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Australian house prices are 55% overvalued - The Economist
Topic Started: 2 Sep 2014, 05:39 PM (2,906 Views)
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Frothy again: Easy money is inflating house prices across much of the globe

Aug 30th 2014

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BEFORE the financial crisis of 2007-08 low long-term interest rates fuelled an extraordinary house-price boom around the world. That bubble was pricked in the crisis and subsequent recession. Since then, however, central banks’ attempts to crank up the recovery by pushing down long-term interest rates to new lows have had a predictable consequence in many property markets. House prices are now rising in 18 of the 23 economies that we track, in eight of them at a faster pace than three months ago (see table).

There remain some weak spots, especially in Europe. Prices in Spain, which had one of the biggest bubbles before the crisis, are still falling. They have also been declining in France and Italy, reflecting continuing economic weakness in the euro zone’s second- and third-largest economies. In contrast, housing markets are buoyant in some northern European countries, notably Britain.

Since some recovery was bound to occur after the housing slump, how worrying are the renewed signs of exuberance? To assess whether house prices are at sustainable levels, we use two yardsticks. One is affordability, measured by the ratio of prices to income per person after tax. The other is the case for investing in housing, based on the ratio of house prices to rents, much as stockmarket investors look at the ratio of equity prices to earnings. If these gauges are higher than their historical averages then property is deemed overvalued; if they are lower, it is undervalued.

Based on an average of these measures, houses are at least 25% overvalued in nine countries. Judged by rents, the most glaring examples are in Hong Kong, Canada and New Zealand. The overshoot in these economies and others bears an unhappy resemblance to that prevailing in America at the height of its boom before the crisis.

Following an agonising housing slump, America’s property market now looks in good shape. Prices are rising again, but there are few signs yet of history repeating itself. Although low borrowing rates are supporting the market, frothiness seems to be confined to some cities such as San Francisco where the supply of new homes is especially curtailed. This forms part of a broader tendency for property markets to be especially bubbly in big cities, particularly capitals such as London.
Compare global housing data over time with our interactive house-price tool

With global monetary conditions so loose, governments are using regulatory tools to cool overheated housing markets. In Canada, for example, the maximum term of the riskiest mortgages has been lowered from 40 to 25 years. Regulators in both Hong Kong and Singapore have repeatedly raised stamp duties and tightened lending restrictions. The measures seem finally to be working, especially in Singapore, where prices are now falling.

China’s market is on the turn. Though prices are still higher than a year ago they have edged down over the past three months. Developers are cutting back as a glut of newly-built homes has swamped the market. Since property and construction make up 13% of GDP, a big fall would pose trouble for the economy. But that may be contained since Chinese homebuyers have to chip in big deposits while the government has the fiscal capacity to prop up the market if things turn really nasty.

Read more: http://www.economist.com/news/finance-and-economics/21614167-easy-money-inflating-house-prices-across-much-globe-frothy-again?fsrc=scn/tw_ec/frothy_again
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Veritas
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At least we are not New Zealand.

Alternatively, what would those Doomers at the Economist know about anything eh?
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Strindberg
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Veritas
2 Sep 2014, 06:08 PM
At least we are not New Zealand.

Alternatively, what would those Doomers at the Economist know about anything eh?
Sweet FA based on their prediction record.

http://australianpropertyforum.com/single/?p=8107661&t=8470469

But the Economist doom sellers (just like macrobusiness, sayce, mish, durden etc etc) fully recognise that there exists a never ending supply of gullible new doom wishers looking for a crash to give them a cheap house which they can never obtain whilst they live for today wasting their dosh on rent, gadgets, phone bills, Bali, the latest fashions and useless gold.
Edited by Strindberg, 2 Sep 2014, 06:35 PM.
Housing costs to Income broadly unchanged since 1994 - re-ratified here
The People of Australia have the highest median wealth in the World
2002-2012 10 year house price growth the SLOWEST since 1952-1962
"There are two kinds of people in this world: ones that fiddle around wondering whether a thing's right or wrong and guys like us." (Hugo to Gagin in Ride the Pink Horse)
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Don't get burnt by the property market

August 31, 2014
Daryl Dixon

How seriously should property investors take recent warnings that Australian property prices are 20 per cent to 30 per cent higher than they should be and that there is an impending apartment glut in 2017? Whatever the fundamental basis for these and similar warnings, existing and new property investors need to be aware of the potential downside.

The basic issue is to understand the risks involved with investments already owned or being purchased. While less popular for purchases of listed assets including shares and property trusts as well as managed funds, large levels of borrowing are widely used to help acquire direct property holdings.

This high level of gearing helps to drive up property prices in good times such as the present and down when markets turn down, for example due to increased levels of vacancies and/or falling rents. Currently, strong foreign buying interest, low interest rates and a shortage of available stock is forcing and encouraging new investors to bid up prices.

While it may be some time off, a similar downward ratchet in prices will start when interest rates rise again and when new housing developments result in an oversupply in the major locations. Compared with share market falls which can be brutal and swift, downward property price movements are generally protracted as sellers holding out for higher prices ultimately are forced to lower their expectations.

Read more: http://www.smh.com.au/money/borrowing/dont-get-burnt-by-the-property-market-20140828-109ful.html
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John Frum
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Strindberg
2 Sep 2014, 06:24 PM
Sweet FA based on their prediction record.

http://australianpropertyforum.com/single/?p=8107661&t=8470469

But the Economist doom sellers (just like macrobusiness, sayce, mish, durden etc etc) fully recognise that there exists a never ending supply of gullible new doom wishers looking for a crash to give them a cheap house which they can never obtain whilst they live for today wasting their dosh on rent, gadgets, phone bills, Bali, the latest fashions and useless gold.
Keep pumpin' and spinnin' it pal, us ticket clippers depend on your clever sophistry.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness.
"Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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Why do we assume that price to income ratios should be mean reverting?

If non-discretionary non-housing costs have gone down, and 2 incomes have become the norm, then why shouldn’t we except people to allocate more of their income to housing.

Similarly, if the costs of maintaining and managing a rental property are lower, then an investor can take a lower gross yield to achieve the same net yield.

Regarding cross country comparisons, there may be cultural factors regarding the price to income ratio in one country. The biggest one would be the number of income earners who usually reside in the house, but also the relative non-financial value place on owning your house, and also the tenancy laws.
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Timo
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55% would be a conservative correction
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
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Bardon
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Not long now until the Economist reckons our houses are 100% overvalued. Just as well buyers will never take any notice of them.
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peter fraser
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Bardon
7 Sep 2014, 10:50 PM
Not long now until the Economist reckons our houses are 100% overvalued. Just as well buyers will never take any notice of them.
On a simplistic international comparison they are overvalued, but when the different tax structures are taken into account they are not as overvalued as it first appears. If the AUD corrects to 70 cents USD they will appear cheap compared to many countries. It all depends on the metric used.

Not talking about NG or CGT, but input taxes as distinct from retrospective taxes on housing.
Any expressed market opinion is my own and is not to be taken as financial advice
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Catweasel
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peter fraser
7 Sep 2014, 10:58 PM
On a simplistic international comparison they are overvalued, but when the different tax structures are taken into account they are not as overvalued as it first appears. If the AUD corrects to 70 cents USD they will appear cheap compared to many countries. It all depends on the metric used.

Not talking about NG or CGT, but input taxes as distinct from retrospective taxes on housing.
Catweasel say mouse onto something,

with its global currencies,

and white shoes will have the new narrative,

to entice its eager little prospects,

but it also mean a ski the lodges in a Japan,

now a cheaper than a ever the before.

Who wouldda a thunk?
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