Sydney price growth to drop or prices to drop?

Discussion in 'Property Market Economics' started by Frank Manno, 23rd Jun, 2017.

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  1. highlighter

    highlighter Well-Known Member

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    A crash of that magnitude arguably can't happen. In bubble markets where prices have dropped up to 60%, it's usually been a sharp over-correction, leading to a rapid return to the long term mean. More than 70% is pretty much out of the question, because fundamentals act like a floor. There will always been demand from fundamentals. Right now proportion of investors in the market is unusually high, about 50%, but this is slowly coming down, and the other half of the market (and soon most of the market) isn't just going to stop buying houses.

    Remember too even if there is a 50% crash like there was in Ireland, it's not going to be uniform. In Ireland most, I'd guess 80-90% of the drop, was contained to assets on the city fringe. These were owned by people who'd bought very recently, for the highest possible price, builders were also sharply discounting, and it all went into a spiral which stalled projects (think house and land packages). The owners and investors and tenants in these new suburbs were mostly on lower incomes, so were more vulnerable, and few if any had much equity. Those assets often turned into ghost estates, there were literally hundreds of them, and many became worthless.

    Personally I think if a sharp crash happens here (about 50% maximum, but that would be overall), it's going to be contained mostly to apartments, fringe suburbs and to some extent, overvalued homes in the most ridiculously expensive cities. Normal, good quality family homes, in popular suburbs, in areas dominated by owner-occupiers (especially if most of the suburb are on good incomes) might see some correction but it's going to almost certainly be small (I'd guess less than 15-20%, which was certainly the case in a lot of these suburbs in Dublin even through the worst of the recession) and those assets will recover quickly. If you're holding that type of asset, all you have to do is not panic. If you're holding the former, like an apartment or fringe asset in a suburb already flooded with supply, you may have a big problem. So at worst good quality assets might retrace some of their recent ridiculous gains.

    Bubbles don't correct in an even way. We're already seeing some cities drop much earlier than others. If you look at the Case Schiller 20 (USA's main index) you can see many cities started crashing a year or even two before others, especially the smaller cities. And if you take out the lost value of failed condos and "zombie subdivisions" the value of most assets have either returned to their peaks or have seen very strong growth.
     
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  2. Sackie

    Sackie Well-Known Member

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    This is precisely my view too. Nicely articulated.
     
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  3. korando1234

    korando1234 Well-Known Member

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    this psychology is what worries me most.. so many younger investors I have met may have perhaps forgotten that the market generally runs in cycles and have this "it can only ever go up" mindset..

    it's been one heck of a run, but as the saying goes it's not a projector of future growth.. and quite simply the Syd/melb double digit growth can't continue and is not healthy for the many reasons you have mentioned in this thread..

    so far the 'soft landing' seems to be working well but the next few weeks may be most telling, the last thing we'd want is panic to set in..
     
  4. highlighter

    highlighter Well-Known Member

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    I think one of the biggest risk groups is going to be older people. It's been very popular for Boomers to invest to "grow a nest egg", which means many are not exactly going to sit by and wait if the market stagnates.

    Negative gearing is a big problem too. It enabled a lot of people to enter the market, but without capital growth, many inexperienced investors have no plan and will just be left with the costs? I think we're going to find a lot of very recent investors have bought into oversupplied assets with no plan beyond "prices will go up". Really highlights the need to diversity and to look assets with good cash flow.

    I worry negative gearing will be a sort of pin itself. It's a strategy I think many have used very poorly. I have older co-workers with four, five negatively geared homes, often in the crappiest locations, or all in OTPs. If they don't make money on them, they will have to sell, because they can't afford to pay P&I.
     
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  5. emza

    emza Well-Known Member

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    Frankly, the hypothesis of "cycles" is unsupported too! It's like the property clock - used by spruikers to convince you to buy despite the evidence.

    Go back to when Howard cut CGT. Before that there were no "cycles". Keep going back far enough and you hit a sixty-odd year period where real house prices were flat, following the massive crash in the 1890s.

    Since Howard cut CGT, our housing bubble has been inflating. Any small fallback or flat period has only been in the context of overall inflation far outstripping wages.

    We had a massive flood of cheap credit, tax laws that made speculation a good bet, illegal money and states addicted to stamp duty to the point they were loath to upset the apple cart.

    At this point, there is no way in hell our landing is going to be soft. This isn't a cycle... there never was a "cycle". There was just unrelenting cheap credit and more and more people using it to speculate on capital gains.

    Somehow people became convinced that borrowing money to buy established homes off each other at ever-increasing prices was good for our economy.

    This is the context of "cycles".

    There are simply billions of dollars in interest only loans out there. People who were spruiked or followed the herd and who borrowed and bought purely because they thought there was easy capital gains to be made. For a lot of them this was true and it has been true for a lot of years now.

    But the entire edifice rests on there being a greater fool... someone to buy that massively inflated property so all those retirees can cash out. So all those self-managed super fund speculators can take their money off the table.

    But wages are flat or falling in real terms. APRA just smashed I/O.

    If total credit volume in Australia drops and there is no alternate source of money flowing in (like illegal foreign money) then prices drop in aggregate.

    How long can all those I/O speculators who bought in the last year hold out when their NG property is flat or falling in price?

    "Cycles" have always been such nonsense. If they were a scientific hypothesis you'd demand evidence to support the idea. But it doesn't exist. The evidence we do have is of near unrestricted cheap credit flooding a country combined with a tax code that rewards capital gains speculation.

    That house that went $70K - $700K over fifteen years ain't going to $7 million over the next fifteen...
     
    Last edited: 26th Jun, 2017
  6. MTR

    MTR Well-Known Member

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    Property clock, take this with a grain of salt, and would not compare this to property cycles, what is happening on the ground, the real data ie volume/sales/days on the market/demand are some of the tangible indicators

    Property booms, make sure you jump in, clearly you not been paying attention.:p

    property prices doubling in a short time frame 2-3 years is not evidence?

    The boom cycle in Perth of 2001-2007 was not real?? driven by mining boom and immigration.

    Property boom in Melb - 2008 despite GFC

    Property boom cycle in 2013 for Sydney, Melb and Perth.

    Why do we have booms supply vs demand, that simple and it can be a number of factors that drive the demand ie immigration, low interest rate environment, infrastructure, strong economy, foreign investors etc.
     
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  7. emza

    emza Well-Known Member

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    Prices doubling in 2-3 years is evidence of excessive credit flowing into a market... not evidence of a cycle.

    I didn't say booms didn't happen... I said the concept of "cycles" is unsupported b.s.
     
  8. Perthguy

    Perthguy Well-Known Member

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    The APRA measures seem sensible to me too. The bigger the boom the larger the correction, so best deal with it now rather than wait.
     
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  9. gman65

    gman65 Well-Known Member

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    Looking at Sydney's weekend auction results, looks quite poor, with some 305 properties with no results. Auction Results Sydney, NSW - Latest Weekend Results

    Is this usual for so many to not have results? The cynic in me says those properties "forgot" to be entered by agents, because they didn't sell. While the headline figure is 71%, if even 50% of these are not being reported due to not being sold that's a "best case" 65% clearance rate..
     
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  10. Perthguy

    Perthguy Well-Known Member

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    AMP Capital's chief economist, Shane Oliver, suggests that the recent property booms have really affected the way sellers are listing homes. This is affecting buyers who are being forced to wait until these people put their homes on the market. Well, if they don't have a market advantage, that is.

    "Average Australian capital city prices have had multiple cycles over the last 15 years with booms around 2003, 2007, 2010 and [even more] recently," said Mr Oliver.

    "The cycle is better seen in terms of the rate of property growth, as not all downturns or bust phases have price declines, but rather just a slowing. The cycle can also vary from city to city, with only Sydney and Melbourne being in boom phases recently, and also within cities.

    "The main factor driving the property cycle is the cycle in interest rates, with periods of rate cuts eventually driving upswings in the property cycle and vice versa for rate hikes. Around this, the supply of and demand for property also has an impact, along with job security and unemployment."

    What sort of cycle does the Australian property market experience?
     
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  11. MTR

    MTR Well-Known Member

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    Not really sure what your point is and why it is BS??, perhaps I am missing something. I think as investors we are here to make money from a boom cycles that's all that matters at the end of the day.
     
  12. Perthguy

    Perthguy Well-Known Member

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    You're not missing something. For those of us that invest in property, property cycles are very obvious. Property cycles may be harder to see for someone who does not invest in property.
     
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  13. MTR

    MTR Well-Known Member

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    LOL... easiest way to make money is buy in boom cycles, you don't need to do anything special other than buy.

    MTR:)
     
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  14. Kangabanga

    Kangabanga Well-Known Member

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    Yep would say just the beginning of APRA measures starting to bite. Going to PI is bad enough, now many will only be able to go 80% LVR , basically means many speculators depending on 95% or 90% LVR lends will not be able to expand their portfolio. With low yields and possibly prices going down, there won't be any sense to continue to invest or holding negatively geared property.

    Double whammy to sentiment will come from apartments unable to settle or buyers choosing not to settle. Lots of over leveraged developers in hot water soon.

    In overpriced markets like Sydney, it's either red hot or its not.

    Anyone who attended Sydney auctions care to comment?

    @melbournian how did the Melbourne auctions go?
     
  15. emza

    emza Well-Known Member

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    Okay, I'll explain - people have a false belief that "cycles" exist for property. As a result, they make poor decisions. Some of these include SMSFs throwing money into OTP apartments. In other cases it's just general malinvestment.

    If you have a theory, it must map to reality at some point. If it's supported by evidence, you can show it.

    The idea that property moves in cycles is b.s... not supported by evidence.

    For example, APRA changes cutting I/O... this isn't predicted by cycle theory. It's political and financial.

    If Labor get in next election NG might be locked to new builds only... which has a significantly dampening effect on those using I/O and NG to speculate on capital gains.

    Hell, China deciding to decrease iron ore buying isn't predicted by cycle theory either.

    If "cycles" existed then everyone would be billionaires... but they're not. People wouldn't be asking Geelong or Wollongong vs wherever else. Cycle theory would tell them.

    What people think are cycles are guesses.

    Also, people seem to think cycles mean there can't be a massive price correction. No matter that other countries have had their housing bubbles burst.

    I'd add that if you look back over the history of property prices in Australia there is no evidence of cycles. There is no predictable pattern. There is no equation that describes the shape of that graph.

    But people believe irrational things anyway and so they throw dumb money into a housing bubble hoping that later on a greater fool will buy from them and they'll retire rich.

    There are no cycles because the things that change are unpredictable. Will NG go or stay? Will China crack down on illegal money or not? Will anti-immigration push from One Nation threaten Coalition seats and make them reduce immigration?
     
  16. melbournian

    melbournian Well-Known Member

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    a bit up and down

    -----
    I went to auctions a number of auctions but these were more interesting ones.

    HH corner block 850K in the past was HW Corner was nearly 1 mil. HH is better than HW
    Reservoir still flying high 911K (ex- housing com area) sames as Preston multiple bids. 850k on ex-housing comm house

    I went to a Heidelberg Heights Auction 1 Dennis St Heidelberg Heights - Def gone down the West Corner block versions were hitting nearly 1 mil. This one closed in with 2 bidders (an aussie and an Indonesian). I knew the guy who won. He basically had a couple of bids and it won. the other underbidder gave up saying what is the point he gonna up me again. The winner said was going to build 2 on that 650sqm for his mom and him

    [​IMG]

    The eventual winter at 850K
    [​IMG]


    12 Ambon St - again some run down ex-housing comm house. which had multiple bidders. Came down to Middle Aged Viet lady Vs a group of young viets. Trying to up themselves
    underbidders - young group of viets [​IMG]

    I went to reservoir on McColl St (sort of housing comm) area and it seems like no stopping it went for 911K (multiple biiders but fights was btw possibly a FHB with a baby on the way - a trade was driving some air-con install truck). Vs a bunch of Indians which went from 700K and 911K. it was very interesting auction Everytime underbidder tried to put a knockout 10-15K bid, the Indians just up 1K each and every time till the end. Lots of different indian groups turned up - thought it was pt Cook or tarneit for a second.

    The underbidder congratulated the group of Indians.
    [​IMG]
     
  17. AlexV_Sydney

    AlexV_Sydney Well-Known Member

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    that's true. Agents often don't report missing sales and when the market is weak they tend not to report or report, but without disclosing sale price. However the rate of missing reports isn't unusual, it's within normal 20%-40% range.
     
  18. jins13

    jins13 Well-Known Member

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    I didn't say that Australia is immune to the downturn of the cycle, what I was referring to was comparing Australia's economy to other countries without taking into consideration the unique market we are in. It's like comparing apples with oranges.
     
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  19. Perthguy

    Perthguy Well-Known Member

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    This true. Boom and bust has gone on since Australia was founded. The only question I have is whether it is a correction or a crash. For example, the Sydney property market boomed preceding 2003 and peaked around 2003. After that there was a bust cycle from around 2003 to around 2013. Was that a correction or a crash?
     
  20. emza

    emza Well-Known Member

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    "Australia is different"

    Straight from the "there is no housing bubble" playbook.

    Humans aren't different though... and humans love to borrow excess credit and inflate economic bubbles and tell themselves all sorts of warm bedtime stories along the way about "why it's different this time".

    It's not different though.