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Prepare for an Australian house price plateau
Topic Started: 5 Dec 2013, 09:42 AM (5,176 Views)
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Prepare for a house price plateau

Callam Pickering

How much more can investors get out of the housing market? Not a great deal.

The 2013 house price ‘boom’ – if we can call it that – has largely been a Sydney affair, with real dwelling prices in other capital cities growing at a rate consistent with income growth, or in the case of Brisbane and Adelaide, barely growing at all.

Investors have jumped on board the Sydney bandwagon but if they have invested in other cities recently then they would be disappointed in the results.

The state national accounts, released last week, provide information on the average gross disposable income in each state. This data can be used to assess which states have the highest relative house prices.

The house price-to-income ratio is below its peak in each city, in some cases significantly so. Generally the ratios show broadly similar trends with two main exceptions: Sydney house prices tend to do their own thing and Perth house prices rose to unprecedented highs during the first commodity price boom.

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It is however important to note that by indexing the ratio I am capturing the change in the house price-to-income ratio rather than the absolute level of the ratio. The level of the ratio has traditionally been higher in Sydney, as Sydney’s diabolical public transport system ensures that people need to live close to amenities (plus the harbour is fairly pretty). However, due to weak house price growth over the past decade, the premium to live in Sydney is no longer as great as it once was.

The most recent peak for each city came during 2009/2010, during which house prices were supported by a first-home owner boost that was largely unprecedented. Once that was removed relative prices declined across the country.

During that period, growth in household gross disposable income slowed across most states, with Western Australia the notable exception owning to the mining investment boom. In 2012/2013, gross disposable income was largely unchanged in New South Wales, Victoria and Queensland.

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With the unemployment rate expected to rise and the participation rate likely to slide further as more ‘baby boomers’ begin to retire, household income growth should be fairly modest in most states in the 2013/14 financial year.

Income growth in Tasmania has been particularly weak in recent years and it was no surprise that Tasmanian Premier Lara Giddings announced a doubling of Tasmania’s first home owner grant to $30,000 or around 10 per cent of Hobart dwelling prices. Of course the grant won’t help Tasmanians afford their own home, the policy is an abject failure wherever it has been done, and will most likely reverse the trend of increasingly affordable housing in Tasmania.

So for investors, where should they be investing? The reality is that most cities are not great investment choices right now.

The house price-to-income ratio increased in Sydney, Melbourne and Perth during the September quarter and is now at levels that would be considered high given the prevailing economic conditions.

Low interest rates will support house prices and lending but subdued household income growth is likely to persist for some time and that will be the biggest driver of house prices in the years ahead. The potential for investors to flip properties for large capital gains is limited if buyer activity slides and that will inevitably happen if income growth is as weak as many expect.

Given the outlook for the economy, new investors will be left to fight over the scraps in the housing market. The current level of price growth nationally is unsustainable without greater activity from owner-occupiers and potential first home buyers and I don’t see that demand picking up anytime soon. Expect price growth to slow and perhaps even decline in 2014.

Read more: http://www.businessspectator.com.au/article/2013/12/4/property/prepare-house-price-plateau
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Dr Watson
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I think the median price will plateau as soon the interest rate cut stimulus has fully passed through, probably sometime in the next six months. The plateau could last some considerable time. But average land sizes will continue shrinking and average commute times will continue increasing.

Therefore the case for renting is weak. The median price could be unchanged in a decade but what you'll get for it in 2023 will be a smaller block farther from the city centre.

The plateau can be pushed further out if the RBA delivers more cuts.
Edited by Dr Watson, 5 Dec 2013, 09:53 AM.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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peter fraser
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Dr Watson
5 Dec 2013, 09:52 AM
I think the median price will plateau as soon the interest rate cut stimulus has fully passed through, probably sometime in the next six months. The plateau could last some considerable time. But average land sizes will continue shrinking and average commute times will continue increasing.

Therefore the case for renting is weak. The median price could be unchanged in a decade but what you'll get for it in 2023 will be a smaller block farther from the city centre.

The plateau can be pushed further out if the RBA delivers more cuts.
One would imagine that as our cities spread, well situated inner city homes will become ever more desirable whether or not the median price is rising, with the proviso that the area does not change in nature (IE become a slum)
Any expressed market opinion is my own and is not to be taken as financial advice
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Logic
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peter fraser
5 Dec 2013, 09:59 AM
One would imagine that as our cities spread, well situated inner city homes will become ever more desirable whether or not the median price is rising, with the proviso that the area does not change in nature (IE become a slum)
Peter
In the case of Brisbane, some of those burbs, like Jindallee and Chelmer, have had a decreasing population, so I suspect you are correct. These lone occupants will leave the home planet and more stock should come onto the market in those areas..
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Dr Watson
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peter fraser
5 Dec 2013, 09:59 AM
One would imagine that as our cities spread, well situated inner city homes will become ever more desirable whether or not the median price is rising, with the proviso that the area does not change in nature (IE become a slum)
I agree. Inner-city homes will always be highly sought after and will probably continue to see some capital growth. I think the median price will be kept in check by the way our cities are changing (Hong Kong-ification) and the limited room for further interest rate cuts.
Edited by Dr Watson, 5 Dec 2013, 10:10 AM.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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Count du Monet
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peter fraser
5 Dec 2013, 09:59 AM
One would imagine that as our cities spread, well situated inner city homes will become ever more desirable whether or not the median price is rising, with the proviso that the area does not change in nature (IE become a slum)
Generally that's the rule, but it isn't always smooth sailing. At the moment an investor could look for choice inner city and I'd assume in 4 to 5 years it will show a normal gain in the principle. But will be in an Aus dollar that has slid quite a bit on the world exchanges. So I'd go for good international shares in a value market like Europe in preference at the moment.

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Prepare for a house price plateau


I've had this number for over 2 years for general property making an exception for Sydney.

(Shadow will fill you on my failed prediction of a 40% slump from mid 2010 to the end of 2011. :bl: )

Failing that though the capital simply doesn't exist to create a sustained rise in general house prices. And with a falling dollar Aus business lending will revive and take the Lions share of new capital until the end of the decade.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Pig Iron
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Count du Monet
5 Dec 2013, 10:21 AM
I've had this number for over 2 years for general property making an exception for Sydney.
yeah and you've been wrong on that one as well.
I am the love child of Tony Abbott and Pauline Hanson
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Dr Watson
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Count du Monet
5 Dec 2013, 10:21 AM
Failing that though the capital simply doesn't exist to create a sustained rise in general house prices.
Very true. Unless the RBA delivers more cuts or the Government borrows to pay for biggish housing grants. Both would be scraping the bottom of the barrel and reek of desperation.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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peter fraser
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Dr Watson
5 Dec 2013, 10:10 AM
peter fraser
5 Dec 2013, 09:59 AM
One would imagine that as our cities spread, well situated inner city homes will become ever more desirable whether or not the median price is rising, with the proviso that the area does not change in nature (IE become a slum)
I agree. Inner-city homes will always be highly sought after and will probably continue to see some capital growth. I think the median price will be kept in check by the way our cities are changing (Hong Kong-ification) and the limited room for further interest rate cuts.
True, and I would add that apartments will become much more accepted as a normal choice for a permanent dwelling for a family, which then leads me to submit that we really should be looking at the "all dwellings" index rather than the current residential homes index as our guide. We are one of the few countries in the world where a 4 bed home with 2 car and 2 bath with a backyard is the accepted norm. Although that's nice to have it is inefficient use of space and adds greatly to the cost of housing.

It's not the norm in London, Paris, Rome, New York, Hong Kong, Prague, Moscow, Berlin, Amsterdam, Nice, Bruge, Lyon, Shanghai, Beijing, Singapore, KL, or the majority of other global cities that we compare Sydney and Melbourne with.
Any expressed market opinion is my own and is not to be taken as financial advice
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Count du Monet
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Dr Watson
5 Dec 2013, 10:40 AM
Very true. Unless the RBA delivers more cuts or the Government borrows to pay for biggish housing grants. Both would be scraping the bottom of the barrel and reek of desperation.
Actually lowering rates doesn't create more capital, it tends to reduce it. Higher rates attract more capital from domestic savers and foreign investors. This the enormous risk of running emergency low rates for too long. There will be consequences! There ain't no free lunch unless you steal it.

The purpose of low rates is to drive the suckers onto the open markets looking for yield.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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