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The Residential Property Cycle in Australia - BIS Oxford Economics
Topic Started: 23 Aug 2017, 08:38 PM (889 Views)
Rat
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Filthy Rodent

Interesting article... https://www.bis.com.au/the_residential_property_cycle_in_australia.html

The Residential Property Cycle in Australia - BIS Oxford Economics

One of the misconceptions about residential property is that prices always go up. However, like any other investment, prices go down as well as up. Over the long run, price growth tends to cycle around a sustainable level with a corresponding cycle in prices (Chart 1). In the long term, the short term fluctuations eventually even out to the long term or equilibrium level. In the short to medium term however, the cyclical element dominates the underlying influences on activity levels. Knowing where we are in the property cycle is a key consideration for successful investment.

The long–run underlying equilibrium price of real estate is typically somewhere between the rate of price inflation (reflecting building costs) and earnings inflation (reflecting capacity to pay for dwellings and the labour component of building costs). Other factors also have an influence, such as increasing scarcity of land close to urban centres, expenditure on improvements to the property, and the shift from a high interest rate environment in the 1980s and 1990s to a low interest rate environment since the late 1990s, which has resulted in a structural rise in the equilibrium price, as the lower interest rates afford a greater purchase price on any given level of income.

Real estate prices cycle around the equilibrium rate of growth through the property cycle. The course of prices depends on the nature of investments and investors’ liquidity situation, as well as on the short term relationship between supply and demand for real estate. However, the cycle is not symmetrical in the upturn and the downturn. In the upturn, prices rise at a faster rate than general inflation and therefore rise in real terms. Through the downturn, there is a tendency to hold assets rather than to sell at a capital loss. Consequently, there is often not a corresponding fall in real estate prices. Instead, prices flatten out or decline marginally as sales volumes fall, consequently falling in real terms.

Real estate sales volumes (or the actual number of sales) are subject to cyclical influences for a variety of reasons including stronger interest (vendors & buyers) in the upturn and reduced interest, especially by vendors, in the downturn.

In the upturn, price expectations of vendors and purchasers are buoyant, creating an influx of investment and a perceived pressure on purchasers to buy quickly in a sellers’ market. This leads to buoyant market conditions and high sales volumes.
In the downturn there is less purchaser interest and purchasers’ price expectations tend to adjust downwards more quickly than those of vendors. The adjustment of vendors’ price expectations will depend on their willingness to sell at a capital loss and the extent of forced sales (which will typically accept the best price offered).
Activity begins to recover somewhat during the stagnation phase as price expectations adjust and more normal conditions are restored.

Speculative investment behaviour is destabilising, as it is the inflow of investment which creates a boom. The corresponding strong new construction activity creates an oversupply and inevitably a downturn, which is accentuated by the exit of investment capital. The greater the boom, the greater is the bust. The subsequent recession in building activity is an integral part of the cycle. The more severe and the longer the stagnation after the excess supply has been absorbed, the greater the build up of pent up demand the higher the probability of a subsequent boom.

Short term economic factors influence the timing and extent of the cycle. Some examples of these are:

The cost and availability of housing finance affects demand by owner occupiers. Property investors are usually more concerned with interest rates compared with yields on alternative investments.
Government policies such as changes to capital gains tax and changes to first home buyer incentives can also influence property investment. Population and migration policy can also influence the magnitude of the underlying demand for dwellings and extend a period of undersupply, as occurred in the last decade as overseas migration was at record levels.
The broader economic environment will also affect demand. An adverse economic environment can bring an upturn to an abrupt end, accelerate a downturn or delay a recovery, and conversely for favourable economic conditions, which may encourage confidence and demand and continue to push up construction and prices.

The cycle in residential price cycle is evident in price growth at the national level. Total real house price growth nationally has averaged 3.6% per annum between June 1979 and December 2014. BIS Shrapnel estimate around 0.8% of this increase was accounted for by the added value of renovations and improvements across the housing stock.

Strong price growth in the late 1980s saw prices growth move above trend, with the subsequent downturn and then weak price growth through the 1990s resulting in prices being below trend (Chart 2). This triggered the upturn in the early 2000s, which saw prices remain above trend over 2002 to 2010 (even with the GFC induced correction in 2009). However, the downturn in prices over 2010 to 2012 took prices back below trend. Despite the recent price growth, prices remain below trend, suggesting more upside to prices while conditions remain conducive to price growth.

However, while the above cyclical trends can be observed across all capital cities, each capital city is different and at different points in their price and building cycle. BIS Shrapnel addresses each of these markets, their current point in the residential cycles, and their outlooks in our Residential Property Prospects 2015 to 2018 publication.

Cycles in the residential sector typically vary in length from five to eight years (peak to peak or trough to trough). Prices in an upturn have risen as much as 50% to 80%. However, this type of cycle in prices is not expected over the next decade unless there is a major collapse in prices. A low inflation environment means that real house prices are not eroded substantially by the time the fundamentals fall into place for the next upturn. Consequently, any upturns in the residential cycle commence at a higher starting point for real prices.
Edited by Rat, 23 Aug 2017, 08:38 PM.
Consumer protection laws extended to small businesses. Banks not permitted to repossess due to non-monetary defaults (for example, a fall in the property value).
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Rufus
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According to Simon we can't argue with BIS
Take risks - if you win you will become wealthy, if you lose you will become wise
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Rat
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Filthy Rodent

The cycle doing its thing as always...

http://www.smh.com.au/business/the-economy/the-problem-with-property-doomsayers-20170826-gy4r4q.html

The problem with property doomsayers

The team at ABC's Four Corners assembled a thrilling package about the Australian property boom last Monday.

It came replete with forecast of the "perfect storm" for property and an inevitable popping of the property "bubble".

Absent a rise in the jobless rate, which has been falling recently, it's hard to see where the trigger for forced property sales would come from. In times of price weakness, home owners tend to just sit on their properties, keeping volumes low and price falls capped.

Australia has never seen a precipitous fall in house prices, as has occurred overseas. Price booms tend to be followed by period of price stagnation, rather than falls.

Perhaps the biggest reason to believe Australia's property boom won't go spectacularly bust is that the Reserve Bank won't let it happen.

There is good reason to believe that future interest rates will remain lower than they have in the past.

Those who paid mortgage rates of about 10 per cent prior to the global financial crisis may yet earn the same sort of bragging rights over future generations that those who endured 20 per cent rates did.

But for now, it's unlikely that a campaign of aggressive interest rate rises will be responsible for triggering the sort of property collapse that many fear.

There may be other external shocks that bring us undone. But the more likely scenario is a slow deflation of our property boom and prolonged high prices.

The majority of Australians, as homeowners, will still probably think that's a good thing.
Edited by Rat, 28 Aug 2017, 09:01 AM.
Consumer protection laws extended to small businesses. Banks not permitted to repossess due to non-monetary defaults (for example, a fall in the property value).
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