Money Tip without the Boring Stuff - Will property prices fall?

Bricks and mortar - safe as houses?   Not sure after surfing the internet trying to find a balanced argument in favour of buying property at the moment.  Here is a summary of what I found.  The blue (as in colour) comments are mine.   Please share your thoughts on this subject.

John Hewson – former Liberal leader, economist – 7 October 08 Gold Coast Bulletin (quite pessimistic)

“Property markets are going to go down, and go down for some time.” said Dr Hewson.

He said that falls would be across the board, particularly commercial properties. “I think there could be a hell of a property shakeout.”

Harley Dale, HIA, Chief Economist – Sydney Morning Herald 1 October 2008 (Cautious. Remember he is representing the Housing Industry Association.  They need us to remain optimistic as a significant downturn will really hurt the housing industry?)

Harley Dale, the Housing Industry Association chief economist, says house prices will suffer in the short term as potential home buyers hold on to their money.”There’s a very clear risk that already fragile household confidence in Australia will take a further hit on account of the sheer barrage of negative news,” he said.

But housing market activity had already cooled after a run of interest rate rises earlier this year, so the Wall Street dive was unlikely to trigger tumbling house prices, he said.

“We’ve long said that we think we are in for a period over the next 12 months where house prices will be flat and a little bit weakened, and that we are in for a 12 months where the amount of home building we do is going to fall,” Mr Dale said.

“But we don’t subscribe to the view in some quarters that we are now going to see massive falls in house prices in Australia.”

“Yes, [Australian] house prices will have deteriorated in recent days and weeks.

“We predict in some markets in Australia [such as Sydney and Western Australia] falls of 5 to 10 per cent [in the next six to 12 months].”

House prices had fallen as much as 40 per cent in the US and up to 20 per cent in Britain, but this would not be repeated here, Mr Dale said.

This was because housing demand remained strong, due to a growing population and an annual shortage in houses being built

Mr Dale’s parting advice for homeowners was to rejoice in the spoils they had already earned, and which were unlikely to be wiped away.

“The average value of homes in Australia* is worth about 150 per cent more than it was at the start of the decade, and no matter what happens and no matter what uncertainty prevails, at the end of it all the majority of that 150 per cent increase is still going to be retained with homeowners.”  (What if you purchased your property in recent years?  or worse, you were one those poor buggers who purchased in Western Sydney about 3 years ago who have lost 20% plus!)

Steven Keen, Associate Professor of Economics, University of NSW – 8 October 08 (talking to Kerry O’Brien on ABC’s 7.30 Report) (biggest pessimist of all!  go to www.abc.net.au to see the full interview.   I was glued to the screen throughout the entire interview.)

“But the reality is housing prices in Australia run at seven times the median incomes, when the affordable level which the demographic survey works out rather well, is about three times.And to put that in context the American market, after all the crashing it’s been through is down to three and a half times median income level.

So we’re talking about a house price level in Australia which is twice the level that America got to. And that means, I think unfortunately, the only direction in the long-term for house prices is down.

The only way you can get your house to be sold for a higher price than you bought it for is that if somebody takes out more debt than you did relative the their incomes. (good point!)

If you look back to 1929 when the stock market bubble burst in America the ratio of debt the GDP was 150 per cent.  It rose to 215 per cent as the economy collapsed, not because debt was rising any more but because prices were falling and output was also falling.

It is now 290 per cent. That is gigantic, virtually twice the level. Australia had a lower level of debt back at the start of the Great Depression; our debt ratio was 64 per cent.

It is now 165 per cent. So we have that much more debt than we had, and really the only sensible explanation of what caused the Great Depression is a combination of excessive debt and consumption.

KERRY O’BRIEN: What’s your advice to individual Australians right now?

PROFESSOR STEVEN KEEN: Get out of debt, simple as that. (don’t say it Josie!  no I have to … ‘told you so’.  sorry.   Did you know that for every $100 we earn, we currently owe around $160.  Back in 1990, you know the ‘recession we had to have’ we owed $50 for every $100 we earned)

KERRY O’BRIEN: It is not that simple though is it?

PROFESSOR STEVEN KEEN: It isn’t that simple, it takes difficult decisions to get out of debt, but that’s the only thing to do”

(Also, according to the Sydney Morning Herald on 1 October, 2008, Steven Keen predicted a 40 per cent fall in house prices in the next 10 years, mainly because of the high levels of debt in Australian households.   Quite alarming. )

Jonathon Pain, Chief Investment Strategist, HFA Asset Management – 26 Sept 08 (also very pessimistic.)

“I think we could see a 20 to 25 per cent decline in residential house prices here in Australia over the next several years.

And we here in Australia very, very sadly have also turned our homes into glorified bank ATMs, and hence as a consequence of that household debt in Australia now is at an all time record high as in absolute terms and as a multiple of income.

If you look in fact at house prices in Australia over the last 80 years on an inflation adjusted basis, we are currently approximately 30 per cent above that 80 year trend line. So in actual fact for us just to get back to the trend line we would need to decline by 30 per cent so a 20 to 25 per cent decline is possibly quite conservative.”

Start doing your own research.  If you find an optimist, let me know as I struggled.

Cheers and thanks for visiting www.askjosiekay.com.au - free financial advice with no strings attached (in other words … guarantee I will not hassle you).

Sponsor - Savvytel* - Keep all your credits!   Calls half the price of Telstra, Optus and Vodafone.  Check it out and save money.