Monday, December 13, 2010

Property plateau visualised



This blogger has been arguing the likelihood, all things being equal (that is, no external shock) that property is headed for plateau not collapse. The kicker being that the flattening out of prices could last a long, long time.

This belief is based upon the extraordinarily deep faith Australians have in property as a long term investment, as well as the extraordinary array of public policy supports there are for housing investment.

That is not to say that there will be no falls in prices. In fact, this blogger expects significant falls, mostly in areas dominated by first home buyers - outer suburbs. The green belt around the inner city is where the FHBG spiked prices first. Those that sold then moved inwards, firing up inner city prices.

But as the subsidy is withdrawn the outer areas are suddenly overpriced and begin to fall. Those that bought in the burbs with the grant are suddenly under water and can't sell. The move-up ladder stalls and inner city prices plateau.

This is what happened in Sydney in 2003 after the first FHBG. This blogger expects it nationally this time around.

The SMH has a great image today (above) of auction clearance rates that shows this process in action. Note the reasonable clearance rates in the inner suburbs and collapsed rates in the outer.

12 comments:

dingo said...

What about a Europe Shock?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8197780/The-eurozone-is-in-bad-need-of-an-undertaker.html

You never hear the bullet that's got your name on it.

David Llewellyn-Smith said...

A fair point, yes. Should have written "external shock". In fact will update now.

Booboo said...

OK That Europe report and related stories are starting to scare me.

homes4aussies said...

As always, nobody can ever pre-empt all of the factors which are at play and will be in play in the future in any market.... one that I know to be in play in Brisbane, and I suspect will be elsewhere, is that prices in regional and typical retirement areas are correcting as the second home and investor markets struggle.... this is very much a factor in Brisbane because of the struggling Gold and Sunshine Coast's markets (especially for apartments).... I think you will find a lot of retirees, leaving those inner to middle ring suburbs, taking advantage of the cheaper prices for a tree or sea change/retirement, and thus willing to be more negotiable on the sale of their home..... falling prices will then put pressure on those highly leveraged recent buyers... personally I think the correction will not discriminate....

Anonymous said...

The plateau will be only for the time it takes investors to realise those negative gearing losses won't be offset anytime soon.

David Llewellyn-Smith said...

Maybe Anon, maybe. But there's three generations of belief in houses and they may just hang on and on...

Aaron said...

I am troubled by these sorts of posts David. The simple over-dependance upon auction as a means of selling property is, in itself, an indication of the bidding war we have turned the property market in to. I remember back in the early 90's when I was starting out in the shiny shoe brigade myself (real estate), that you could expect one auction to 3 to 4 private sales, whereas now, in some areas, auctions represent well over 90% of sales.

Probably the biggest thing to mention however is that whilst you highlight the absence of external shocks, you need to consider the stratification of the debt burden across the borrowing population to understand what consitutes a mild, moderate or extreme shock, and to whom. My guess is that based on some of the figures you and your fellow bloggers have cited in relation to housing affordability and percentage of HDI, a mild shock may in fact be enough to start a more significant softening of prices should supply improve quicker than expected.
Like all systems, even small changes can result in larger consequences and we have a government asleep at the wheel.

Keith said...

I am not convinced that anything other than a hard landing is going to occur, at least in Perth.
Perth's western suburbs are off between 20 to 35% from there peak. WA property sales volumes have fallen by some 40% from the peak.
Popular Margaret River Vineyard properties have been slammed by price drops of 50% from the peak.
Fabulous Eagle Bay is down by a minimum of 40% if you find anyone to make an offer.If the trend continues this FY should see total property sales in WA at a 15 year low

Anonymous said...

David,

I think you have to factor in two things here

1. China - If China slows down dramatically then it will kill unemployement and the housing sector.

2. Debt - Australia is at all time record debt and if people keep digging deeper it will catch up.

I think there is a hard landing coming whether its now, months or years down there road is the million dollar question. Australia is going to have to face facts one day with all the debt that most people are carrying. The mining boom wont last forever.

LBS

David Llewellyn-Smith said...

Totally agree, Anon. My point is that housing can flatline for a long time and sentiment not crack in the absence of an external shock.

My most favoured scenario is just that, followed by a permanent China slowdown some time in the next five years and then property crash.

If/when we get the external shock the bubble is kaput...

Anonymous said...

This proces is always slow. Even in the hardest hit USA cities it took more than a year to drop 10% from the peak

Torchwood1979 said...

I'm with DLS; quite skeptical of the burst scenario and expecting a slow deflation in spite of the economic reasons for a correction. Why? Because property has an almost religious hold over the Australian psyche that could help it defy economic reality for a good few years yet. "They can stay irrational longer than you can stay solvent" works in reverse as well.

Of course an external shock, of which there is no shortage of candidates, could do it in no time at all.