Doug PollardNot so safe as (Australian) houses
October 12th 2008 22:47
Pic by Rough Rider Blog
Well, it’s finally here. The recession we really have to have. And it won’t be over for a while. There’s a lot of talk about how Australia will ‘probably’ have a ‘relatively soft’ landing – but there’s an elephant in the room.
Property.
By and large Australians don’t invest in stocks and shares unless they’re forced to, for example, via superannuation. They prefer to invest in bricks and mortar.
And for a long time we’ve done very well at it. From 1986 – 2007 property rpices rose an average of 400%, while incomes only rose 120%
And the boom has only recently come to a halt – prices in the suburb where I own an investment property rose 23% in the 12 months to September this year.
The trouble is, those sort of prices are unsustainable. We've speculated property prices up so far, no-one can actually afford to use the stuff any more.
As a general rule most experts agree that for housing to be affordable and prices to be sustainable in the long term, prices need to be sitting at about 3-3.5 times median income.
Right now it’s averaging around 7-7.5 times annual income across Australia. We’re in an asset price bubble, and it’s about to burst.
Tasmania has the most affordable housing, at around 5-6 times annual income. The major capitals are sitting on around 8-9 times, with parts of Sydney up at 11 times.
A massive correction is overdue.
In 2007 the IMF predicted prices would fall around 20%. AMP is a little doomier, predicting a 25% fall, with no recovery until after 2011.
Speaking on ABC’s Counterpoint programme on 22 September, Steve Keen, an economist at the University of Western Sydney and Hugh Pavletich, a former property developer in Christchurch, New Zealand and co-author of the Demographia International Housing Affordability Survey agreed they expected an AVERAGE fall of 40% over the same period.
None of the experts could foresee when prices might return to current levels, but none expected it within the next 10-15 years.
The message to property owners is: if you own property outright, with no mortgage, sit tight. It’s only a paper loss.
If you have a mortgage:
Step one, cut up all your credit cards and pay them off. Buy nothing you can’t afford to pay for with cash.
Step two, pay off any other debt you have as fast as you can.
Step three, put all your available money into paying off your mortgage as fast as you can.
If you must sell your property, because you can no longer afford it, you’re about to retire, or whatever reason, be prepared to accept much less than you were expecting. There will be a lot of people like you, such a baby boomers retiring, leading to a glut on the market.
If you can hang on, remember that things will probably only BEGIN to turn around in 2012, and the current peak may not be reached again until well after 2022. Adjust your plan accordingly.
Naturally some areas will hold their value better than others, while some will suffer a dramatic slide. McMansions in outer suburbs with poor public transport, and rundown properties in poorer inner city areas, to take a couple of examples, will probably do worst.
Solid well-maintained properties in near-city suburbs with good infrastructure will probably not fall more than about 20%.
But the Australian love affair with property investment is about to come to a nasty end.
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Comment by Johnny Come Lately
Jack's Back
Comment by Addam Stobbs
The tax is a nightmare