The month of May started with a 25 basis point cut in the official cash rate to 2.75 per cent, the lowest setting in 53 years. Real Estate experts were adamant this would put a pulse back in a directionless market. But rather, we have seen a sharp plunge in monthly home values.
While weekly data is extremely volatile, according to RP Data, house prices rose 0.38% in the week of the RBA’s rate cut, but took a 0.45% dive one week later. Price declines accelerated to 0.75% in the third week of the month, notching up one of the biggest weekly declines in over a year before slowing down to a 0.49% correction last week. It would appear we have had significant price declines each week since interest rates fell to 53 year lows.
Research shows there is a strong correlation between house prices and consumer confidence. What is actually happening is consumer confidence is taking a hit and dragging home prices down with it.
Darwin recorded the largest fall in home prices, down 3.5 per cent for the month. Adelaide followed with a 2.3 per cent decline, Melbourne – home to Ford recorded a 2.1 per cent decline, Canberra 1.3 per cent and Sydney, a 1.0 per cent decline. Only two capital cities had rising prices, Hobart notched up a 2.2 per cent rise and Perth 1.0 per cent.
» Home prices drop steeply in May – The ABC, 3rd June 2013.
A price-drop of 1% – 3.5% is not down ‘steeply’ or ‘sharply’. What adverb will the ABC use when house prices drop 30%? Catastrophically? Painfully? Titanically?
I’m not opening the Champagne quite yet.
This is good news. Just when I was despairing that prices really might keep going up and up forever, I was quite heartened to read that maybe all the uncertainty about jobs and the economy are finally beginning to have an effect. We need to see the market fall a lot further than this though.
I was looking at auction results over the past few weekends and I find it quite mind-boggling that people pay over $100,000 more than the higher end of the quoted range, often over $200,000 more. How is it that people are so willing to pay so much more than houses are supposedly “worth”? I know that the answer to this is that the price range is underquoting but those underquoted prices don’t seem all that low to me.
Anyway, let’s hope that soon the good news keeps coming, and soon those price drops are more like 30 or 40% rather than piddly little drops.
@ Still Waiting
“How is it that people are so willing to pay so much more than houses are supposedly “worth”?”
Easily.
Debt. Coupled with a belief that they can service the debt.
We have a country that has not seen a MAJOR economic shake for over 20 years. This means that those who are in their 30’s have never experienced a nervous personal economy. The fact that all their mates are in debt to their eyeballs provides reinforcement that debt slavery is the norm. Despite running investments in this tough economy that is evident, the fact that I have no debt puts me in an enviable position to my peers.
Yet what do I hear from them?
“I can’t believe you’re not in property…You’re crazy”
“If I had your money I’d be buying heaps of houses”
“You’ve gotta get into property or your gonna have nothing when the stock market crashes”
“The richest men in the world did it through real estate” (Really? The software kings, oil barons, warren buffetts etc made their wealth through property?…..Conversation over)
“What do you have that’s as safe as houses?”
Etc. Etc.
But they never stop to consider the reason they are struggling financially is because of their debt load.
When you step back from all the BS that is the modern world it is so crystal clear and simple. But no-one wants to know this:
The most privately indebted nation, has the highest % of mortgage loans and has the highest property prices in the world.
Read that again: We have the worlds highest private debt.
Where most of that private debt is in residential mortgages.
And the highest property prices in the world. (yeah, yeah an apartment is Shanghai is dearer….look at the trend, not individual cases)
Our house prices are so high, because we borrow alot to buy them. Now, mortgage debt growth has been on a downward trend for years, with no sign of a sustainable turn around: Because a sustainable turn around doesn’t exist…
Have we reached the point where lowering rates achieves nothing because we’ve reached peak personal debt? I don’t know, but given that we are in uncharted territory, it can’t be far away.
@ Matty – amen to that brother!
I think those praying for a lower currency will curse what they wish for – that is cost of living for essentials will bite the mortgage belt hard and affect the domestic service economy and the jobs market.
Curious to see what will happen with rents though, at the moment there still seems to be tight vacancy, but a lot of higher end property looks to be sitting there untenanted. It seems owners are prepared to lose money if they do so slowly.
But who knows what is in store that may tigger a RE:
http://www.youtube.com/watch?v=_pk0vE-MM_g
@Matty,
Spot on……. I cant tell you the number of my friends in general who say the same thing. Australians, not all, in general are going to experience a massive AFC (Australian Financial Crisis) and its going to be ugly. It just comes down to 2 things Matty arrogance and stupidity by most of them…… You would think the baby boomers would know but alot of them are in just as much debt as the young one. Thinking they will retire with tons of money. Only a matter of time.
Good article on ZeroHedge a couple of days ago re: Australian economy in general and Perth economy in particular:
http://www.zerohedge.com/news/2013-06-02/down-and-out-down-under
What a sad state of affairs when so many folk define themselves on the ownership or otherwise of stuff / house. What fragile souls we have become. It’s hard to imagine what will become of them / us when things really fall apart.
In a globalized economy, with a strong resource base and flow through of goods and services, we no longer need each other. And the consequences of which are all around us now.
The worrisome thing is when the empire, falls apart, as they always do.Housing is just one piece of a much bigger puzzle. Ouch!
I still have no idea if Oz has finally hit rock bottom, or if we will be able to kick the can further down the road? Not a clue!
I have been following this great site for a couple of years now & never commented till now. We are a couple in our late 30’s with a young daughter who while saving for our first home got priced out of the market. I had a mum in my mothers group who in 2009 sold her Richmond 2b’rm home on a main road for $1million. They purchased it 5yrs early for $500k. It made the front page of the Age. This is how frenzied things got in inner city Melb.
We do not want to go into that sort of debt & not have any cash to travel or live our lives.
So we’ve kept saving, we don’t want to move to the suburbs. My father offered to help with $50k & match what we have in savings but even with a $100k deposit I am not comfortable with that amount of debt even though it seems to have become the norm to pay $600-700k for a 2brm dog box in the inner city.
The crux came with selecting schools for our daughter next year. I realized that if we sign her up to a school in our local area we will get entrenched in the community & the reality is we can only afford to rent where the avg house price is $800-$900k!
Instead we have just signed on the dotted line for a $250k , 3 brm house in Woodend, 1hr out of Melb. My partner doesn’t mind the commute as he is a sales manager, I hope to find something locally down the track. The house requires some serious renovating but we are up for the challenge as we won’t be moving til the school year next year.
A house become available in our street last year that had a price drop from $700 plus to $630k. It was in a state of serious disrepair & needed at least $100k spent but the estate agent would not budge from $620 & it sold. Both our families put alot of pressure on us to buy it & all said $630 is not expensive for a house these days but I’m glad we didn’t do it.
I am not buying into the spruik, we just want a comfortable life in a home of our own that we can afford to renovate. It’s a tree change & a lifestyle change we are looking forward to, but now the borrowing is getting interested. And we are doing it on our own, my dad can keep his money in the bank for his retirement rather than prop up this crazy market further.
We have the ANZ, C’wealth come round & both have told us with my partners salary at $90k & mine at $52k our borrowing power is $850 plus. That’s how this housing bubble started & has kept blowing out. Pressure from family, society to borrow more than u can afford & banks wiling to sign you up for debt.
I don’t wish a crash on anyone who genuinely just wants town a home but def take issue with all the investors, speculators, profiteering real estate agents. Something’s got to give & will…,
Good for you Leatitia, wise move.
Also with 2 people are working your yearly income is susceptible to change in the future.
For me I enjoy money in the bank more than home ownership that puts huge amounts of pressure on your finances and debts that sometimes will never be paid.
Its an easy decision for me, you just have to be comfortable going against the crowd.
@Leatitia – “We have the ANZ, C’wealth come round & both have told us with my partners salary at $90k & mine at $52k our borrowing power is $850 plus”
WOW – and therein lies the problem. The big banks are prepared to sign you up to a lifetime of debt servitude and RISK.
How a couple on a combined income of $142k could possibly service an $850k mortgage is beyond me? At 5% over 25 years the annual mortgage payments would be $60k with interest at $42.5k
Assuming a combined take home income of $100k would only leave $40k for living expenses with the mortgage soaking up 60%!!!! You wouldn’t want children or lose your job under thoese circumstances.
If that is prudent lending I’d hate to see what’s happening out there in mortgage broking land.
Congratulations on taking a very sensible approach and not listening to those family and friends who were prepared to push you over the cliff.
Leatitia, “something’s got to give & will…,” that would certainly make sense given that people are taking on ridiculously sized mortgages. The fact that the banks have told you that you can borrow more than $850k is insane! Could you then imagine if interest rates went up by a few per cent?
And Matty, yes, this whole bubble is built on debt, I agree with you there. But you’d think that we would have had our crash already. When prices dropped a few percent, or even 10% or so, that’s not nearly enough given prices are about double what they should be, based on fundamentals.
But then we have foreigners who invest here and they don’t care about the rent; in fact they are quite happy to leave their properties empty, banking on the capital gain or at least the save haven they see in Australia. Without all this foreign investment and all the other props holding up this property bubble, we would have crashed long ago. By the way, I’m not being racist, but I get pretty angry about the amount of foreign investment here when it prevents Australians from being able to buy homes to live in.
Leatitia … very cool.And when the whole ‘relocalization’ starts to really gain momentum, you will already have you place, know it well, and find your own way of being part of the community – without the heavy debt. Rock on!!!
What people don’t seem to take into account is that when you default on your loan the bank does not need to sell the property for the amount that you paid. All they need is the amount outstanding on the loan. So in a downturn you can kiss your deposit and what ever equity you have goodby.
And of course at the other end of the scale, if you do not have much equity in the property and you have to default, the bank will come after you for any other assets you own because most loans are recourse.
So when property prices are high and there is a possibility of a correction, it only makes sense to take out an interest only loan and not hold any assets. You may as well be renting.
Leatitia with you putting down 50k and only having 200k you could pay your house off in a few years. What my wife I did was take the highest income and not touch it. It all went into paying off the house and we lived off the lowest income. I was making about 70-90k (Was in sales) and my wife was on 60k-65k. We got our house paid off 4 years later. We had about 150k to pay off. What a difference that made. It sucked because we did one overseas holiday but didnt have kids at the time. You and your husband were very smart in 250k as opposed to 600-700k. You will thank yourselves when the housing market has it massive correction. Also next time your father says you should have moved into the expensive area ask him if he would want a 600-700k mortgage on the salary your family is on. I bet he would say no come push to shove……….Good luck
Thanks everyone for your advice & support. Wish there were more sensible people reading this blog, people power will make a difference, it just might take a while..
And I know what my dad will say when he sees the house ‘You should have bought a brick veneer!’
@David C
“What people don’t seem to take into account is that when you default on your loan the bank does not need to sell the property for the amount that you paid. All they need is the amount outstanding on the loan. So in a downturn you can kiss your deposit and what ever equity you have goodby.”
This is a great point, thanks for reminding us “The house always wins”.
@Still Waiting
By the way, I’m not being racist, but I get pretty angry about the amount of foreign investment here when it prevents Australians from being able to buy homes to live in.
Its disingenuous to simplify the migration/housing issue as racist. No reasonable person can critise a migrant for wanting a better life for their family. The reality is many follow the ‘get a foot in the market at all costs’ approach that has worked for friends in the past, but low rates high debt often sees them just hopping onto the treadmill. This is only ever a short term solution for our highly inflated housing market. Part of the reason rates steadily, yet reliably head south.
@Leatitia
I don’t wish a crash on anyone who genuinely just wants town a home but def take issue with all the investors, speculators, profiteering real estate agents. Something’s got to give & will…
Being over leveraged isn’t really a problem ‘until it is’! I like your thinking! Congratulations on choosing the modest road, allowing you to spend your money in the community and economy that would otherwise have been funnelled back into the banks (had you bought the great Australian spruik on house prices). The RBA should be thanking sensible people like you, not tempting them into “picking up the slack” on their mismanagement (read: hospital pass!)
Re Leatitia, congrats Admin and other bearish sites for working so hard to genuinely assist Australian families persue real prosperity, rather than the sales pitch of it. You are effecting real change!
The house always wins. A friend of mine recently bought a house for $800k – it had been passed in at auction for $1.2m 12 months ago.
This time around it was a “mortgagee in posession” sale.
He did well
The bank got there money back
The owner got wiped out!
@Leatitia – Banks seem to automatically give a 6x annual income as your borrowing power. That may be the norm but it’s ridiculous. I instead bought a 3BR townhouse of 305k, which is around 3.8x my annual income. I hope to pay it off in 10 years.
@ Stomper
Joe public says: That’s an outrage! How can they just sell a house like that and cripple someones future? You wait ’til today tonight does a story about this!
Mr Bank says: Meh….I got super funds to report to. They need a return on investment…or they buy bank shares elsewhere, which will destroy my bonus 🙁 ….. and besides we better get used to this process, we gotta do this mortgagee thing lots more times yet.
I say: $800K for a house in Australia….Not London, LA or Singapore, but on an Island surrounded by slaves? I’m not interested sorry.
The bubble is created by credit but what drives it is fear – fear that prices will rise and you will be left unable to afford a home, fear that there is a shortage. Who creates this fear – the banks through main stream media. To solve a crime follow the money.
Off topic but I could not resist!
Reading some of the news reports (spin) on the recent GDP figures you can’t help but laugh at the journalism (used loosely).
With regard to The WA figures the Australian states “and a fall in the last quarter, caused by a one off dip in exports, is not out of the ordinary”. HUH?
There was this too which was a quote from a consumer study posted on PerthNow. “This decline in financial conditions may be driven by a disconnect between what consumers are hearing in the media versus economic reality” the report says.
I don’t know how that comment got past the review stage! What were they thinking posting a truthful statement like that!
Meanwhile here in WA the vacancy rate is continuing to climb and they are putting up houses as fast as they can. Just as the bust seems to be gathering momentum after a huge boom.
Look out WA, that light at the end of the tunnel is not daylight!
Hi, I’m a journalist writing a story for a national magazine about house prices. Looking for someone who has been trying to buy first property in Brisbane or Melbourne & has become disheartened at places selling for far more than agent estimates / being outbid at auction, etc. I’m hoping to line up phone interview in next few days. If you think you might want to take part pls contact me on the email address at my website, listed, or via Twitter – my handle is HazFly – I’ll explain in full.
Hazel,
I don’t think you’ll find all that many people on this website taken in by MSM spruiking, prices double every 7 years etc etc mentality.
It’s hard to be disheartened by not having to be chained to a $500k mortgage.
But looking forward to the article non-the-less.
I think the guys over at Macrobusiness give a pretty good rundown of the inherent issues with the property market at the moment.
I see the Aussie dollar is getting hammered. Is this a good sign or a bad sign? Any thoughts anyone?
Hazel, I dare you to do a story on Negative Gearing.
Damian I think it will stay in the .93 to .95 range as everyone awaits the news on employment figures (Which are a freaking joke)….. someone works 1 hour and they are considered employed. F$%KING joke…
@ Damian
It’s a compromise. Better for exports worse for imports.
In a developing nation such as Australia (economically developing where we are net importers of capital) it may mean that more money comes to our shores_But that will then push up the dollar:Catch 22.
For those whose jobs aren’t tied to exports then it’s worse as it means that price inflation in everyday imported goods will occur.
Those in the media who have been calling for a lower dollar will get what they ask for eventually, but they don’t consider the down side.
Foreign investors get hurt as the assets they hold loose value against their own currency.
It’s a very complex issue. But it’s safe to say that in an economy that is as fragile as the LOCAL Australian economy is, any sharp moves either way are in honest truth unwelcome.
Those who argue that a falling dollar will save Australia fail to accept that there are major structural issues locally that are destroying business after business. Which in turn is destroying family after family.
But it’s more important for the MSM to talk about who will win The Block and The Voice.
There is much silent suffering at the moment.
@25 – for me it’s a good sign. I’ve been waiting two years to bring my savings over from the UK, so I can spend it in Australia. It’s earning 0% interest in the UK and as the pound continues to be devalued, it’s worth less and less.
Interesting to note that the more ‘incentives’ governments give us to buy into property, the currency drops accordingly. The weaker the dollar, the more foreign investment comes in, and property prices remain afloat instead of dropping. It’s a vicious circle. But when I am ready to buy (when prices are more sensible) I want to be getting the best exchange rate, so the weaker the dollar, the better it is for me – sorry.
A good sign for me. I moved 95% of my savings offshore. I’m banking on forex gains when I transfer it back in.
I see the AUD on the slide to new lows, property declining all in the wake of a weak economy, China slowing down, US winding back quantative easing and eventually strenghening of the Eurozone. Let’s not forget that the AUD is overvalued compared to the long term average. Only downwards from here.
If the property bubble implodes, there will be blood everywhere. Better not to have deposits in Australian banks. Thank you for the high interest rates U Bank, it worked a treat for me.
@Damian – It’s a sign all right – a sign of things to come;
– rising import prices
– rising interest as we lose our safe haven status
– rising levels of Govt debt (Federal and State)
– rising unemployment
But ultimately – falling housing prices!
@JJ – I’m in a similar position. Been stuck in Europe for 4 years now waiting to get back with my hard earned Euros. I’m dual citizen (Irish / Australian). I guess there are a lot of people like us waiting in the wings but will there be jobs for us when we decide to return? That’s the big question. My brother lives in Brisbane and told me not to bother coming back to Oz unless I had a decent offer of employment. His exact words….”Try Perth instead. Nothing happening in Queensland. It’s all going to go to shit soon”. I left Brisbane in 2008 and anyone with half a brain could see what was coming. The big 4 where just handing out cash to any idiot fool enough to take it. Giving 600k to a 25 year old kid on 60k/year is just reckless leading in my opinion and bears an awful resemblance to what happened in Ireland just before things went tits up and people lost everything. I was one of the fortunate few who survived the property crash in Ireland so I know a bubble when i see it and Australia is no different to any other bubble that’s gone bust in the last 10 years. I wonder how this will all pan out. Things are starting to unravel very fast now and investors are panicking. The longer the boom, the quicker the bust.
Leatitia played it smart. My advice to everyone is keep your debt to a minimum, try and off load those big SUV’s (petrol prices will go up), hold onto your job and up-skill over the next 2-3 years. Forget about buying property for the next 5 years and if you can rent a nice place out of the big cities and commute.
Now this guy knows what hes talking about:
http://www.moneymorning.com.au/20120830/why-the-australian-economys-bet-on-china-will-fail.html
@Leatitia. Good on you! My wife and I are in a similar situation. Our incomes are quite similar to yours but I could not think of why anyone would want to get into that kind of debt (Although we are more fortunate in that our parents can help us out a bit more).
The confusing thing about all this is that a family on ~ $150K gross is in the top 20-30% (or higher still) of income earners in the country (a bit lower in the major cities). However in most cases that does not equate to being able to afford the top 20-30% of housing. Some people are really getting in over their heads!
The beginning of the end it appears to eye watering property prices in the ‘invincible’ WA mining towns. I wonder now how far it will spread ?
http://www.afr.com/p/national/iron_ore_boom_town_burns_homeowners_KMU7sHtZineGs5Hn20psjK
Hey Damian
I see that article you reference was from August last year.
The Money Morning and Daily Reckoning crew are starting to change their minds, they are now spruiking a 14 year housing boom…
Those self interested wankers can no longer be trusted …..
Bob Much Wiser, I just had a look at the article and I think you need to look at the date again. It says June 12th this year.
As for Money Morning and Daily Reckoning, I don’t think they really believe in the 14 year housing boom. I think they’re just trying to get some more subscribers by promoting some guy who is spruiking property. But yes, I did find it disappointing that they’re giving him any air time, particularly after being so bearing on property over the years.
If you want proof that we are living in a real estate bubble, just go to Google search an type in the letter R
and nothing else.
And of course the first suggestion that comes up is…
you guest it, REAL ESTATE.
1 – 2 per cent in a month not a big fall? Times that by 12 months and …. Bang
Hi Letitia its very interesting that ANZ was prepared to lend you $850 000 on a combined income of 90+32 = $122 000 – wow. I don’t know how much equity you had but seems to me like irresponsible lending – what if interest rates go up or one of you loses their job. Maybe you are very young and have $200 000 equity and really great jobs with prospect of advancement. We have a much greater combined income – double yours and still will not take on debt over $500 000 – which prices us out of the suburb we live in in the Western Suburbs of Perth, so we continue to rent (as do the people around us in the street – lots of renters – either side + behind). Well I hope its going to work out for you. I think the rule of thumb is that housing costs shouldn’t be more than 30% of expenditure, seems like the banks are doing whatever people can afford which may be above that! Hope it works out for you
I got my borrowing power assessed by my bank just a couple of days ago where I was told I could borrow up to 280k on an income of a tad over 50k. I am actually pretty pleased with that, given that for my first home I’m not looking for a place that’s any more than 350k, but like others have said, would I really be able to keep up with the repayments if interest rates jumped up 2% or more? I’d probably struggle or default. Of course, there’s no predicting what I’ll earn in the future, maybe I’ll get a huge pay rise or a much better paying job, but I can’t guarantee that. I’m not in a rush to get a place, but I just wanted to see where I sit with regards to how much I can borrow at this point in time, and my aim is to reach the 20% initial deposit, so I’m just going to keep saving and hope that the house prices will come down again, but this time a bit more than before. The last thing I want to do is get a place only for the prices to crash 1 month later.