Tuesday, May 03, 2005

Australian Housing Bubble Is Collapsing

Stories out of Australia give us an idea of what's to come. "Banks were partly responsible for the boom in prices because they were prepared to accept top values for dwellings and often offered almost unlimited credit. In effect, the banks put the housing prices up and they have now reduced them; a dangerous game."

"Those who bought standard Sydney or Melbourne inner city apartments and borrowed 90 per cent of the value may now find that their loan is more than the current market value of their unit."

"At the top of the real estate market (2003) St George lifted their housing lending by 18 per cent and introduced no deposit and low-doc loans. Then, last year, dwelling lending went up by another 16 per cent. It was a time when investors were responsible for between 40 and 50 per cent of the market. Now they have been burned off."

I expect this turn of events will occur in the US, too. "Only a month ago the Reserve Bank was forecast to raise rates further. Now that seems most unlikely and a rate cut seems more appropriate."


At 11:40 AM, Anonymous Anonymous said...

Question for everyone...how low can one underbid on a home?

Has anyone ever bid 20% below asking price? 30%? 50%?

Seriously, how low can we go and expect to get a seller caving in.

At 11:40 AM, Anonymous Rob said...

“The pace of inflation is still moderate, but it is not as moderate as it once was,” said David Wyss, chief economist at Standard & Poor’s in New York.

Oh yeah, and I am sober, just not as sober as I once was.

It's going to be very interesting to see if Al really tries to get the rate all the way back to "neutral" when he leaves. He's another 25 basis points closer. I think the flat yield curve is telling us that there is a going to be more conundrums coming.

At 11:42 AM, Blogger deb said...

I clearly remember following the Australian housing phenomenon over the past couple years. We have family down there and their experiences seemed to be just 1-2 years ahead of where we were. When we were just really heating up, they were in the "desperate to buy phase", like we are now. I guess that means the bubble's days may be numbered.

At 11:48 AM, Anonymous Don said...

I have bid 60% under asking price and been accepted. Extremely unusual to do that though, even in a depressed market.

Ideal sellers for deep discounts are estate sales where the mortgage is paid off and the kids just want money now.

Banks tend to prefer holding out for more cash in my experience.

At 11:49 AM, Blogger deb said...

Anon 11:40,

I will never forget a client that I had in about '93. We had been through a couple years of huge price declines. These people saw the train wreck coming and sold in '89. They wanted to buy back in in '93. We looked and looked, but they would always want to offer 20-25% under asking. No one would bite. They finally decided to wait longer. We still had two more years of steep price declines. They finally got a house at the price they wanted.

Moral is: sellers are very slow to believe the reality of where the market may be headed.

The head of the co I worked for (Fred Sands) was famous for sending out a letter to all the company's listings telling them to lower their price or get the home off the market because the amount of inventory was killing us. He was blasted for it. This was in about 92- he was so right.

The foreclosures and forced sales really end up setting the market because no one else is forced to take whatever the market will offer.

At 11:59 AM, Anonymous Anonymous said...

My very close relative live in Sydney, and we (wife and kids) went to visit them five months ago. The house prices over there have gone up at least 120% in last seven year, and some areas even up 200%.

The house prices about 15% higher than OC (after factor in the currency), this is after 10% decline In second half of 2004. Consider the wage is about
80% of here and high pay job is much harder to find over there,
I know it totally unsustainable, however all the people over there,
at least I met, are talking about RE investment. (very much the same as here).

Because of 5 acres of land in their property, if they lock in the profit, the returns will around 175% in less than 3 years. And because of large land,
they believe that even the RE fail, the impact will much smaller.
(which I know it totally not true because it can’t translate to income, but they are rich anyway)

At that time, based on my judgment, I think the prices will deflate at least 40%, but they plan to keep the property for many reasons.

I believe OC will step the same experience of Sydney’s, currently, I heard the house prices have gone down 10% more in last five months.
Since I already sold my house recently, I hope my assumption is correct: that the housing prices will go done 30% in next two years.

At 12:00 PM, Anonymous Anonymous said...

So it seems that bidding half the asking price is not unheard of.

Single family homes in my city go for about $500K, so I think offering $300K during the coming crash is not so crazy.

At 12:04 PM, Anonymous Rusty said...

Deb, that last sentence was key. We just sold our house FSBO, closed in March. We had a lot of people who were "very interested" who put in offers 10-15% below our asking price. And these folks had realtors we were expected to pay another 3%. I guess it is S.O.P. these days, even in "warm" markets, to underbid like that.

We never even counter-offered those bids. Just told them no thanks, and hung up.

After about 5 of those we got one of them to come back and ask what we "really wanted". We told him full price, and no real estate commission. We got it.

We were selling because we were sitting on $250k appreciation after 3 years, and wanted to cash out. Had we been selling out of desperation rather than greed, the story would have been completely different.

At 12:18 PM, Anonymous Anonymous said...

I have noticed that this blog has a number of regular participants who are realtors, myself included. Realtors who have been through previous cycles and know where we are headed. I'm very surprised that it hasn't topped out yet, but I think we may be seeing the last spike. If it wasn't for these new I/O loans it would have already happened.

At 12:39 PM, Anonymous Anonymous said...

Don at 11:48, those are some good tips. Banks are no different than most any seller. As a matter of fact, they are more able to absorb monthly expenses. Therefore, I have also noticed that banks are holding out for top dollar. I have personally researched some "REO" properties where the bank received a 40% windfall in addition to their mortgage being paid off.

Another comment said the foreclosures and forced sales set the market. How true, how true. Right now, foreclosure purchases are every bit as hot as new construction where buyers are camping out at the builder's open houses. When the public bidding on foreclosed homes starts to drop off, standard sellers of real estate will be about six months behind the lag. Watch the foreclosure sale activity, and then get ready to invest.

At 12:56 PM, Anonymous signofthetimes said...

Good to see some pros commenting on this blog. The mouthpieces for the housing industry are cheerleaders. But the folks in the trenches know the score.

A frustrating market for the pros, no doubt. We just sold a few apt bldgs in Norcal last year and got top dollar---way more than we ever expected.

But now we're sitting in lots of cash and can't find anything locally. On the residential level, cash is trash when you have essentially asset-free buyers able to get 100% (even 110%) financing at low teaser rates.

I rent a home now having sold my home a couple of years ago. I could pay 100% cash if need be. But I can't (or won't) compete with clowns---who don't have two nickles to rub together---willing to pay 30-40x rent equivalent.

Once the credit cycle turns and I/O's and short-term teasers go bye-bye, I would hope that sanity returns and responsible people with real money once again reap the rewards.

Here I am, with 25 years of Calif property experience and sitting in cash, and not able to buy a home in good conscience. Yet the 24-year-old son of a friend---without assets or current employment---just went in on a co-purchase of an $850K home with the intention of selling it in a few years for a "few hundred thou" profit. He had no trouble getting financed. And there's your problem.

At 1:13 PM, Anonymous Anonymous said...


You sound like an experienced RE investor, so let me ask you a question that has been bothering me for a long time.

At what point should one invest in RE?

Is it unrealistic to expect rents to cover mortgage costs, plus taxes, plus upkeep, plus insurance?

Is this a realistic entry point?

At 1:53 PM, Anonymous signofthetimes said...


--At what point should one invest in RE? Is it unrealistic to expect rents to cover mortgage costs, plus taxes, plus upkeep, plus insurance?---

I guess it depends if you are talking about a residential purchase for yourself or a commercial investment.

Residential is harder to quantify. There are a lot of soft factors that go into a buying decision that make not make perfect sense financially. That said, when rent is half the cost of ownership (as it is where I live in California), I think it makes no sense to buy unless you literally don't care about money. In my case, the home I rent would have to appreciate 35% just to breakeven over the next few years. If the costs of owning and renting are within historical margins (within 10-20%), I think it's probably OK to buy particularly if there are "soft" factors that make the purchase desirable---good schools, fall in love with the house, etc.

Commercial, I think, is much easier. I personally don't look at income property unless it throws off income. That may sound flip, but here in NorCal it is next to impossible to find multi-family bldgs that throw off income at today's prices. Managing income property is thankless so there had better be tangible financial rewards. An assumption of continuous dramatic asset appreciation is not enough IMO. It has never been true historically and I'm not willing to bet that we have entered a new hyperinflationary era.

The buildings we sold last year were in our porfolio for nearly 30 years. So they weren't exactly "flips". We actually tried to sell them in 1999 during the dotcom years but no one seemed interested even though they were throwing off very good income. Yet in 2004, we sold them for double what we hoped to get in 1999 despite the fact that vacancies were up and income was down. Go figure.

The other type of commercial RE deal is either raw land or speculative location. For example, a colleague knew that a small airport was being considered in a nearby town. The decision was still a few years off. He purchased some speculative parcels dirt cheap in hopes they would be condemned for public use as an airstrip. He was right and made 10x his money but it took seven years. The best thing about his purchase was that there was very little downside because he bought so cheaply.

Decades of experience in California property helps me see what is transpiring with a pretty clear head. I've seen many of these booms before. They are a great time to sell, not to buy. The difference this time is that this is more or less a national (or international) real estate boom. Many have never experienced one before so they think they have entered some new era of unlimited profits. I'll take the other side of that bet.

At 2:17 PM, Anonymous Don said...

>I'll take the other side of that bet.

Have you considered short sales on homebuilders, banks with concentrated lending exposure or subprime lenders?

I'd like to hear your thoughts on those approaches if you've got expertise to share.

At 2:31 PM, Anonymous Anonymous said...


Greatly appreciate your insights. You've cleared up many points for me.

In my case, I'm just starting off, in my early thirties, and stuck in a bubble city. Based on your comments, I'll likely buy a home once home ownership costs are less than 1.2 times renting costs.

On the investment side, in the coming crash, I might consider a rental property if I can find something that is cash positive assuming little money down. I agree that unless I can get some income out of that property, it's just not worth it. Appreciation may not be a factor for a VERY long time to come.

At 2:32 PM, Anonymous Anonymous said...

--At what point should one invest in RE? Is it unrealistic to expect rents to cover mortgage costs, plus taxes, plus upkeep, plus insurance?---

No one should invest in real-estate unless they are seriously motivated to work hard in order to get rich. The rewards are there, just as there are in any other business, but there is seldom easy money. The great advantage of real-estate is that you can do it in your spare time, and you don't need any special talent. (Not everyone can start a successful computer software business, for example.) Part-time real-estate is particular appropriate for people with stable jobs with no overtime (government bureaucrats, etc) who have a knack for at least one of the main activities involved with real-estate: day-to-day maintenance and repairs, major renovation, tenant management, legal/finance/sales. If you have to hire other people to do everything, then that raises your expenses and eats up all the profits. Also, if you can't do anything yourself, then how do you evaluate the ability of other people to do it?

In general, price 100x monthly rent indicates a residential property that can be quite profitable in the long run if you do some of the work yourself, assuming appreciation is about equal to the rate of inflation. So if the monthly rent is $1000, then the price should be $100K. You can find properties like that in Texas right now. If you start in your thirties and gradually expand your holding, you will be rich by your fifties. Plenty of people have trod this path to wealth in the past, and plenty more will tread it in the future.

For those people who aren't interested in active management, the best approach is to wait about 5 years until the bubble is deflated, then buy equity REITs.

At 2:35 PM, Anonymous San Diego said...

I'd love to hear your opinions on this question re: foreclosures. First I should say that I'm not a RE investor, just a regular person interested in finding a way to trade up in house without increasing my monthly payment (or at least not by much).
I've never looked very closely at foreclosures in the past, as the process seemed a bit mystifying to me ... I know there are various stages of foreclosure at which you can acquire a property (auction, REO, etc.), and some of them require having full cash in hand (yikes).
However, last night I looked at foreclosures.com, and was amazed to see a whopping 4,000+ homes listed in SD county, including FSBO and preforeclosures. So my first question is: What does "preforeclosure" mean, exactly?
What we've considered doing is finding the homes with the # of bd/ba we want, in areas we like, and dropping a note on the door asking the owners to call us if they think they'd be interested in selling to a solid buyer, then, if the property looks good, checking how much they paid and what the area comps are before making a firm, below-market offer.
It seems to me that many of these folks in "preforeclosure" may see this as an opportunity to avoid foreclosing and damaging their credit, and would therefore be willing to take less.
For us, it would be an opportunity to trade up at numbers that pencil out (we are sitting on $270K in equity) without selling our home and renting ... we have kids and are a bit too chicken (!) for that. However, if we wait for the market to tank before looking to buy, we'll also take a hit, so this might be the best opportunity for us without selling/renting. (Homes that are "well priced" (haha) are still selling briskly here. Last week, my neighbor's house sold by owner in one weekend, for full asking price).
Any thoughts?

At 4:48 PM, Anonymous signofthetimes said...


---Don asked: Have you considered short sales on homebuilders, banks with concentrated lending exposure or subprime lenders?---

It's tough to game the market by throwing short or buying puts. You'll notice that most of the carnage with stocks comes in a very short period of time. A stock may be destined to fall, but the real move may come in only a few days of trading. They can inch their way higher for months, then boom, one day they drop 20%. You need to be short stock or long puts on that day or you miss the move. That's why it's so tough. Using options controls your losses and often magnifies your gains but you have to be spot-on with your timing otherwise the time decay will wipe away your profits.

The homebuilders MIGHT have put in a long-term top here, but since there is no ETF that tracks them you'd have to short or buy puts on individual companies. Right now, most of the builders are either downtrending or in correction mode. But they are still reporting strong earnings and have very low P/E's.

Another sector to look at is the mortgage companies. But again, most of them have already corrected significantly. They also throw off big dividends which you'd have to pay while short. And they have very low P/Es.

A third sector are the REITs. There are a few ETFs that track them so you can manage risk better there. IYR is an example. I was short IYR in Jan and caught a 10% move down. But miraculously, IYR is now only 3% below its all-time high from Dec. It throws off a decent dividend which attracts some folks. My guess is that this sector is ripe to fall at some point this year and I'd consider shorting it again...maybe quite soon.

I think the best area for shorting is not the banks, mortgage cos or homebuilders, but instead the ancillary companies that have done so well because of the housing boom----namely home improvement, home furnishings, etc. This is no secret as most of these companies (like Masco bombing out today) are already in downtrends. But I think these companies have just seen the best three years they will ever see and it's downhill from here. Profiting from this will require timing, stockpicking and finding low-risk entry points for shorting.

At 4:59 PM, Anonymous signofthetimes said...


---Anon wrote: In my case, I'm just starting off, in my early thirties, and stuck in a bubble city. Based on your comments, I'll likely buy a home once home ownership costs are less than 1.2 times renting costs.---

Well, don't make any decisions based on what I wrote. Just use the information as another set of data points. The most important advice I can give is to not believe the hype. Do your homework, run the numbers and don't get caught up in the emotion and panic that seems to be running hard and fast right now.

Believe it or not, there will be homes available for sale next year, the year after that, and even 10 years from now. If you feel pressured---either by peers, by realtors™, or by a spouse---take a step back. If you have to cash in your IRA, postpone a wedding, or take out an interest-only piggy-back ARM (all things I've read recently) to buy a home, chances are you are a poor candidate for home ownership right now.

I remember buying a home in the mid-70s during a lull. I got the place for 15% below asking. There were no bidding frenzies. Three years later, I sold it for double what I paid. It took 2 days to sell and there were multiple offers over asking. The market was in mania mode. The same thing happened in the '80s. Now here in the '00s, it's happening all over again, only more frenzied. But in between those periods, there were 5-10 year lulls/downturns when no one cared about real estate.

It's hard to believe right now that real estate could ever hit a lull again. But it will. Imagine the looks on people's faces in 1999 (when the Nasdaq was nearing 5000) if you told them that in two years the Nasdaq would be at 1000. I'm sure they would have thought you were a kook.

At 5:10 PM, Blogger realist said...

someone suggested buying rental property in texas, because the prices are low. that's true, but because there is no state income tax, the property taxes are high and eat away at cash flow. even if you pay off the property, you'll always have increasing taxes in texas.

don't laugh, but i've found a great way to get cash flow is to buy mobile homes on their own lots in the carolinas. i look for mobile homes with water views. i usually pay about $50,000 to $60,000 (lot value) and rent them for $450 to $650 per month. property taxes are only on lot value, so there's great cash flow. when i get enough of them in the same neighborhood, i build two and three story houses on pilings (stilts). i've found that most lots, down here, zoned mh are also zoned for duplexes. once the building starts, the lot prices shoot up.

At 6:52 PM, Blogger Sunny said...

Realist, you are flowing with the wisdom. Keep it up.

At 7:03 AM, Blogger burbanman said...

San Diego wrote: "For us, it would be an opportunity to trade up at numbers that pencil out (we are sitting on $270K in equity) without selling our home and renting ... we have kids and are a bit too chicken (!) for that."

SD, you are sitting on $270k in PAPER equity. Like most homeowners nowadays, I had been constantly checking my market value. I have a townhouse that I thought was a cool $225. That was until a neighbor in a larger unit sold for $6k less than than! I sold recently for 93% of what I thought my house was worth. We plan to rent and sit on our cash.

Bottom line is your reservations about renting are unfounded. Rates just went up, so your equity will appreciate even more in a CD. Take into account the (+)CD interest,(-)rent, (-)previous home taxes, (-) previous maintenance costs, and (-) previous mortgage interest. You will have a much lower net rental cost than you think.

It's a gamble whether your equity will rise or fall, but with so many people sounding the bubble drum do you really want to take that risk for your family?

My advice...walk slowly towards the exit before the stampede starts. You won't regret it.

At 6:39 PM, Anonymous Anonymous said...

As someone who rents in Adelaide, Australia, and has a sister-in-law working in loan restructuring in Melbourne I know there is more to Australia than Sydney. Housing markets in Australia have been strongly regional in the past although Sydney has always been seen to give a lead. This cycle we have seen overlapping booms in all the major centres -- but there have still been some variations in timing. Units have recently fallen in value in Sydney and Melbourne.

In Sydney this has been partly related to the introduction of extra sales taxes on investment properties and partly related to high vacancy rates and slight drops in real rents. The latter means that properties that cost two or three times as much as five years ago are pulling in only slightly more income.

In Melbourne the same pricing problems have been accentuated by the massive level of near city unit building. High vacancy rates for units but not for houses have meant many investors have been forced to move into their unit and rent out their house.

One of the additional drivers of housing frenzy in Australia has been the wide spread publicity given to negative gearing in recent years. Unlike the US, Australian owner ocupiers cannot claim their mortgage interest costs off tax. However, real estate investors can write all their costs above income from a property off their tax. There are many spriukers exhorting people to purchase loss making investments to get capital gains that can be realised after retirement (when tax treatment is kinder). Over the past five years the capital gains have been huge and continuing and so these schemes
have looked pretty good.

My sister-in-laws in-laws bought a unit in Adelaide two years ago and are yet to find a tenant but are sitting pretty (on paper) with the asset appreciation and the avoided tax. In the long term I think they are in a bad way (having bought a unit with no kitchen that no one wants to live in) but I might be proved wrong.

A good place to go for information on affordability levels in Australia is the Commonwealth Bank - Housing Industry Australia report. Us non-fee-paying plebs can get it a quater out of date. The latest is at https://research.comsec.com.au/
ResearchFiles/H/HIA_December_Qtr_2004.pdf and shows affordability continuing to plumb all time lows in Adelaide. People proclaiming the "bubble has turned to rubble" have no grounding in reality. If you invested in Sydney or Melbourne units your day of reckoning has already come, or maybe its just begun. Other sectors and other markets are different. As a renter who would like some stability of tenure so my kids can stay at one school I must believe that a price correction will come. But I do not think it has begun and I do not think it will happen quickly in Adelaide. After the last Adelaide boom nominal prices flattened for five years before they fell slightly for two. Of course this added up to considerable real price falls and the magnitude of the boom and its drivers were different.


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