Tuesday, February 11, 2014

The cold truth about hot property prices

Another great article on Property prices that I came across well worth a read.

The cold truth about hot property prices

Job security may be of increasing concern for many Australians, but you would never know it looking at investor activity. Has there ever been a greater divide between the outlook for prospective home buyers and investors?
First home buyers may be pessimistic but the investor-fuelled housing boom continued to roll on in December. It was business as usual, with the value of housing loans to investors rising by 2.9 per cent in December to be more than 40 per cent higher over the year.
The increase in investor activity, particularly in New South Wales, has been largely unprecedented in Australia, with lending well above its historical levels. Owner-occupier activity on the other hand has increased significantly, but is still well below prior peaks when you consider population growth.

Graph for The cold truth about hot property prices
A leading reason for this is that first home buyer activity remains at an exceptionally low level. Despite historically low mortgage rates – which have prompted investor speculation – the benefits have not accrued to prospective homeowners.
Renters are more concerned with job security than leveraging up during uncertain times. And who could blame them, particularly with full-time employment declining over the past year? I would go so far as to say that the Australian labour market hasn’t been this weak in over a decade (There’s no silver lining in Australia’s ageing labour market, January 16).
In such an environment, how long can this housing boom last? That is always difficult to pinpoint but it is disconcerting to note that owner-occupiers also appear to be becoming a little less optimistic. The number of loan approvals by existing homeowners has slowed across most states in recent months, in sharp contrast to investor activity.

Graph for The cold truth about hot property prices
What should be clear is that the current make-up of Australian lending is not conducive to sustainable house price growth. Investors are notoriously fickle and, if their optimism fades, then the market will turn – and quickly.
Compounding matters is that Australian housing hasn’t exactly been a great investment in recent years. Sydney house prices, for example, have increased by 0.8 per cent over the past decade after accounting for inflation. Real prices have declined in Perth over the past seven years.
Even Melbourne, the best-performing housing market since the onset of the global financial crisis, has offered only a modest return on investment since 2008.

Graph for The cold truth about hot property prices
How long can investors ignore the fact that Australian housing has not offered more than a short-term speculative profit in years? And when they do, what will happen? Similar profits could be obtained with term deposits. Surely there are overseas property markets that offer superior returns if property investment is your thing.
No one can pinpoint the exact moment that Australia’s $5 trillion housing market will slow. Speculators who think they can are playing a pretty risky game.
A decade ago, the Sydney market showed what could happen when a market becomes completely dominated by investors at the expense of other home buyers. When investor optimism subsided in 2004, it took a decade for Sydney's real house prices to return to their peak. That may not happen again, but it should provide a sober reminder than housing investment isn’t always a good investment.
Low interest rates will continue to support the Australian housing market but it has become increasingly obvious that the current housing boom is being driven by unsustainable speculative activity.
In the long run, house prices will be driven by labour market conditions and demographic changes – two factors that are set to work against house price growth. How long will it take investors to cotton on to the fact that Australian housing has not been a great investment in years?


  1. Great analysis and information from the ABS. One big takeout is that those who purchased a house in Perth in 2006 are still behind in real terms on the 'investment'. No wonder so much mortgage stress is around. No wonder so many fire sales are occuring. Spare a thought for the first home buyer. Imagagine that poor young couple shackled to mounting debt on falling real house prices.

  2. I am investor also, i earned almost 1mil in property market took me 3 years. I have left the market to those people think that market will not dropped to tank. I had stopped buying, this coming time, property price is going to drop sharply. My predictions are similar with you, and it is all the same. Ben Cass , Benjamin Cass Ben Cass , Benjamin Cass