Im getting a bad feeling in my stomach

Definitely - the number of investors as a share of transactions in the market has ballooned from somewhere in the 15-35% range (it tends to move with booms and busts) to way up around 50%, peaking close to 60%. That's a huge jump - a lot of extra investors. In that time, share ownership has declined from 55% to 36% (acc to the most recent ASX Share Ownership Study) - many investors have likely switched from investment in companies to investment in property. Bubbles also attract a lot of inexperienced investors, especially in their final years. Foreign investment has leapt too from a few thousand to tens of thousands annually, increasing by 17x in five years (Knight Frank).

There has absolutely been a huge surge in the share of investors entering the property market - and most of it has been very recent (within the range of 5 years) and it has corresponded to most of the extreme price growth. It's the same with developers - a lot of new builders and developers. So demand for homes as an investment has jumped dramatically, while demand for homes to live in hasn't really budged much at all. If any price falls reduce demand for property as an investment, driving investors from the market, it's possible we could lose many or even most of the additional investors we've gained in the last five years - recent investors who are negatively geared or on IO loans are at particular risk if their entire bottom line depends on capital gains and low interest.

Some first home buyers have certainly been pushed out of the market - so there may well be buyers on the sidelines waiting to enter the market, that's true. But how many could buy if prices fell? Hard to say. Lending conditions are getting tougher (so they'll need a decent deposit and savings history). They can't pay as much and have to save a bigger deposit with less money. The long term average of first home buyers (the group most likely to be seeking new mortgages after investors, and so a key source of market demand) as a share of the market is around 20%. This has dropped to about 14%, so it's a drop, but not a massive drop. Would a return to more normal levels be enough people to "save" the market from correcting, if some investors were to sell? Hard to say - it could happen in a contained correction.

 

Perth's situation is a little unlike the other capital cities because it was closely pegged to the mining boom. Had the mining fortunes not abated, Perth would still be breaking records.

IMHO Perth is not a good proxy for what 'normally' happens.

 

Noted Perth is an extreme case, but the general story of any boom is much the same:

Prolonged high migration on the back of a jobs and investment boom creates a housing shortage that builds equity and spurrs investors. Consumer confidence is high due to jobs creation, which creates a new sense of "normal" and people become over-risky in their decision making. Then jobs growth stalls, supply catches up, and the supply/demand ratio balances, restricting capital growth. Rents freeze, economic sentiment fades, equity investors freak that they can't cover costs without capital gains, market supply increases and the "glut" ensues.

The main difference as i see it is that Perth actually had negative jobs growth, where as i speculate the east coast will be more flat. This will mean stalled prices rather than the prolonged falls WA has experienced, as people will not be forced to sell. All other triggers look the same.

 

We really need wide spread reform to heavily encourage even more multi-unit developments.. The only way to bounce back and to have a working plan for long term is to have a stable number of high density homes being built and sold, and much more than recent times.

Its a difficult balancing act, too many too soon and if financing hits a wall it could trigger a domino effect crash, too little and over a long term Sydney property will probably double all over again in ten years, not a healthy thing unless the median wage also doubles or the cost of money goes from 4% to 2%.

And we all know the only way to fix the affordability issue is to address the supply side of the equation not the demand, its silly what they are doing in Victoria for first home buyers.. helping buyers even more just creates more demand. Need to be allocating units to first home buyers only and other units to essential services people (e.g. nurses, bus drivers) only.. maybe with subsidized rent?

 

@sash Now sold - amazing result, happy vendors.

 

The huge amount of mortgage wealth that Australia is carrying is certainly a risk. I think unsecured private debt (credit cards, personal loans etc) in Australia is also a risk. I have been looking at some of the metrics for the countries that had a housing bubble that collapsed, specifically USA and Ireland. There are 2 measures that look like they could be important.

- Private credit by deposit banks and other financial institutions as % of GDP
- Consolidated foreign claims of BIS reporting banks as % of GDP

For private credit as a % of GDP, in 2010
Australia - 130.1%
Ireland - 228.2%
US - 193.8%

It would be useful to know what the percentage of each country was at the time of the housing market collapse and what Australia is now. This could be one measure to indicate Australia is approaching a "danger zone" so to speak.

For consolidated foreign claims as % of GDP, in 2011
Australia - 45.4%
Ireland - 263.2%
US - 40.5%

My understanding is that Ireland was in trouble around 2007? The consolidated foreign claims as % of GDP in Ireland in 2007 was 387.1%

I am not sure what this means but 387.1% of GDP seems terrifyingly high?

Stats from this report: https://www.researchgate.net/profil...Capitalism/links/56b0753b08ae8e37214e87ad.pdf

 

Just to say I find your posts VERY informative and never get tired of reading them because they articulate, well written and supported with factual evidence - just because it's not what people want to hear doesn't mean it's wrong and it's definitely NOT a sermon

 

Good stuff do share....good time to get out of Sydney....

 

Great insight, I've never heard of Foreign Claims so will look in to it!

FYI tradingeconomics gives a lot of the data you're after

Australia Private Debt to GDP | 1995-2017 | Data | Chart | Calendar

flick through the list on the right to get different data points. Same thing for Ireland:

Ireland GDP From Construction | 1997-2017 | Data | Chart | Calendar

 

Cool. Thanks for the link. Looking at the most recent private debt to GDP ratio in Australia on the link provided... it is getting high. Housing correction soon?

 

I think the importance of the figure is the potential to fall rather than its height itself. Debt goes up in accordance with peoples' ability to service it (ie. the ratio can't cause a crash just because people are taking out loans) so the only cause can be GDP tanking. That will cause the ratio to rapidly inflate without debt actually going up (result of GDP being the denominator of the ratio).

As GDP is a strong indicator of jobs and income, it gives an idea to peoples' ability to service debt. A notable fall in GDP means people are less able to support the debt level they have, so it trips the crash. So the high ratio just means the economy is exposed, but doesnt mean it will crash (ie. a "soft landing" may also be possible if gdp does not tank).

For an indication of how fast GDP can fall, Ireland's dropped 20% between 2008 and 2010. This then spurred the government to borrow in an attempt to stimulate the economy, perpetuating the situation.

I can't see a stand-alone sector that will have as big an impact on Australia that Ireland's construction crash + financial crash had. The biggest risk i see is a fall in manufacturing timing with a big wind down in construction, and the government not able to sustain its current spending as it chases a surplus. Throw in the global slowdown that some people predict under Trump and we have a problem. Combined, GDP could get hammered which would send up the debt/gdp ratio. The ratio in that sense is an effect of the downfall, and not a cause (gdp tanking being the cause).

 

@JDP1 makes sense. I think sometimes with these things it's hard to tell what is cause and what is effect. For example, I have been told on this forum that rapidly expanding credit causes house prices to increase (cause). I argue that credit is rapidly expanding because house prices are increasing (effect).

 

NSW state planning might have to do some major rezonings and allow things like terrace budding homes to be built for higher density in some urban zones. The ones being built up near Penrith are extremely popular! It would be nice to see a lot more of that in affordable areas like Western Sydney. Long term it also lifts the intrinsic value of a place too.

 

The good
40% above marketed price
$150K above optimistic reserve
3.4 times purchase price

The bad
$100K+ spent on selling process
Something like full time hours for 3 months

And the ugly
Developers dropped out around $70K below reserve
Investors dropped out just below the reserve.
OOs battled it out to the end.

Don't know the future - but definitely the best time to sell compared to the past.

 

OK...let say you bought for 340k....sold for 1.15m

340k plus 100k for selling and 15k for getting in.....so 705k profit.

So what is so bad? Except.....tax...

 

Awesome result! Congrats!

 

@sash

Tax - of course !! One of life's certainties isn't it ?

Actually meant to put that in as the ugly - funny how the mind lets some things slip.

 

Booms don't last forever we got 7 years from mining boom, that was awesome for those that jumped in.

Perth is suffering today because we have nothing to replacing mining jobs.

 

I think I'm repeating myself from my other two post, but I don't think we should compare our current econony and housing trend with past events such as GFC, when we have completely different political leaders and market cap/trend.

The reason why is because back than we have less regulations within the financial industry and people have less available access to financial information, ie Google weren't thag famous back than and people rely heavily on word of mouth.

Now a days people get to access data much easier and investors are actually getting more savy. When you ask an investor now a days why they buy in such areas they can easily give you a number of valid reasons. Although I do not always agree with them, but it shows me people are actually doing more research and put more thoughts into where they spend their money. Of case we can't ignore those that just follow media trends, but from what I can see they are the minorities and at most these people only hold their own PPOR and 1 investment property.

Yes I do agree and believe that Sydney and Melbourn market are over priced and we are living within a property bubble within these two cities. However, I do not see in the short to medium term how this bubble will burst, when the hype are tightly controlled by banks and the evidence of return of confidence in the stock market.

In summary I'm actually holding a more positive view than I was before, unless there are major national events happen that will cause major distribution.

Though I'm still a massive advocate to tell people stay away from OTP units at all cost.

 

better to pay that now than gave ATO come onock8ng