We are continually told that a shortage of houses means prices will continue to out pace the buyer’s ability to afford them, and that money grows on trees.
However two other shortages are starting to show its head in Australia’s property bubble. The shortage of greater fools – someone that will buy a property for more than what you brought it for is causing auction clearance rates to tumble and prices to drop.
According to RP Data-Rismark figures released today, house prices are on the decline, falling 0.8 percent in June, and the largest fall since April 2008. The lack of greater fools were the most in Perth, where prices fell 2.5 percent, followed by Brisbane which fell 1.3 percent.
The shortage of greater fools has been caused partly by another shortage, one of credit and evident by a plunge in mortgage approvals this year. Australia has been in a credit crunch since January, after many of the banks dropped Loan Value Ratios (LVR) to around the 80 percent mark.
The Australian residential mortgage credit crunch was caused by a boost hangover. After the Federal Government boosted the First Home Buyers Grant, the banks ran after first home buyers like a cat in a mouse plague. Caught up in the frenzy, banks, in particular Westpac and the Commonwealth didn’t cotton on to the number of 100% LVR loans they were writing and that APRA requires LMI (Lender’s Mortgage Insurance) premiums to be put aside an not adsorbed into normal operations.
It was suggested by BusinessDaily in January, that Westpac had to increase the paid up capital of its mortgage insurance subsidiaries by more than $330 million, kicking off the drop in LVRs. Since then, the debt crisis in Europe has only helped exacerbate the problems as money gets more and more expensive.
» House prices hit the wall – Yahoo News, 30th July 2010.
» Home prices drop after 17 months of gains – The Age, July 30th 2010.
Did you see in the news today – Australians took out home loans at the slowest rate on record in June.
http://www.abc.net.au/news/stories/2010/07/30/2969164.htm
It’s only going to get worse from here.
I like the title of this article!
I find it interesting the parallels between shares and property.
Some shares can go up significantly on speculation, but when the speculation is not supported by economic fundamentals then the price inevitably falls back.
This is exactly what happens in property. However property is an illiquid asset. The consequence of this is that the time scale that the bubble forms and inevitable collapses is much longer for property.
Nevertheless, the greater fool is present in shares and property.
First Home Buyers left the market last year – as they could no longer afford it
Investors are now leaving the market too – because property investment is built on capital gain and not investment yield.
Why would an investor sink money into property at less than 3% yield when bonds, term deposits, and to a degree some shares provide more then 3% return?? The answer is the speculation factor of capital gains.
Unfortunately when it comes to the property market, everyone looks at the return side of the equation, and not the risk side..
I wonder what the property spruikers will have to say about this..
But property is still selling. Albeit to Property Hoarders. Homes around Brisbane North are still selling to Property Investors. For Sale -> SOLD! -> For Lease all within a few weeks.
The property spruikers will no doubt come up with the good old faithful “Supply of land and property is still low, so we expect property prices to flatten out” – What a load !
A week ago journalists were saying property was going to increase 40% over 5 years!! It just shows you that everyone thinks they are a property expert. Another load !!
Yeah, the property “experts” keep saying that this is a “consolidation” period after last years massive capital returns.
Like what J Hill said, why would anyone risk their hard earned money into a investment when:
* Rental return growth is less than CPI
* Capital growth prospects will either stagnate or turn into capital losses
When there are much less risky investments such as bonds ot termed deposits which generate a higher investment return
Property will continue to sell its just that the prices will continue a slow fall for the next year.
Ok I can buy these arguments.
If prices start going up again soon however, I think we can safely say that you are wrong.
Cause if they dont go down now, they never will.
If someone on $75,000 cannot afford a one-bedroom unit in the city, or afford to build a modest house in a new housing estate – then as far as I’m concerned, prices only have one direction to move!
I watched on ABC news last night that over the last 12 years, the average super fund has only returned on average 3% pa.
Over that time the average inflation rate has been 2.8%.
Also, another point to make is that the average termed deposit was 4.5%.
No my point is, what has the super funds invested in if we are getting such lousy returns on super.
If they invested in Australian property in that time it would have been a two or three bagger.
In reference to super – one word can describe it all – fees !