Overheated, correctly valued or a bubble about to burst
Hindsight is a most valuable tool … which we don’t have, so we turn to debate and a bit of calculated guess work or structured risk analysis.
There are the doomsayers who have all their reasons why the property is so overheated & will implode creating untold havoc with our economy & property owner’s finances. They of course believe every word they espouse & why wouldn’t they, it is their firm and self justified personal belief?
These are the minority who seem to have very loud voices, provided with media space because they are controversial … this is what sells. What is fact; is that people are listening to these same doomsayers & have been & will continue to procrastinate. Now years later are justifying their procrastination & looking for any reason to substantiate what has become an inability to get into the property market where they wish to purchase. Too late, prices moved!
The question is when will they lift their heads out of the sand & take a calculated risk based on historical data and facts – apply these statistics to the fundamentals taking place in Australia today & invest in property, which might not necessarily be where they want to live, but nonetheless is an opportunity of securing a piece of land to just get into the market today at today’s value.
What is fact is that Australian property may be overvalued due to a very high demand underpinned by an undersupply (theory of supply & demand created by demand both onshore & from offshore purchasers who see immense value in Australian property).
And there is little doubt that the intersection of high house prices with high household debt does create vulnerability in the market. This may result in property prices rectifying as they last did in about 1987 : if unemployment rises dramatically, if interest rates shoot up & if there is an oversupply of property! Highly unlikely, but possible.
An astute investor would take cognisance of these fundamentals! These same investors also understand that property is a very low risk asset class & is in no ways a short term investment! They are also astutely aware that shares, gold, art and many many other asset classes can also come tumbling down. These same investors also know that they simply cannot leave their in the care of a fund manager who is charging a fee to produce dismal results. Plus the fact that property not only bounced back to pre ’87 values but doubled in value over the next 12 or 13 years! Government records will also show that over the last decade, property prices have more than trebled in value in many capital cities around Australia.
Investing is a calculated risk.
An effect of the widening gap between affordability, rising house prices and household debt is resulting in the slowing down of capital appreciation; until average household incomes catch up with property prices as it has done over the last 4 to 6 years in Sydney.
A big what if is : “Overseas investors still value Australian property as well priced, affordable & a wonderful investment opportunity!” And continue to purchase property within Australia.
The majority of property owners however are not suffering household debt this couldn’t be further away from the truth than if you pushed it … less than 1% of property owners in Australia are suffering with Mortgage Debt! Less than 1% and it has been around this level for years. This is a fundamental that is also underpinning the value of property where it is at today.
Property values have levelled off for now but there is no sign of a bursting bubble. This is a natural cycle of property. It is the media which is focused on bad news at a time when property is experiencing another part of the cycle.
Building costs continue to escalate, however the high demand & drastic under-supply ensures an increase in rental yields to cover the rise of these costs and the costs of increased funding. Yes your tenant covers most of these increases anyway. A fact not discussed by the doomsayers!
I am sure you are aware that leaving your money in the bank is also extremely dangerous, the after tax returns on your bank savings barely keeps its nose above inflation & the given fact that the purchasing power of this money will weaken over time. There is inherent risk here too.
Now : “What if the bubble of property prices does not burst?”
Those that follow the doomsayers will once again curse & say ‘I should have got into the market when I had the chance!’
This is fact with thousands of people saying this exact thing every single day (as they continue to procrastinate & prey that property will drop in value) knowing that the opportunity was yesterday & prices have only gotten stronger than the rusty handcuffs of their procrastination. Ask anyone who procrastinated, they will tell you how they have missed the boat, but prices will come down & they will buy then?????
The threat of higher interest rates may cause some home seekers to postpone their buying decisions but on the whole if interest rates increase by .5% (predicted rise of .25% early 2011 & a further .25% towards middle 2011) this only adds around $20 to your weekly payments on a mortgage of $300k.
As an investor when you compare capital appreciation against increased mortgage repayments over a year period, one would like to think that the capital appreciation would be somewhat higher … meaning if you put off your purchase because you are worried about interest rate increases & in this year the value of property increases by only 1% on top of the $300k purchase price today; you are potentially $1960 worse off than if you chose to invest today!
- Purchase price $300,000
- Interest repayment increase of half a % on the $300,000 investment = $1040 pa extra repayments
- The capital appreciation of only 1% pa would amount to $3000
Figure 1: Predicted under-supply of Property in coming years Australia Wide
In Summary a property bubble burst might occur as a result of :
- Much higher interest rates in the short term
- Over supply of property
- High levels of unemployment
If and when this might occur & you happen to be invested in shares or other commodities, your portfolio will be decimated at the levels of the recent GFC or worse?
How many property investors / owners lost value in their property portfolios in Australia during this period = Zero! Plus the fact that property continued to appreciate during this time!
- Or you can invest in shares, which is in a highly volatile market & constantly trade (if you invest at the correct time & even more importantly sell at the correct time) you could also achieve 11.5% gross over this same time frame … who do you know holds shares for 80 years?
- Property in the 120 years of records kept in Australia have always doubled every 7 to 10 years no matter what the economy or weather was doing at the time
- Another interesting statistic is that property over the last 80 years has returned 11.5% per anum no matter the market conditions
Back to hindsight … it is your money; take a calculated risk based on your own financial position, personal risk profile, investment strategy & requirements.
After writing this article The IMF (International Monetary Fund) released results from a recent study concluding “Housing market in Australia unlikely to collapse.” Quote in The Age – “The current historically high terms of trade are expected to be long lasting. Strong population growth and high real income growth in the wake of record-high commodity prices this year will continue to support house prices.” offers clarity to the discussion above.
Are you aware that : Australia built 22,000 too few dwellings in 2009/10, with a projected deficit of 16,800 dwellings in 2010/11 and 21,000 dwellings in 2011/12? PLUS the fact that there are strong fundamentals in terms of a critical lack of housing supply and a very high demand, Australia’s housing market has already been correcting in terms of price movements and most Australian homeowners can readily meet their debt servicing obligations.”
Do you still honestly think that there is a property bubble and it is about to burst? We are going to experience a once in a lifetime dream ‘propertunity’ for those willing to invest to capture the growing rental demand and higher rental yields … and of course some capital appreciation during the next 7 to 10 years as per the last 120 years of Australian property recorded history.
None of us have a glass ball to predict the future .. but the fundamentals in place will surely guide the future!