In an address to the CPA Australia conference, Luci Ellis, Head of Financial Stability for the Reserve Bank of Australia has warned poor investment yields are a sign there is an asset bubble. “If rental yields are very low, investors are buying properties without really thinking about the rental yield.”
“Buying an asset just because you are expecting the price to rise in the future, well that is actually the academic definition of a bubble” adding this would be “undesirable and be seen as a problem.”
While the comments came as an impending warning of a bubble, in reality this has been going on for years. AAP Economist Garry Shilson-Josling has written “REIA data for capital cities, averaged using weights used by the Australian Bureau of Statistics (ABS) to calculate its house price index, show pre-tax rental yields have been hovering at just under three per cent for the past five years.”
What has keep investors in the game over the past five years has been ever increasing capital gains which is off course the “academic definition of a bubble” according to the RBA’s Luci Ellis.
The central bank has a mandate towards economic stability, so they are unable to confirm there is a bubble which could bring down the house of cards, and cause instability. In fact, they have to do the opposite and say everything is just fine. This was the same for U.S. Federal Reserve Chairman Ben Bernanke, who in October 2005 just months before the collapse of the US housing market told Congress that there was no housing bubble in the USA, and that house prices “largely reflected strong economic fundamentals.”
If property investors are gambling on capital gains, then the next year or two could be a real challenge. According to RP Data-Rismark, in the three months to July house prices fell 0.2 percent in Australia with Rismark International managing director Christopher Joye saying there are risks of further declines in the year ahead. With soft or falling house prices, and poor yields, one had to wonder if property investors will start to jump from their sinking ships en mass.
» Reserve Bank says property investors could create housing bubble – News Limited, 6th October 2010.
» House prices ease as property market slows – The Australian, 30th September 2010.
uBank offer 6.51% at call. No risk of asset values falling, no maintenance costs, bad tenants, just a healthy yield.
I love it, apartment/investment property glut…students going back to India/China. The Aust goverment paranoid, yes paranoid, of unemployment. ABS cooked some juicy figures on the 7th Oct, but if you check the fine print aggregated hrs are dropping fast, meaning? We are all working part time/casual with wages stagnating.
Major sell off of units end yr, beginning of the crash as people try and cash in on current prop values. As real interest rates are eating repayments via their wages.
In other words the wealth effect is wearing off very fast…
But Tom, people borrow money to invest in housing, they dont borrow money to invest in a bank, generally.
The media have gone into overdrive trying to talk up the Market and all the old hot property shows are back on TV Guess why??? because they all have a vested interest in keeping the market from falling but this time the RBA will not cut interest rates like it did back when the GFC hit. This means one thing ‘POP’ All property investers can kiss any future cap gains bye bye!
With 60% of China’s GDP based on construction and a property bubble also set to burst, it looks like Australasia / World Economy is going to take a very nasty turn for the worst.
Unfortunately we will all suffer.
I think we will find that statictics have been fudged for a very long time.
Yeah 2bob I’ve noticed that the media has gone into spruike-a-mania in the last few weeks.
The Weekend Newspaper and Local Rag are just jam packed full of Property related advertising. Everytime I check my yahoo email I get spammed with ads from the crazy b!tch who wants to flog some Ponzi Spruiker handbook about how she made $3.5 million in 18months.
Chargin, u say borrow to invest? Should that be borrow to gamble or speculate:) Don’t worry, I know what you mean. Outside of borrowing large sums of money upfront and watching it double every 7 to 10 years, I guess you can’t negative gear your bank deposits, either.
Tom, when you deduct real inflation from the 6.51% as well as capital gains tax, it is not a great proposition – though better than property. I’d rather have that free cash go into physical gold.
Chris