House prices fall by suburb

The price of houses rose more than apartments, so it's possible that any correction will have a similarly larger magnitude.

 

The "growth" areas are the ones saying 0.0%... they are the properties at all time peaks.

Ps. Not a well formatted graph... extremely hard to read. Imo for readability it should have separated out the units and houses in separate graphs and put the labels on the right side axis.

 

What is the hypothesis here? I'm trying to understand given where the FX rates are today.

 

Does the iuter west blu mountains means areas like Blacktown,Penrith etc.

 

Yes. I believe it means Penrith, Liverpool and Blues

 

it may be that most units are still in a position to rent and keep going. I know my friend's neighbor tried to sell a 2 bed unit in Chatswood. No offers at the Auction and after few months went for rental. I suppose the low Interest rates is still protecting those units.

 

Thanks Bunkai,

The hypothesis is based on cycles analysis. It is definitely dangerous to make predictions, but here I go.

So I agree that in real terms, property markets will correct. But in nominal terms, I think the correction will be far more muted.

I wrote a blog on my website about the real movements of the (Sydney) property market, stating that it has been in a bear market since 2004. I think this bear market completes its cycle in the next few years. This shows that property markets can correct in a number of ways, and you can't ignore the value of your currency when valuing assets. Really interesting, with predictions at the end:

Sydney Property Prices Peaked in 2004 - Bridge to Bricks

Also, the 18-year property cycle theory (which certainly has its legitimate critics) did predict a gentle correction in 2018-2019, and a resumption of the bull market thereafter.

What is a Property Cycle?

An excerpt:



So to be clear, I definitely see economic headwinds, but my guess is that the correction will be largely be felt in the currency markets, where either the AUD, or even all currencies get wacked.

If that happens, good Sydney property will in fact be a life boat IMHO.

 

Hi John the lending changes may be a game changer though and challenge historical trends.

 

I would have thought that a sudden devaluation of the AUD would be every highly leveraged property investors worst nightmare, especially when much of the money is financed from offshore
In the past has it not caused interest rates to suddenly shoot up and caused the price of everthing imported to increase, which puts more pressure on households to stop spending .

 

Thanks Marmot,

Well, predicting currency debasement at this point makes a lot of sense. That essentially is what low interest rates as well as the now ended QE is trying to produce. We haven't really seen too much currency debasement yet, but that has to be working its way through.

I like real estate in that environment, because a weaker currency is essentially inflation, and inflation is a wealth transfer from savers to debtors. It would also likely see rents increase.

Will interest rates go up in response? Yes, somewhat. However think it will take decades to normalise rates.

It is always dangerous to crystal ball too much, and it can be paralysing. The best anyone can do is build an all-weather property investment portfolio that is resilient, good quality, and generates income that increases over time.

Best,

 

Rents are strongly correlated to wages, furthermore world economy has a lot of spare labor and so wages for unskilled labor which is like absolute majority of Australian labor force will not go up unless government policy pushes them up. However policy tinkering in any given country in a world where capital, goods & services flow w/o impediment across borders is likely to increase unemployment significantly among new entrants to the labor market, good example is France where younger cohorts are suffering significant unemployment. With minimum wage going up in AU, I predict even more casualization of work for younger people, lower permanent employment rate and as a result I do not see their total pay go up even though minimum wage is increased, so good luck waiting for inflation. Not going to happen until excess global labor is soaked up. It doesn't matter that US unemployment is at record lows or AU unemployment is below average: what matters global labor spare capacity.

China's labor pool started shrinking couple years back and by 2025 that will gather pace. I'd expect wage pressures no earlier than that.

 

Looks like it's already happenning in AU, Looking for a full-time job? Statistically it’s never been harder,

Government can keep pushing up minimum wage, it's not going to solve anything.

 

HI John...how many cycles have you seen?

The bear market in in Sydney started in 2003....it then took 7 years for the market to recover. There were many false starts till the upward trajectory from 2011. I saw houses/units sell for 40-50% less in mortgagee sales.

I can see the pattern repeat again....why...because a lot of people are seriously over leveraged. A lot had incomes of $80k-$100k...bought $2.5m in property have about 500k in equity. When they started....they bought on I/O only (5 years) and were paying about 85k in repayments...they are now closer to 95k on the best I/OKrates. They were okay as they are getting about 110k in rents for about 8 properties. So they were only slightly negative or neutrally geared.

As people are finding ....getting I/O again when you are at full finance capacity...i nearly impossible. When this happens in the scenario...above...that 95k pa will jump to over 135k per annum....plus costs of about 45k for 8 properties...and they are negative by about 50-60k!

That has got to hurt the market.....

 

A country cannot just prints its way out and make all its domestic debt smaller in terms the newly minted debased currency without massive damage its economy and credibility for years to come.
Zimbabwe and Venezuela are recent example of this screw-up.

QE is winding down, USD yields are rising, AUD 10yr yield is rising,
We may see rising mortgage rate independent of what RBA does.

Domestically lending screws are getting tightened rigorously aka making it harder and harder to get loans.

If they were to debase currency don't you think they would have don't exactly opposite? ie market would be flooded with easy loans?

 

52% ?

 

In my opinion, I agree you are bang on, except the last sentence.

Agreed QE was a bad idea, and I think we will have to pay the piper for all of the easy money that has been created over the last two decades. I am just saying that central banks and regulators manage nominal prices, and not real prices. So if property crashes, they'll ease rates and devalue AUD again.

Money supply and credit expansion = inflation, whether it goes into asset prices or consumer prices is irrelevant. True, regulators have cracked down on lending to private real estate investors. But credit is still flooding into the public sector. So we are seeing a transfer of debt consumption from the private to the public sector, with overall credit continuing to expand.

I have my views on where I think the economy is going, and to be honest, I will only be right half of the time. In a sense it is foolish of me to try to predict the future, because we don't really know.

What I am confident about is my investment strategy and my asset selection. And I know that if property markets correct that I will be able to benefit from that as well.

Time will tell.

 

Thanks Sash,

I have been investing since 1999, but obviously I can find charts that show cycles that have lasted over a century.

I agree there is too much credit in the system, but I know dislocations can last longer than people think.

My view is that this is a great year to be scooping up Sydney real estate. A focus on accumulating quality real estate over long periods of time, and a rejection of hot spotting is how I was able to create a large portfolio. I don't see a reason to change my fundamental investment approach now, and I expect a single digit correction, not a crash.

 

Perhaps...but a lot of places have already had double digit corrections...including my suburb of Lane Cove were prices for houses have come off about 10% from the peak in late 2016-early 2017.

Units under $1m are moving...but houses are an issue.....some of the higher price off the plans are also being discounted..as they are not moving.

Hills has a lot which have dropped 10% plus...a friend listed a house in Quakers Hill with 920- 950k expectatoins a couple of months ago..in the end I got a call and he asked me if he should sell at 850k...I said sell because i can't see it hit 900k for a while. He needed the money to upgrade.....he is now very pleased as the shiney new apartments (3 brms) have all the mod cons and is happy renting at $550pw...which is less than a mortgage at the moment. As a matter of fact when he factors in insurance, rates, water, repairs and repayments he would be up for 650pw......something to think about...

 

With rising yield pressure from international market, RBA just don't have the fire power in terms of IR lever, IRs are already at all time low and RBA doesn't have much wiggle room left with them.

RBA knows its limitations, its also acutely aware of the systematic risk 500bn IO loan poses and the forth loose lending has created.

APRAs enforcement of tighter regulation (on behest of RBA) is to de-risk and deleverage these froths which if not timely countered can become a systemic risk at exactly the wrong time with no lever left to pull

We will face a sustained downward pressure in terms of house prices as long as lending criteria remains tight and it may remains so for few years to come.

Sustaining loses year after year in a falling or stagnant market is easier said then done.
Housing is a highly leveraged asset and as its true with any leveraged product, rise is amazing but so are the falls, A mere 20% rise can double or triple your invested capital and a similar fall can wipe out your entire capital plus more if you are forced to sell at the wrong time due to non sustenance of the repayment increases from IO to PI or some other reason.

As @euro73 has pointed time and again 'its a decade to deleverage', strategies which worked in the past may not work in the next decade.