CPI into account wages have been stagnant, which has all been occurring in an environment where unemployment has been 'low' by conventional economic standards.

 

Low wage growth is definitely a problem, and a ceiling for asset price growth.

But just remember, that if interest rates are falling, incomes do not need to rise for there to be an increase in disposable income.

Lower interest rates takes the pressure off the need for rising incomes. Up to a point at least.

 

The official CPI is a joke.
What most people observe in Australia is high inflation and ultra-low wage growth.
- train/bus ticket prices hiked several times already
- childcare/school fees never stop rising
- electricity/gas/water rates keep rising
- council/strata rates keep rising very sharply
the high strata rate is a joke. a 2-br apartment in the suburbs can easily set you back $1000 p/q, where does that money go? a 2-br apartment in the city area can easily hit $1800 p/q, sometimes as high as $2500 p/q, why the heck do we have to pay that much? imho, the strata management industry is in dire need of some sort of disruption. By comparison a 3-br apartment in an average city in China can cost as little as 200 yuan per month (or under AUD$150 p/q).
- insurance premiums just keep rising every year like clockwork
- menu prices have been hiked around 10% during the last year or so (understandable, chefs/staff need to be paid more, and restaurants' energy/water bills are much higher too)
- food prices also steadily going up
- even a haircut costs a lot more these days (same barber: 2008 - $15, 2018 - $25, up 66%.
Basically these recurring essential expenses have been steadily rising, whereas prices for discretionary items have stagnated: TV/computer/phone/storage devices/other gadgets/internet/clothing/accessory etc.

 

Sydney is now down 10.08% YOY and Melbourne is not far behind on -8.9% YOY.

'We've stopped dreaming': Meet the people abandoning Sydney

 

Oof! -4.5% drop for the quarter for both Syd and Melb.

6-12 months at this rate of decline and things will start getting wooly out there.

 

Get involved in the body corporate & you'll find out where it goes. Also have you seen the state of most Chinese apartment buildings a few years on? They become absolute **** tips because no one takes any responsibility for maintenance & refuse to spend money on anything.

From what I've seen it basically comes down to 3 things.

1. Complexity. Elevators are are incredibly, insanely expensive. Especially elevators that gets used daily by damn near every person. Electrical & water resources that in a house are a council problem, become a building problem. The council won't give two ***** about getting water pressure on higher floors.
2. Lots of common spaces & resources. Pools are expensive. Hallways need to be vacuumed by someone getting paid to do it. A lot of developers also flog off very long term lucrative management contracts for some extra dough that lock the body corporate into paying hefty fees to managers for years to come. These can be a massive rort, probably my biggest criticism. Believe NSW & VIC have cracked down on this
3. Developers cheaping out. They use the cheapest materials to get through the warranty period, then it's the body corporate's problem to deal with ongoing problems.
   

Here's a good youtube video on the Chinese property experience, from a guy who is lives in China & has two properties there (isn't a property specific commentator / has no ties to property other than owning 2 apartments):

highlights include:

• having to renovate a brand new apartment because chinese builders & westerners have very different ideas of quality
• the elevator collapsing (cable snapped - should be impossible with modern safety mechanisms - not when you buy dodgy garbage)
• tiles falling off, including one hitting a child

 

All very good points, esp. the elevator bit. I work in an office building owned and maintained by a well-known landlord in Sydney, and the elevator keeps breaking down or malfunction almost on a monthly basis. Some time last year an elevator completely broke down and it took them 2 weeks to order some replacement part and have it delivered from overseas then install & get it working again. Not being able to make anything certainly make stuff incredibly expensive in Australia.

w.r.t China, what the guy in youtube says is true, but while what he experienced can be seen in any city, it's far from normal. My take is that, first labor cost in China is much lower when it comes to property maintenance, as they hire cheap staff from the rural area who are happy to get any work for very low pay. Secondly, the population density there is much higher, making it possible to spread the cost among a lot more residents. As for elevators, they are often made locally so it's far cheaper to maintain.

Anyway, this highlights the difficulty of profitably investing in an (esp. high rise) apartment building for the long run in Australia.

P.S
I recall there was a book published over 10 years ago written by a guy from UK who witnessed the insanity of owning apartments in Australia and wrote down what he found to help potential prepare.

 

"almost 40,000 jobs have already been lost in the construction sector during the past year"


Why developers are delaying or abandoning half the apartments they planned to build

looking at the graph more jobs losses to follow soon?

 

By ‘elevator’ do you mean lift?

 

Latest Episode of Close Of Business has a section about slowing construction.
Looking pretty grim for construction workers and developers but for developers, many have been anticipating the downturn.

Close Of Business

 

If unemployment within the construction and building industry becomes a big problem, then getting rid of negative gearing for established housing, might actually create more jobs .

 

No one wants to see jobs disappear. However if the focus of this forum is the direction of property prices, then the slow down in construction and the reduction in construction jobs that will result, will ultimately lead to higher property prices.

Unemployment within the construction industry means that fewer properties are being built, feeding into upcoming shortages and higher property prices. A painful but normal part of the property cycle.

 

I don't think the blue line will be doing anything much for a while but the Sydney and Melbourne lines will be coming down to make it a more realistic comparison I've just moved to Sydneyand while Sydney has some stunning suburbs and I can see why there's demand Sydney also has a lot of suburbs that are really very crap very ugly nothing much going for them and they should not be priced significantly higher than Brisbane just a little bit higher

 

That doesn't seem too good to me.I would still be selling in Sydney at this point even though the best time to sell was 18 months ago

 

Check out ourbodycorp

There assisted self manage service is great for body corporates

 

Another crook month for house prices coming up, at least according to Corelogic:

So far in March, house price changes:

Sydney -0.8%

Melbourne -0.7%

Brisbane -0.5%

Adelaide -0.2%

Perth -0.5%

5 cities -0.7%