by Scott Pape - February 20th 2010
Real estate experts tell it like it is, offering their views on the property market in an attempt to gauge its true value.
Someone, somewhere right now, is sticking a voodoo pin into a Barefoot doll.
Of all the criticism I’ve received, it’s real estate agents and property investors who really like to dig it in. Some of them have been known to email me three times in a day telling me how wrong I’ve got it. I get it.
So with that in mind, I asked questions of three blokes who talk straight on property. Introducing the Real Estate Agent (Paul O’Malley), the Renegade (Neil Jenman), and the Ratings Guy (Louis Christopher).
1. The January edition of The Economist magazine said property prices in Australia are overvalued by 50 per cent. Are they right?
PO’M: Even if The Economist is right and property prices are overvalued by 50 per cent, that doesn’t mean they will crash by 50 per cent.
The magazine was highly critical of Government stimulus and fiscal policy propping up asset prices – and I agree with their commentary – especially in regards to the first homebuyer market in Australia. Last year’s enthusiastic first-homebuyers could be mortgage-stressed first-time sellers in the next few years.
NJ: They are right. Australia’s property prices are obscenely high.
LC: They are wrong, as the way they have measured valuation has not been adjusted for taxation differentials between countries. The Economist used rental yields as a basis by which to judge relative valuation between countries.
However, they failed to take into account the taxation differences. And tax counts. In Australia, we have negative gearing tax benefits, which is actually unique to our country. The United States and Great Britain do not have negative gearing benefits.
2. What’s your five-year forecast for residential property?
PO’M: The market is likely to trade sideways over the next five years. Capital growth will be stunted by a lack of affordability for homebuyers. A shortage of housing, combined with population pressure will help protect the market from a dramatic collapse.
However, if mortgage rates were to hit 10 per cent at any time during the next five years, that would have severe consequences for the housing market.
NJ: I believe, once we are all finally convinced that property is invincible, that the property market will face a cataclysmic collapse. And then we will all wonder why we didn’t see it coming.
If Australia does not face a property crash it will be the only country in the western world to have had a property boom without a bust. It will probably be the only country in history to have had a boom without a bust.
LC: Conducting a five-year forecast is almost impossible for real estate, and I would be also arguing it is impossible to make such a forecast for any asset class. There are too many X-factors out there.
However, it is possible (yet still difficult) to make a reliable one and two-year forecast. Our forecast for 2010 is that Australian capital city dwelling prices will rise by 4-6 per cent, with Sydney being an outperformer, rising by 5-7 per cent.
In order for our forecast to eventuate, average home loan lending rates must stay under 7.25 per cent until at least the September quarter. And loan-to-value lending ratios must hold at current levels. Reducing the loan-to-value ratio has significant negative implications for a borrower’s purchasing power.
3. What are some of the common traps you see people fall into when buying property?
PO’M: The biggest mistake is when investors overlook the rental return (yield) a property offers and buy it purely hoping for an increase in price (capital growth). Negative gearing increases holding costs and capital growth should never be taken for granted in the short term when investing in housing.
As a typical example, many apartments in Alexandria in Sydney are currently selling for less than investors paid for them in 2003.
NJ: They believe that property is going to keep going up. They take too much notice of property salespeople. Just remember, the people who are talking us into buying real estate are all the people who are selling real estate.
LC: They fall in love with a home and panic into buying it. And due to their panic they end up overpaying for the property in question.
4. What’s your outlook for housing affordability over the next few years?
PO’M: It probably won’t improve a great deal, as currently housing demand is outstripping supply. Housing affordability will only return to normal levels if we experience a big price correction.
What everyone wants to see happen with housing affordability can only be achieved by what everyone doesn’t want to see happen – the market crashing.
NJ: It won’t get much worse because already it has about reached its limit of unaffordability. With nearly 50 per cent of recent homebuyers suffering mortgage stress, society cannot handle much more. The limits of affordable endurance are almost reached.
LC: Notwithstanding the difficulties in forecasting, affordability will unfortunately continue to deteriorate for free-standing houses in most capital cities.
Units are likely to be relatively stable with regard to affordability. It is true that, at least for free-standing dwellings, supply is relatively fixed, and as the populace grows, competition for free-standing real estate will increase.
Regular readers know that I don’t believe that the current property prices are sustainable. And I say this as a homeowner whose home value, according to a real estate agent I spoke to, has inflated considerably with the property bubble.
But unless I plan on borrowing against my home (cough, cough), it doesn’t mean anything (well, other than the fact a real estate agent wants my business).
My concern with property prices is for those of you who haven’t yet bought your home. Many young people borrow and buy under a mistaken assumption that property prices will stay historically high while interest rates stay historically low.
According to a recent report from Fujitsu Consulting, almost half the people who bought first homes in the past 18 months are already experiencing the painful truth.
Tread your own path!
Photo: http://www.flickr.com/photos/italianjob17/2907889465/
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11 comments
Put your money where your mouth is sell your house.
You call your self an investor
take the profit,buy when the crash comes in a better position and get abetter house.
I don't think so.
you talk of vested interest of the realestate agents.
what about your fearmoungereng to sell your advice and attract people to your web site,attrating the advertising dollar.Anyone can quote figuers to suit there point of view.
Your path has been tread
I don't see my house as solely just an investment. It's my home. Do I think my home will decrease in value at some stage? Sure. Then again, it's the same situation with my share portfolio – but that doesn't mean that I have any intention on selling.
I have consistently preached that the best thing for people to do is to buy their own home – it's a wonderful investment – but only if it's within their means. This 'buy at all costs' mentality will hurt people who rush in over their heads.
Hi Richard,
I think you are confusing the word Investor with Property Speculator. Look up speculator and I think you will fit yourself right into that pigeon hole nicely.
Secondly, I see very little advertising on this site… and I am pretty sure that it would be a minor revenue stream for Scott.. he is a Financial Advisor right… think he prefers his core competency over say online ad revenue.
The ads he does have I hope either bring him new business or may even pay for his server hosting etc.
Also, I am a supporter of Kiva… do you know what Kiva is Richard?
Scott, I am assuming that you have given the Kiva ads on your site for free is you are as passionate about Kiva as I think you are and I am?!
Also Richard, maybe some spell checking software and reading what you right before you fire it off into the interwebby would not be a bad idea either.
By the way what real estate agent do you work at?
I am sure you would be happy to take Scott;s money to both sell his house and buy him a new one or sit back and let him rent whilst you take in the rent and hold the rent in a 'clearing account' for a week or so and make nice big fat interest for free on the overnight money market before you send the 'cleared' rent to the Landlord.
We are not as silly you would like to think Richard!
Just for the record…. I don't get paid for the Kiva advertisements.
I have to say I agree with this article for the most part. One thing that stands out to me though is the reference to housing prices collapsing if average interest rates hit 10%. Although I do agree with this, I personally don't think it will take such a steep rise.
I'm not to sure what the situation is in other states, but over the last couple of years in southeast QLD we have seen our council rates literally double, and electricity, car registration, insurance etc have all jumped considerably(~40% on average)
I don't know anybody who's income has increased by anywhere near this amount over the same period, with most only getting slightly higher than the official 2.1 – 2.9%(which is another argument altogether), so to me it comes down to simple math.
Assume a loan of $300000 and an interest rate of 6.25%(which is conservative given a quick look this morning indicates effective rates of around 7% and above from major banks), and an annual council rate bill of $3000.
Using simple interest formulas, the interest would equate to $18750 pa, and a cost of $21750 pa including rates.
If it was an investment property, assuming a rental return of $400 pw, this equates to a loss of $950 a year even before maintenance costs. If it was an owner occupied home, we need to add general living cost to that figure as well.
Most people I have spoken to recently who are buying or looking at buying are quoting the 20% over the next few years capital growth figures many “experts” are touting as a primary reason for buying, as well as not wanting to “miss out”.
Given the current state of the global economy and the recent surge in birth rates, I'm curious where this money will come from to continue capital growth?
I'm curious how much of the recent the capital growth has come from fictional wealth created by onselling and rebuying of property, ie sellers make $100000 profit selling a home, so they pay $110000 more to buy another.
I hope for many peoples sake I am wrong, but can someone please show the error in my thinking? Negative gearing can't account for it all, and if you honestly believe that property prices never crash you must not believe that history ever happened so I'm not overly interested in those sorts of answers unless you have a truely valid point.
And to end on a lighter note,
The_Mainlander – I found this rather hilarious to read,
“Also Richard, maybe some spell checking software and reading what you right before you fire it off into the interwebby would not be a bad idea either.”
right != write, lecturing someone on a rather mundane spelling issue when you have spelling errors in the very sentence you use is brillant(sic)
Hey Brainslug,
What you don't like irony?
Heehee.
i cringe when i read this age old stupid debate about property bubble.
there WILL BE a CRASH in OZ prices, end of story,
How do i know?
because this is the exact same debate i heard when i lived in ireland before 2007 and what happend? a massive crash in prices, average house price dropped up to 50% and some hosus are actually worth nothing and whats worse is they are STILL FALLING, all my friends are now stuck with negative equity and mortgage stress and bankruptcy
and before anyone starts ranting on about that it wouldnt happend in oz because of some stupid reason like of the tax laws or because of the resours boom or whatever other silly reason that makes no sense those same lines were used in ireland 5 years ago and the only people who used those lines are the ones who want to protect the bubble for as long as possible.(mortgage brokers,banks,real estate agents etc)
its happend in the UK,USA,Ireland,Japan etc and it WILL happend here only a matter of time
why do people ignore what goes up must come down?
Busts follow bubbles like night follows day
real estate is the safest and most rewarding investment one can make. australia has strong fundamentals and a strong housing market. there is one simple law: house prices never fall in australia. my suggestion is that you buy now while the price is relatively cheap.
Your a total gumby if you actually believe that statement. Have a look at the price history over the last 50 yrs, and property has had serious price reductions on at least 3 occasions…
Great article and insight. I love your conservative stance and how you always discuss pros and cons. Most people forget there are always cons with investing. I believe there is always a common denominator that is related to property crashes, and that is unemployment and population growth. US and Japan property crashes were related to debt, but that problem always grew because of rising unemployment from massive company job losses. Japan similarly but mainly their population is actually decreasing annually. Australia can have a property bust, but it will coincide with china/resources bust and lots of miners will lose their jobs, shareholders (ie everyone) will lose money. Then it will be sell, sell, sell. This should act as a warning to reduce debt and for people to think about what they would do if they lost their job.
I’d like to have read Steve Keen’s input here, even though we know wheat he’d say. Steve committed the ultimate sin (which has smashed his credibility until the bubble pops) by putting a deadline on his theory that the Aussie housing bubble will pop. Until we have a significant external event that pops the bubble that almost the entire Australian population and banking sector has bought into without question (the belief than most Australians has in my own humble opinion is that ‘property is a good investment and always goes up’ – having sat in on dozens and dozens of meetings as a financial advisor I think I could safely speak for a good chunk of the property buying population- that they all believe that Aussie property is safe and will always go up. Just like they know the sun is surely to rise in the east at the moment). So the banks readiness to lend, and the population’s willingness to borrow continues this pyramid situation with property prices. My thoughts aren’t popular with real estate professionals, but I’m glad that I’ve sold my property and won’t be left ‘holding the baby’ when the music stops. Shame about the current prices because real estate is my preferred investment class.