Welcome to Finance and Fury, the Furious Friday edition. Today we have a pretty good episode! (I find this interesting at least, so I hope you do too) – We’re talking about the Australia Property market, specifically the property bubble.

  1. How monetary policy has affected house prices over the last decades
    • Most people my age born in the 80s to 90s, even 2000s have only seen property go up
    • This makes it seem like a safe bet – so I want to look at this and the reasons for the meteoric rise, then look deep into whether or not we’re in a bubble.
  2. Just quickly before I get started, speaking about property (or lack thereof) I’m participating in the upcoming Vinnies CEO Sleepout to raise funds for the homelessness problem in Australia.
    • If you have been enjoying the content and finding it valuable, I’d really appreciate if you could help me out by giving back. We’re raising funds for rehabilitation and counselling to help homeless people, crisis centres for victims of domestic violence.
    • Go to Finance and Fury and click on the banner on the home page to help

A Recap

Over the last couple of episodes we have covered a lot about property and monetary policy – because a lot has been happening!

  1. Just in the past 12 months
    • ASIC end of 2018 updated consumer credit rules and set the requirement for banks to look at people’s actual expenses when assessing lending
    • APRA with removal of 7% benchmark for assessing serviceability on home loans – lowering to 6% or so, and potentially lower as rates drop
    • RBA – we saw RBA drop rates to historical lows this week – 1.25%
    • Foreign buyers’ restrictions as well
  2. All had either positive or negative effects on demand, but nothing about supply. And this is the major issue in our property bubble problems.

Market forces

  • Prices are set from two points of supply and demand
    • Supply is available purchases – people selling their house, or new houses on the market.
    • Demand is much more complicated as it comes back to a number of factors
      • Incomes/demographics – working age population, immigration, concentration around employment/ where people want to live.
      • Availability and cost of credit – if you can borrow a lot, and at low cost it increases demand
    • We have had a lot of demand but little supply increase to meet the growing demand

Where we have come from: Property market history

If you’ve been listening for a while you will have heard me touch on a few of these points

  1. Reasons for property prices increases – Demand side – rates and availability of credit
    • Below 6% until 1971 – the Brenton woods system was abandoned and our interest rate rose to 13.75% in 1983
    • AUD floated in 1983 and rates kept rising. Up to 17% by 1991. Then, there was a drop to 9%, before going up a bit to 10% in 1993
    • By 1997 rates had dropped to hit 6.7%, which is more than a 10% drop in less than 6 years
  2. We can see how the market responded to this (price reaction) by looking at the property price history from 1997 on wards (sky high!)
    • To break it down, in 1973, median house prices across Australia’s capital cities looked something like this: Nominal House Prices
    • But, back in 1973, the average weekly wage was $111.80 (accounting for both full and part-time workers)
    • Today, a full-time worker makes on average $1,453.90 weekly (before tax)
    • Our wage growth and median income growth has helped to fuel the demand for property
    • Side note on income growth; Taken as an average, not individual. If we measure the individual it’s much more than 2% p.a. (changing jobs, or don’t ever receive a promotion etc)
  3. Inflation matters! So, we need to compare real values, in today’s dollars and normalise for inflation.
  4. In 1971 the median house price was $190k in today’s dollars, by 1991 the median price was $260k – that’s real growth of 1.6% p.a. approx. over 20 years.
  5. In 1997 the median price was about $300k, by 2017 the median price was $700k – in real terms 4.3%p.a.

Every step of the way there has been an interest rate reduction in the price boom

  1. Level of affordability can vary cyclically. House-price to income data suggest a structural affordability problem in Australia over the past 20 years.
  2. Average wages going up since 1997 House prices have grown much faster than incomes
  3. There’s also been growing concern about the low levels of first-home buyers entering the market in recent years.
  4. Also, the demand for bigger buildings also went up which creates a problem – cheap money incentivises people to spend more than they would otherwise – for renovations etc
  5. But most of the price of residential property in Australia reflects the value of land, rather than the cost of construction or the value of buildings.
    • 3% p.a. increased from improvements since 1990
    • 6% p.a. increase from land value since 1990
  6. This is another problem – Australia has an abundance of land, there is a limited supply of well-located land, particularly close to the centre of our major cities
    • Lots of apartments went up into the city to stimulate supply of housing without releasing land – but Australians overwhelmingly want to eventually live in a house with a backyard (80% estimated demand over the long term)
    • With limited demand for apartments beyond foreign investors, large property price drops have been seen from the reduction of prices in units/apartments, due to oversupply without foreign investors

We’re seeing a correction. The current drop in prices to date has been big compared to historical drops.House prices declines are more common in real terms

It’s now one of the largest on record in Australia, only surpassed by a handful of periods in the late 1800s and the first half of the 20th century

  1. Estimates regarding net housing wealth (the value of homes minus mortgage debt) has fallen 12% in real terms from the record peak seen at the end of 2017 – mostly in Sydney
  2. NAB have predicted that this decline in housing wealth is the second-largest on record in the past half century, only surpassed by the 13% drop seen in the early 1990s, when Australia last fell into recession.
  3. GDP growth is slowing, so is inflation, with both less than 2%. This deceleration reflects weaker household spending, which is the largest part of the economy at around 55%.
    • Spending slowdown will keep Australian economic growth slow in the years ahead – but this doesn’t necessarily mean recession
  4. Spending is related to wealth psychology – The Wealth Effect – you feel rich, so you are more likely to spend more. A decline in house prices with no offset from household income increases will result in reduced spending
    • Capital Economics said the downturn could see total housing wealth decline by $800 billion over the next few years
    • This decline in housing wealth would likely drag on household spending, counteracting a continued improvement in Australian labour market conditions.
    • The likelihood of continued sluggish economic growth, will eventually see unemployment start to drift higher as hiring levels slow, making it harder for the RBA to lift underlying inflation back to within its 2-3% target
    • So, they will be forced to drop rates even further and hoping that it isn’t just digging the hole deeper with the money markets. There’s a predicted 1 to 2 more rate-cuts likely in the future.

How do we get ourselves out of this hole?

  1. Housing-market activity will continue to decline as affordable housing falls, joblessness increases and consumer confidence wavers.
  2. How to solve the problem? – requires good governance
    • Require local councils to rezone – Federal Government to implement policy aimed at spreading out population
    • Tax zones – People move where work is – companies get lower taxes to move and they will move – then employees go there, especially if they have lower taxes
    • But it isn’t likely – the Government knows that if our property prices drop, we are screwed
  3. Australian wealth and economic success rests on the back of the property market now – sadly due to Gov fiscal policy, and also Monetary policy
  4. What you can do – remember, set appropriate price limits, don’t get into too much debt, have enough equity in the property to survive declines in property value.
  5. We’ll talk about investing overseas in the next episode – looking at share market and how it responds to these sort of events
  6. Diversification is important

 rateestablished house price indexdwelling prices increased primarily due to higher land values

https://www.loansense.com.au/historical-rates.html

 

 

Congratulations! You will be able to borrow more money to purchase a property!

Welcome to Finance and Fury Looks like borrowing for property purchase is going to be easier. APRA is looking to make some changes to lending criteria enforced onto the banks. Today: Run through what these changes are Why they are occurring What the lending...

Who should I vote for?

Welcome to Finance and Fury, the Say What Wednesday edition Had a few questions recently which is topical. Mostly from friends and family. They know I take interest in politics and policy, and asked me “Who should I vote for?” Can’t tell you that, nor I did them...

Say What Wednesdays: Covering your asssssets in a relationship

Welcome to Finance & Fury’s, ‘Say What Wednesday’, where each week we answer questions from you all. This week our question comes from Tara;   “Hi Louis, what do you think are some financial considerations when it comes to a relationship? - Should you have a...

Say What Wednesday: Baby on Board! The Ultimate Guide to Maternity Leave

Welcome to Say What Wednesdays, where every week we answer questions from you guys, the listeners. This week the question comes from Mary; “Hey guys, love the show. Just wondering about what entitlements, I can receive if I go on maternity leave? I’m currently...

Say What Wednesdays: Want to know how to make the most of your money? Find and forge your own path

Say What Wednesdays Want to know how to make the most of your money? Find and forge your own path Today’s episode is just a quick one. I’ll be going over a couple of questions I have had over the past few weeks about the personal finance course we’re launching. Plus,...

The skinny on spare change investment apps and building wealth when you’re earning $25,000 or less a year.

Say What Wednesday The skinny on spare change investment apps and building wealth when you’re earning $25,000 or less a year. Welcome to Say What Wednesdays – Where we answer your personal finance questions each week. Two questions this week from Chris: No 1 what are...

Goals and Risk profiles, and Philosophy and Strategy workbook guides

Welcome to Finance and Fury Today we will be going through the workbook itself How to put the goals and risk profiles together How to work out the investment philosophy and strategy How to put together the investment plan and checklist Three downloads - Found on the...

Furious Friday: What is the future of the Australian Economy?

Hi Guys, and Welcome to Finance and Fury, the Furious Friday edition. Today we are discussing the future of our economy. What is the future of the Australian Economy? Welcome Today’s episode is on the future of the Australian economy. In today’s episode we will cover...

The number of homes being put up for auction across Australia has plummeted as falling property prices and fewer cashed-up buyers shake the confidence of owners looking for the right time to sell

Episode 25 The number of homes being put up for auction across Australia has plummeted as falling property prices and fewer cashed-up buyers shake the confidence of owners looking for the right time to sell The decline of auction rates and confidence in the market...

Furious Fridays: The Death of Stalin

Furious Fridays The Death of Stalin Last episode we ended with Lenin’s death. The roll out of Communism was well underway and it was time for new leadership. One his last policies before he died in 1924 was the New Economic Policy (NEP) in 1922… A mixed economy put in...

Pin It on Pinterest

Share This