Housing Bubble Prediction

Recently I have read a number of national and international articles and have came to this conclusion:

1. Perth is currently experiencing the worse vacancy issue and there are still plenty of OTP being built.
2. Melbourn CBD sales has shown roughly average 30k-40k lost when compared with the last purchase price and the last sale price.
3. China are seeing more ghost cities where either units being built but no one live there or developments can't continue due to bank not willing to continue funding.
4. Chinese debt are climbing and entering a bear market with historical high consumer debt level.
5. Australia's immigration rate has slowed down
6. Aussie banks are restricting their lending policy which makes investors and overseas borrowers harder to get a loan.

Base on these factors, I will not be surprised by the end of this year we will see some corrections happening in our major CBDs, and as soon as Perth market starts to have panic selling due to the increased vacancy rate = (more stress to hold onto the property for heavily leveraged investors) and economic uncertainty (Chinese slowing in their construction = less materials need from aus), couple with all these thousands of OTP purchasers that not being able to settle their loan specially in MEL and SYD.

Here is how i think the bubble will burst in order:

1. Perth CBD
2. Melbourn CBD
3. Brisbane CBD
4. Sydney outer fringe area such as hills etc due to their very low rental return and added supply of unsettled OTPs

 

Sorry, I don't mean to be rude but is the extent of your research and analysis before forming these conclusion solely to read a few articles?

 

Where else would you suggest me to look into that will form a more solid conclusion? I've read a number of reports and articles that pretty much draw to that conclusion.

Just to give you some idea where I get these info from:

RP Data gain/pain report
Bloomberg news
Times
Some data off domain.com
Plus my own observations from both overseas and locally, I have seen those ghost cities in China personally.

 

Perth self cooled to a large extent - only solidified that base, not picked up in value.

Increase in vacancy rate is your sole reason to trigger a sell off?

 

Avoid. They are in the business of amassing as large an audience as possible, not delivering economically sound insight. Pete Waregent's blog is my favourite source for no ******** economic commentary.

 

Great post Sumterrance, it comes back to a few things.

1. Low interest rates
2. Unemployement
3. Foreign demand for houses
4. Banks willing to lend.

If all those things turn for the worse then I am sure those on the borderlines will be calling out for help. Like in any situation there are people who are well positioned to take advantaged and others not so much.

I just hope it doesn't become a bloodbath. The "market" at the end of the day is based on fear and greed. At the moment both are helping boost up the property market.

Furthermore, given the affect on the cbd imagine the impact on the surrounding areas?

 

Not sure if people read this blog but I like it. I dont take everything to heart but its good to see what different people think. http://www.macrobusiness.com.au/2015/07/what-will-pop-the-property-bubble/

 

I would think that the surroundings will take less hit than the CBD because the entry point for the surroundings are much lower and the yield are higher.

Imagine if a bunch of ordinary investors that got caught up in the hype of buying OTPs in Melbourne CBD, they paid somewhere from 500k to 700k for a 2 bedroom, settling in 2019.

And because these people were taking the current low interest rate and aggressive lending acquisition for granted thinking they will have no problems getting a loan, turns out that lending has been tightened and they have now put themselves into these positions:

1. forfeit their 10% deposit and the developer will need to face sourcing another buyer again (stress on the developers hence offering discounted prices = those that settled alright will see a price decrease due to this problem)
2. Those that are heavily leveraged will find themselves got stuck into this unit going nowhere and when their cash reserve runs out due to the high maintenances of OTPs they have no choice but to sell it quick and cheap.
3. Overseas buyers that can no longer secure a loan due to most large banks are tightening their overseas borrowing policy which ultimately point 1 will be the outcome.

Now imagine all these poor people that just lost their 10% deposit due to not being able to settle on a loan and have already submitted vacate notice to their landlord, they either need to rent somewhere else again or look else where which is the outer rings from the CBD as they are much cheaper.

And don't forget there are still plenty of OTPs that are due to settle, imagine seeing for sale and lease ads everywhere in the CBD and agents telling you whatever touching story to get you sign those contracts.

 

Increased in vacancy rate will be the start of the snow ball effect, the main trigger to accelerate this snow ball forming are those that heavily leveraged and can no longer hold onto their property that trigger the "panic selling", the more panic sell happen and bigger the snow ball forms and once it hit the ground it will cause unpredictable damage.

 

Looking at re.com.au, I'd conclude that the Perth CBD residential vacancy rate would be around 15% [305 advertised properties / (3837 total households * % of rentals) ] with an expected 50 additional apartments being completed per month (smoothing supply as linear). 60% of these new properties are expected to be rentals. Looking at the last 90 days of REIWA stats, the properties withdraw off the rental market work out to approximately 40 per month, giving the market a 10 property per month absorption. To me this is not suggesting a rapid rise in vacancy, but a pretty close to call equilibrium. It is still not positive news, as the overall vacancy rate is quite high and this will put continued pressure on landlords to decrease rent. However, I have to disagree with the Armageddon theory.

Please not this is only Perth CBD, there are many other suburbs throughout Perth metro-area with rental vacancy rates around 2% - 3%.

 

@sumterrence

this is my take

Perth market is slowing down (value is declining / soft rental market in some part of perth)
Sydney still has some steam left
Melbourne is still good
Brisbane is luke warm.. will get hot soon..

cant comment on bubble burst....

 

When you talk CBD's are you referring to OTP developments?

If so, I agree.

But, that is only one small market withing many.

Otherwise; out in the rest of the world where most folks live - just a slow deflation and then a period of nothing to little growth across all Caps.

 

Nope.

 

You are right about my assumption of OTPs in the CBD, but imagine when those folks that trying to sell their place and need compete against those unsettled OTPs that are desperate for a sale, I hope I'm wrong but I believe this small market will have a fairly large impact on the overall property market when they once become unfavourable again.

I'm not referring to anyone in here but most people that I know or heard that bought OTP simply because they don't want to do their own research and thought OTPs are easier and less hassle to buy.

I've had a client ask me if I know the location they just bought as they are from overseas and the agent told them that market will boom, him and his wife both bought 5 OTPs each but they have no idea where is that place, these kind of stories scares me...

 

To put the pressure in perspective a 1% increase in interest rate on a $500k IP would add an additional $5,000 in costs to the investor. An increase in vacancy from 15% p.a. to 20% p.a. on a $500p.w. rental increases the cost to an investor by $1,300. The interest rates are much more influential in holding costs and these are at historical lows and are expected to be reduced further.

 

I don't think there will be a 'correction'. More likely prices in Sydney will just stagnate for numerous years e.g 2003-2011.

 

There will be such an outcome at some stage unless there is an increase in wages.

There may be small localised bubbles around the place in Sydney, but I don't see there being any form of crash unless there is much wider global economic problems. The fundamental undersupply of land within the Sydney basin is what is fueling the increases more than anything.

 

I said this would happen in Perth, no "correction" just a stabilisation over time - shoulda seen the bears' response.

 

The worry with Perth now is that even the cheaper stuff is starting to b discounted whereas in the past year or so, it was the higher end, upgrade stuff.
Not a good outlook.

 

Yeah, I would agree with this... Not too surprising given supply increasing faster than demand.
Home building has to take place because that's a key driver for jobs, especially in mining states. new supply ofcourse puts pressure on like for like accommodation in prices.