The reason that bubble has not yet popped is because over the last 10 years Oz has generally seen below average GDP growth and year on year deflation, not unlike the rest of the world.
To fight those conditions the central bank (the R.B.A.) has been forced to cut interest rates (again not unlike the rest of the world).
Those record low interest rates makes money cheap and property attractive.
But going forward, should Oz see any level of real GDP growth, interest rates will have to rise and when that happens that will be the pin that pops the housing bubble.
To fight low inflation and low GDP central banks around the world have all been singing from the same song sheet by adopting the policy of Quantitative Easing (QE).
QE is basically a policy of printing money and it was designed to grow inflation, but all it has done is created a massive oversupply of cash around the world.
It is this massive sea of cash that is driving up asset prices around the world.
If these central banks continue to use QE then these cash levels will keep going up.
Now naturally you just can't keep printing money, but the question is when will the party be over and inflation start to bite?
The bigger problem is these low GDP numbers have a direct impact on society as it drives up unemployment and drives down wages, creating unrest.
You can see this unrest growing with events like Brexit, the rise ot Trump and the rise of extreme right in Europe, Australia and other countries around the world.
Without that GDP growth, political parties around the world will continue to feel the wrath of their voting public and politics and political parties will move further and further to the extremes.
Inflation is not a problem for Australia. Our problem is debt deflation. We owe so much to the rest of the world for our shitty $1 million fibro and brick veneer shacks that as terms of trade decline, servicing that debt (private debt, not public debt) will suck up all the income we have.
[1] http://www.abs.gov.au/ausstats/[email protected]/0/3FA94A5DA5F20EDDCA...
[2] http://www.abs.gov.au/AUSSTATS/[email protected]/Latestproducts/5204....
Bank loans are roughly 1/3 real estate mortgages, 1/3 commercial, and 1/3 consumer. QE affects all of these. So why is QE not resulting in growth elsewhere in the economy, being narrowly focused on real estate mortgages?
Supplying cheap money is only one half of the equation to get investors to sponsor businesses: the other half that is needed is businesses with profitable business plans. And there the Western world has a problem: globalisation is moving mainstream business away to cheaper area's in the world. That is not a new thing, and traditionally Western economies have compensated that with new innovative businesses. And although there certainly is some innovation, it is not enough to keep up and keep the GDP growing. The aging populations in most Western countries contribute to that effect because younger generations are much more likely to take risks and start new businesses than the older.
The central bankers created QE as a way to add liquidity into the markets to allow banks to lend, to allow small businesses to grow, to help economies to generate growth.
Unfortunately that money was lent to the big bankers and they realized they could take that money and make much easier profits.
The carry trade has been going on for decades and no one has taken any steps to stop it.
It is very easy to for institutes with big wallets, to borrow large amounts of money from central banks only to take advantage of countries with an interest rate differentials.
Then take a look at how JPMorgan Chase, after loosing billions on hedge positions, they took a US government bale out with the promise not to go back to their bad old ways of gambling with hedge positions.
They took the government money and sure enough put it all back on the table betting red, only find it came up black:
http://www.abc.net.au/news/2013-09-20/jp-morgan-fined-920-mi...
A broken promise to the US people with lots of money lost and as always no consequences for those who took the money on false pretenses.
In reality I can see the sense of the bet. Take someone else's money and if you lose, the billions lost will be covered by someone else.
https://www.ft.com/content/9b727552-b48e-11e5-8358-9a82b43f6...
Car sales growing constantly, 80% of all purchases via borrowing. Prices are up too, but not radically so.
The assumption that money printing/QE leads to increased prices is based on the assumption of relatively limited supply for all things: certainly true in the past when mass manufacturing was relatively new and constrained, but given the huge drop in capacity utilisation after the Great Recession it seems you can grow consumption in some markets quite radically without driving up prices.
So if you print tons of money and it ends up in circulation via loans for cars, it may simply result in lots more cars being made and sold but not really big price increases. It may still reflect misallocation of resources, however.
House prices are a huge problem because supply is heavily constrained by building codes, the desire to live in cities, etc and people got it in their heads that a house is an investment whose price always goes up, so they're willing to pay an almost unlimited amount for one if they can get the credit. This isn't true for most other markets.
If unemployment rises, people start to not be able to pay their debts. The default rate rises, banks sell up properties, and the prices tumble.
Recently we were reassured by the Government that the private debt level wasn't a problem because the assets (mostly housing) is very valuable and rising, but I saw a quote from the US in 2005 or 2006 saying exactly the same thing...
In addition it's undeniable that the RBA has been cutting the cash rate and that just like the OP said a rise in the cash rate might pop the bubble. [1]
I don't know the sources of your opinions/information but you should consider whether they are slightly biased for some reason.
[0] - http://www.tradingeconomics.com/australia/gdp-growth-annual [1] - http://www.rba.gov.au/statistics/cash-rate/
The nice thing about housing is that one can easily build a lot more of it, and it makes a great de facto investment: http://www.slate.com/blogs/moneybox/2013/05/19/exporting_hou.... The only thing stopping most municipalities from pursuing this reasonable outcome is politics and resistance from NIMBY incumbent landowners.
you can look at seattle or vancouver for examples of property markets with massive expansion of available units with price appreciation comparable to san francisco
Not everywhere should be tear down and build up in all conditions.
How about the French quarter of New Orleans or historic districts of other cities?
This argument always shows up here and is idealistic bs.
Actually, an even stronger argument is that, well, cities need more than housing. You need city planning and zoning because huge buildings need commensurate transportation, sanitation and water/power supply infrastructure. But neither this, nor preserving hundred years old historically important districts, are what people complain when they complain about zoning. You can plan for more public infrastructure at the same time you allow lots of new construction. Hell, you can tax the developers of the new buildings to front most of the public infrastructure upgrade costs, then distribute the maintenance over the now expanded population. People complain when a city fails to do this for years even in the face of strong demand pressure, because the lower the supply the more the real state investments of existing owners appreciate in the short term.
There are a couple of ways this can fail as a result of various loopholes, but it is, in general, a good approach.
Further, you can offer developers tax credits for densifying infill development since more of the infrastructure is already in place.
Yeah, what a wonderful “local experience”.
The opposite effect happens in small/shrinking towns. Kids who grow up there and move out for a career can afford to buy a house where they grew up but don't want to. Should these people be forced to move back to their small town so they don't displace the "rightful" residents of the booming city?
Further, a group called LF economics did a study on this - some graphs on page 22 here - http://www.aph.gov.au/DocumentStore.ashx?id=cafe7b04-e06c-4e... (PDF warning - it's a submission to the recent enquiry on house prices). Turns out that they found most Australian markets are in oversupply at the moment. They also found no correlation between supply and prices over the last 30 years, and have some points in there for why that would be the case.
In the end, it's more the availability of credit that determines the prices, not supply and demand.
Edit, better link: https://en.wikipedia.org/wiki/Negative_gearing#Australia
>Interest on an investment loan for an income producing purpose is fully deductible if the income falls short of the interest payable. The shortfall can be deducted for tax purposes from income from other sources, such as the wage or salary income of the investor.
And yes, it applies to shares too, but it's not possible to get this amount of debt leverage for buying shares.
There is also 100% CGT exemption if the property is owner-occupied. The worst part is that it extends up to 6 years after you move out (e.g. to rent somewhere cheaper). So you can buy a property, live in it for a year (at which point it's deemed primary residence), then rent it out for up to 6 years, move back in for a year, rinse, repeat, and avoid paying any CGT when you sell. Obligatory: none of this is tax advice.
How nice it would be if they did some data matching to determine who was actually living in a property as their primary residence, vs. changed their mailing address to that of their residential property to pretend it was their primary dwelling, and issued invoices for unpaid CGT.
Given foregone tax from the CGT discount and negative gearing represent significantly larger sums than that spent on Newstart, chasing property investors would seem to be lower hanging fruit...
However the bigger problem remains that capital is taxed at half the rate of labour and this matched with tax free pensions has meant people with built up capital have gotten extraordinarily rich in the past decade and a half at the expense generally of the younger generation.
I have friends who tell me they "need" (well, want to) live in their investment property for 6 months every few years, in order to get a refresh on their tax breaks?
But it's easy to buy a call options on shares, which is equivalent.
Why not?
> Shares are a lot more volatile, and
This is irrelevant.
> your guess needs to be accurate within a very short term or you lose 100% of your investment.
It's also easy to lose 100% of your investment when you buy property with leverage. At least with a call option you can't lose more than your initial investment. You can with property, unless you live in a jurisdiction which cancels the outstanding loan on a property after it's repossessed by the lender.
Perhaps your point is that, with a property purchase, you can ignore short term price movements. As long as you have enough money to pay the mortgage each month, you get 100% exposure to the price increase over 25 years, even though you put only 10% down and borrowed the rest.
The volatility doesn't matter. If I buy a 1-year call option on a particular share, it doesn't matter if the price goes up and down every day during that year. What matters is the price at the time the option expires.
What _does_ matter, and this may have been what you were thinking, is that it's hard to buy a long term call option on an individual share. The longest you can buy easily is probably 2 years, which is much less than the length of a mortgage.
For instance, the chairman of FIRB thought it was perfectly fine for him to take a job with the Carlyle group, a massive international foreign equity fund, while staying on a chairman of FIRB [0]. Even worse, ScoMo was totally cool with this. He's since caved to the public pressure and resigned from Carlyle.
There's also the fact that, last year, the ATO were given a bucket of money to comb through their data and find home-owners likely in breach of FIRB rules (they have all the required bits and pieces, including data-matching programmes with state revenue/land-title offices & immigration). As far as I know, the ATO did this and handed the data to FIRB. No further action after that...
Our politics has pretty much become a game of hot-potato: whoever gets in to power tries their hardest to ensure the housing bubble doesn't pop on their watch. When it does pop, it's going to be one for the history books, given how long they have kicked the can down the road. It's also pretty worrying to see state-level Chinese 'soft-power' being deployed in Australia, via our traitorous ex-politicians:
- Andrew Robb, former Minister for Trade: 'consultant' for Landbridge Group (the Chinese company that was, for some insane reason, allowed to purchase a 99 year lease of the port of Darwin)[1].
- Bob Carr, former Foreign Minister: employed by the 'Australia China Relations Institute' at UTS, an 'independent' think tank on Aus-China relations (funded by the YuHu Group, the Chinese company that bribed Senator Sam Dastyari)[2]
- Alexander Downer, former Foreign Minister and Former Opposition Leader: was appointed (but has since resigned) to the board of Huawei, the Chinese company banned as a supplier for the 'National Broadband Network' amid national security concerns [3]. Is now Australia's High Commissioner (ambassador) to the UK.
- Bunch of others we are not currently aware of...
I am by no means 'anti-China'. But Australia is at a point where it needs to have a serious conversation about how it reconciles its relationship with the US and its increasing economic dependence on China. There's also the small matter of national defence, an area thrown into disarray by the election of President Trump. But it's going to be hard to have a rational conversation, one that produces the best outcome for Australia, if half of the participants are traitorous, paid-up shills.
[0] http://www.macrobusiness.com.au/2016/09/firb-chairman-brain-...
[1] http://www.abc.net.au/news/2016-10-30/andrew-robb-joins-chin...
[2] http://webcache.googleusercontent.com/search?q=cache:c3JxEyT...
[3] http://www.abc.net.au/news/2013-10-30/danby-will-the-china-c...
I remember thinking they might have just been good at hiding the fact they were foreign by having their student kids or extended family who have moved here permanently buy the properties, or shell companies. Which wouldn't attract as much scrutiny. This is just speculation but it's good to be highly sceptical when people put all the blame on foreigners.
Prices are set on the margin, reflected by the goods that are actively on the market, and at any given time only a small percentage of housing units are on the market. If 5-10% of total housing units are owned by Chinese nationals, and that percentage has grown rapidly in the last few years, it could easily translate to > 50% of real estate transactions.
Except young Australians, who have to rent and cannot rely
on real estate property for their retirement.
But in the case of a house, you'll have to repair it as times goes by and that can be quite expensive. But the one who rents it to you would have to do it as well, so, buying a house just makes sure you don't pay the little profit margin of the landlord (just the one of the bank :))
Buying is not universally better than renting, period. There is no such thing as a free lunch; any profit received by owning the capital asset is compensation for the risk of holding that asset.
Also, there is a collective paranoia about missing out, of tumbling off the 'property ladder' and neither you or your children ever escaping wage slave poverty.
Oh not this crap again
As I said before, as long as you don't buy high and sell low, your money has effectively been flushed down the drain in the form of rent.
And if that property falls to $900,000? Now you owe $1 million on a home worth less; literally throwing away $100,000.
If the value of your asset falls, you've lost net worth.
It's preposterous to claim that, even though the price of your home has fallen by half, and you are servicing the mortgage on the old value, that you haven't lost anything. Or that the fact that you can offset capital gains with capital losses somehow makes a plunge in value "worth it".
"Paper losses" are losses. The value of the asset isn't based on the price you paid.
until the bubble pops up, like it did in 2008, but it comes back up so it's a rather temporary set back. Also, rents rarely come down, so most often the property value decline is temporary, or it is another opportunity to buy when things are in water - when there is blood in the streets, there is money to be made.
It would take you a decade for the equity you earn to match the interests you pay. (http://www.mortgagecalculator.org/ to fool around).
Theres property that rented out produces 2% income. If you can make more than 2% a year, then renters will be richer and compundingly so if they rent over buy.
Exactly right. Most people here have probably seen nothing but rising house prices their adult life. Even with a massive bust, people still believe it. In reality, real returns to real estate are barely above inflation.
It also means you essentially can't rent anything bigger than a 2 bedroom apartment; bigger units make so much more financial sense to own (easily $1k/month cheaper even before you include the investment aspect) that there is no market for renting them.
It's hard to believe that amateurs on this board actually believe house-flipping is a sure thing.
With Australian interest rates at record lows, property investors keep borrowing unperturbed.
It's not an economic miracle, it's a huge amount of asset speculation built on one of the largest levels of household debt in the world, just like in the US and many other countries before the GFC. All it will take is a rise in unemployment, or a shock from China, and it will go (of course interest rates won't rise, the RBA would have to be insane).
If you are at 30%, you are also meeting one of the most common recommendations in personal finance (regardless of whether that recommendation is _good_ or not).
It seems obvious to me that recommendations of either moving or finding additional housemates both can have significant short and long term negative impacts on financial stability, emotional, and physical health (I didn't bother looking for a source for this because this is hacker news not a dissertation).
1. https://www.earnest.com/blog/rent-and-the-30-percent-rule/ which cites http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jch...
I would think the feeling that you're never getting ahead will have a more negative mental health cost than a housemate ever will.
Particularly for younger people, it makes a lot of sense to suffer the higher proportion on rent. Quality of life is much higher living centrally, and income will probably grow, while rents are usually a bit sticky.
Understandable on wanting to stay east. Once I moved east I didn't want to go back but there are definitely options available if you do.
Though I did end up moving to Yamba this year for more space for my money.
I love Yamba! It has always been my dream to get a remote job and move somewhere on the north coast. How much do you pay in Yamba/which part?
I pay $550/week for a 4 bedroom house with a separate full apartment(bed/living room/kitchen/bath) downstairs that I use as an office(for comparison I paid the same for a 1 bedroom apartment on Melrose Pde in Clovelly that was smaller than my office now). We're pretty much dead middle between Pippis/Main so a few minutes walk to 3 beaches and 15 or so to the river.
We had a floor of $400 when looking so not sure what the lower end is like here to be honest but given the work situation I'd assume there is a fair bit available around your price range.
Remote work is definitely required up here. When we were looking at houses the most common phrase we heard was "There are no jobs in Yamba".
That's a good price for proximity to the main beach, and especially with the separate apartment. Have you considered subletting it out (maybe even just the holiday season?), could probably get a good price for that location. Do you find Yamba a bit dead? I grew up in Grafton, and know how slow-paced rural Australia can be.
It is, it was a toss up between this place and one over by Coles which was far from the beaches but had a private dock and a pool. There was certainly a lot around though as I was told many many times "no jobs". :)
For subletting not really though I think we're the first people to rent the whole building. I like having the separate office space too much to give it up and we'd need to furnish it down here with more than desks/bookshelves/filing cabinets and whiteboards.
Yeah it's pretty dead here but that aligns pretty well with our interests. I like running/gym/working and my wife loves the gym/beach. Then we both like hiking which there is ton to do within sort of a 1-1.5h radius.
The slow paced part is definitely a problem but we lived in Chang mai for most of 2015 so we have had experience with it to an even worse degree fairly recently.
When I lived in Ultimo my rent at both places was less than half what it was for my places in Bondi or Clovelly.
You begin to see the nature of the problem.
It's also not morally wrong to pay more for accommodation that suits your lifestyle better.
However what I fear is that if the super isn't managed well, inflation hits, or you just don't build up a large enough investment the high rental prices in Australia will eat up the majority of your investment returns.
If you get into the property market, you can count on capital gains tax benefits and negative gearing against any other income you have. Additionally, other benefits that are means-tested often exclude property (at least primary residences).
Meanwhile, I have invested at least 50 hours touring houses, applying for loans and trading texts with braindead realtors in December of 2016 alone while trying to buy my family's first home.
From where I stand, real estate is a terrible waste of time, energy and effort. If you want exposure to the asset class (why?!) buy into an MBS mutual fund; if you feel the itch to be a landlord (again, why?!) toss money into a REIT[1]. Do anything, basically, to avoid a large, career limiting[2] asset of uncertain value on your personal balance sheet.
[1] Assumes you live in high COLA area where renting is more sensible than buying. Do your math, I am not an investment advisor, and your situation may be different from mine.
[2] To avoid charges of hypocrisy: I no longer have a career, so I am happy to settle down, buy and customize the hell out of a house.
Although I'm tempted to blame narcistic millennials eating their smashed avocado I tend to think every young generation is this selfish.
Australian youth is amoung the richest in the world, it's junk they can't buy houses.
They just can't buy down town in big cities in the super rich sections at age 20.
How people can think selling overpriced things to other countries is bad for the economy is incredibly strange.
The government looks the other way since building is one of the last big job creators now that the mining boom is over. For example, there is a government body for foreign investment breaches (rules like you're not allowed to buy 'used' property if you don't have permanent residency, but I've personally talked to quite a few Chinese students whose parents did that for them) but it has never once initiated court action [2].
So everybody profits in the short term - Chinese corruption can move 'dead' money out of the country, Australian government gets to present itself as a job creator. Except young Australians, who have to rent and cannot rely on real estate property for their retirement.
In the long term, the bubble is going to pop and then you have dead cities with empty high rises falling apart (but then again, people have been saying for at least 10 years that the bubble is going to pop any day now and it's still inflating)
[1] Contains no numbers: http://www.smh.com.au/comment/grey-money-from-china-helps-bl...
[2] http://www.abc.net.au/news/2014-11-27/foreign-buyer-rule-enf...