Is Melbourne in A Real Estate Bubble?

freakatronic on 29/12/2016 - 16:52
Last edited 02/01/2017 - 13:21

Happy New Year Everybody. Yes it's two days away.

Now, I thought I'd throw the question to the OzBargain audience. I got some good points of view last time I asked, so I expect more of the same. I could only be bothered looking for Melbourne information, as if I looked for other cities I'd have 700% more work to do for a forum post when I'm supposed to be working.

Reasons why I think we're in a real estate bubble:

  • Low to no wage growth ABS Data
  • Inflation similar to wage growth RBA Data
  • House price growth doubles inflation and wage growth on the most conservative measure, quadruples it on the real growers REIV data

So what I see, and correct me as I know you will if I'm wrong, is that the only improvement in earnings for average Melbournian comes from inflation. While at the same time, housing prices were bid up at 4x the rate of wage growth. I'm going to vote "yes", it's a bubble. The largest determinant of price is the market's ability to sustain those prices. We're not all doctors and lawyers, and most of us can't afford a place in Melbourne anymore. I just can't see how this is sustainable.

Go on then, educate me.

EDIT We've got some excellent thoughts from well educated people so far. Thanks to everyone who's weighing in, and to anyone else - feel free to lay it on me.

SECOND EDIT Thanks for all the useful opinions everyone. I fear people missed my point and started arguing about whether property is affordable or not. Yeah, I know it's not affordable. There are plenty of things that aren't affordable, and their price isn't going to change much regardless of the fact. It's $244k for one share of Birkshire Hathaway, but that's no bubble.

Poll Options

  • 161
    Yes
  • 46
    No
Home & Garden

Comments

    • tonka on 31/12/2016 - 15:09
      +1

      70% crash in realestate wow, that is prepper stuff.
      So what would happen speculatively, I would expect that would turn Australia into a financial disaster on a scale no country has ever seen. Our stock market would be completely wiped out as every bank is decimated. A massive chunk of the population would go bankrupt. Unemployment would surge in certain industries dramatically and money would be in such short supply it would cease up our whole economy and throw almost everyone out of work. Crime would then go through the roof and wholesale protest and then uprising would ensue.
      It's possible even your 40% across the board could do this.
      So far the reserve bank and other financial leaders have show a reluctance to let this happen. I think the government will do pretty much anything to stop a 'crash', a slow consistent decline maybe we could cope with.

      • [Deactivated] on 31/12/2016 - 15:22
        +2

        Look at Japan in the 80s and 90s, it's possible. Ireland could have had the same problem but they dropped interest rates to zero and made itself a tax haven for multinationals to bring in more jobs.

        And this was supposed to happen in the USA and even Europe, but this is where bailouts come in.

        This could also happen in Australia and a bailout process can happen, if they don't we're screwed. The other question comes is whether we can afford a bailout process. Italy and Greece couldn't get out of it and they had support from all of Europe. The US took their debt to 20 trillion to this date. Whether Australia can do the same that's a separate question (CBA and Westpac rank 10 and 11 in the world by market capitalisation meaning they are bigger than Santander, UBS and Goldman Sachs, something definitely isn't right).

        The question is when. Europe is failing bigger than ever (Look at Monte Dei Paschi), US quantitative easing has stopped so I expect next year, but they could still prolong it to another 2-3 years. If an unexpected event happens like an oil crisis or rapid inflation it could happen in a few months.

        I'm just being risk averse I'm not contemplating Armageddon. It's possible to have a great depression or more likely a recession, but I'd say you'd be taking a damn ballsy bet on the housing market at this point with how high prices are and the indicators I mentioned before.

        • [Deactivated] on 31/12/2016 - 15:36
          +1

          40-70% fall in house prices is predicting armageddon. :) Is there a single bank that would be liquid under that prediction?

        • [Deactivated] on 31/12/2016 - 16:55

          @Frugal Rock:

          Hence a bailout. But thanks for the smiley it's New Years after all ;)

          But also recognise that the drop in 40% doesn't affect the banks directly, it's whether the people who own those properties can pay the remaining interest and repayments.

    • tomleonhart on 01/01/2017 - 10:44
      +1

      Yum. To think that I can buy a big house in Neutral bay for around 1.3 mils already tickle my fancy :D

  • [Deactivated] on 31/12/2016 - 19:10
    +1

    Wait till trump steps in as president.

  • Dogfight on 31/12/2016 - 21:04

    I think "bubble" is not correct, i think it is more of a "Housing Balloon" as it will inflate and deflate.

  • s12321 on 31/12/2016 - 22:14
    -2

    NO, the house is more worth than it sales. buy more.

  • edgar28 on 01/01/2017 - 00:10
    +1

    2015 news

    Chinese only contributes 2% of the housing market
    http://www.domain.com.au/news/foreign-buyers-account-for-1-p…

    From memory India is no.1 and England no.2 and so on with Indonesia, Singapore, Thailand

    Un-Affordability is mainly caused by lifestyle from one research that younger generation likes to travel twice a year and party all night long during weekend

    • Powershopz on 01/01/2017 - 09:05
      +3

      "Un-Affordability is mainly caused by lifestyle from one research that younger generation likes to travel twice a year and party all night long during weekend"

      This isn't true and is a false premise sprouted by media outlets to overshadow the growing crisis and inequalities of housing affordability. Unaffordability stems from the fact that the median house price to median wage ratio has increased 3-4x over the past 30 years. Hence buying a house these days costs 3-4x as much as it did 30 years ago. It has nothing to do with peoples income and how they spend it.

      • edgar28 on 01/01/2017 - 11:28
        -5

        And wages also increased around 3 times.

        economic assessment is based on graduate professional wage multiply by 5 for average house, if the value is below, that's "economically" healthy

        not that I agree on the terminology…..

        about how people spend make huge diff. look at ozbargain forum, one guy earns 180k and said Australia has no life and no saving because he choose to stay beside a beach (renting)

        • Powershopz on 01/01/2017 - 13:10
          +3

          "And wages also increased around 3 times."

          As stated - it's a ratio of House Price to Wage so wage increases are taken into consideration.

        • edgar28 on 01/01/2017 - 20:04

          @Powershopz:

          With all those inflation variables and external factors , that's why economist used the 5x ratio as health check

          can't always compare of ratio increase, unless you want your country not being developed all the time.

          If you work in Antarctica, your wages might increase, land price remain low for many years and affordable, is that a good thing? Hence to monitoring tool is the economic "health" check, what is reasonable? So far (i think) it is set by the Harvard University

          you could compare 50 years ago, the ratio might be way lower, that might just mean that the country is not as desired by most, when now it is way desired by many, if the health check is bad, hence you might get the bubble (if we are still discussing about bubble here - or you all sway to other objectives?)

      • tonka on 01/01/2017 - 12:16
        +1

        Interest rates where 3-4x as much back then so on-going affordability would only be higher if interest rates climb.
        Plus no First Home owners grant, no stamp duty exemption and 10% deposit needed not 5%.

        • Powershopz on 01/01/2017 - 13:23
          +1

          FHOG and stamp duty reduction on a 600K property is $25K or 4% or the value (less if you account for total value paid at the end of the life cycle of the mortgage). So lets state property is only 2.96 times expensive as it was 30 years ago. Sound good?

          Deposit needed is negligible when you're talking about total cost of the property but if you want to include it - again house deposit/wage ratio was 3-4x what it is now.

          Yes interest rates were higher back then hovering around 15-17.5% however you could pay your house off in 5 years. Good luck doing that these days.

        • tonka on 01/01/2017 - 13:49

          @Powershopz: "however you could pay your house off in 5 years.", OK sorry but now you must be reading an alternative history. With interest rates at 15-17.5% many people were losing their homes then.
          Also I expect unless your are measuring disposable income the whole equation is worthless anyway, prices on almost everything have shifted so have wages and taxes.

        • [Deactivated] on 01/01/2017 - 18:30

          Would be definitely nice if you could negative gear interest rates at 20% whilst real estate prices were as low as they were in the 80s and early 90s.

        • edgar28 on 01/01/2017 - 20:03

          @jared444:

          ok

        • [Deactivated] on 01/01/2017 - 20:40

          @edgar28:

          No problems m80

    • lousy on 05/01/2017 - 08:03

      That doesn't capture data on newly emigrated permanent residents who are the main buyers

  • [Deactivated] on 01/01/2017 - 12:08

    I reckon that Antarctica is nearing a boom

    • edgar28 on 01/01/2017 - 20:07

      Powershopz might convinced me into that direction

  • Rocket on 01/01/2017 - 13:04

    Supply and demand.

  • axlfan on 01/01/2017 - 16:38
    +1

    Even I moved from the Us here in Jan…Lived in Tasmania for 6 months and now moved to Melbourne.

    Wow the east side is out of reach. The west looks promising. I see places like Point Cook and they are expensive as well.
    I will never buy an apartment I suppose. I will try my best to get a land + house package but I see that there is no value for money at all. Even $700k is an ordinary investment by the looks of it in the West side.

    But I am tired of renting now for the last 10 years. If I throw money into a pit, at least its going into my house.

    • [Deactivated] on 01/01/2017 - 18:34
      +1

      It's also a discipline for people who aren't financially conservative. If you own a place you have to budget for mortgage repayments and save whereas renting you'll just spend whatever you have left from rent. So in essence when buying a house your are being forced to save but instead of it going into your bank account, it's going into owning the proportion of a house.

      • freakatronic on 02/01/2017 - 13:18
        +2

        Well now, that's simply not true. Home ownership is not a mark of excellent stewardship, nor is renting a mark of a wastrel.

        • [Deactivated] on 07/01/2017 - 12:08
          +1

          ahhh…. When did I say that applies to every single person?

  • tonka on 01/01/2017 - 19:14

    I don't know whether it an excuse or avoidance thing but people talk about not being able to buy because the city they live in is out of reach or they like living in a certain place where it's too expensive or because units are a bad deal, can't save deposit etc.
    You buy where you can afford to buy and what you can afford to buy. If you want to live somewhere else then do so and rent but that doesn't stop you from buying where you can afford to and renting that out.
    The very best approach I believe is to rent where ever it's convenient and preferable for you to live. In the meantime purchase your retirement home and negative gear it. Move in later and never pay CGT. Or just buy one or two cheaper properties where it is affordable for you, negative gear them until you have some residual income then use the capital you have in them as deposit for your home. There's plenty of different ways to go with the hyped save 20% deposit and buy a million dollar property probably the crappiest one unless you are earning a motza.
    If someone doesn't won't to do the hard yards to get into the market that is all fine it's a lifestyle choice, opportunity cost etc. But I wish they would just say so instead of demonizing the process and being all hard done by.

  • floorpie on 01/01/2017 - 19:49
    +1

    Interesting to note US house prices have mostly recovered to pre-2006 levels. There was a price crash but people apparently still want to live somewhere for some reason.
    http://www.economist.com/blogs/graphicdetail/2016/08/daily-c…

    • freakatronic on 02/01/2017 - 13:14
      +1

      What the US did with their money supply to achieve such a modest "recovery" could be viewed as suicidal in the annals of history.

  • Windows98 on 02/01/2017 - 00:13
    +3

    The problem with a bubble is that no one ever knows when it's going to pop.
    Just like every other crash, it's always the unseeable events that caused it.

    Diverse portfolio is always the best course and people relying solely on property as an investment just because of the recent increases will feel the burn if anything happens.

  • RocketSwitch on 02/01/2017 - 02:30

    There's no bubble.

    I think apartments are ridiculously overpriced.

    But a home? There's no way. Compared to Sydney, it's a good time to buy if you can.

    The listed house prices when I was looking almost always went around 15%-30% higher than listed price.

    This created interest and competition. Every house I saw had a huge crowd, always sold and had at least 3-4 bidders fighting it out.

    I believe Melbourne properties will be hot as the population continues to grow, it's rising and people are prepared to pay.

  • freemoneyhunter on 02/01/2017 - 09:39
    +4

    Propery prices grow near the same level as the money supply which is around 5%-15%. Inflation is not the CPI which is manipulated by the government to hide inflation, the correct definition of inflation is the increase in the amount of money.

    http://www.economagic.com/em-cgi/data.exe/rba/dmabmn

  • basl on 02/01/2017 - 15:04
    +1

    often its not recognised as a bubble until after it bursts

    • freemoneyhunter on 02/01/2017 - 15:42
      +3

      I did supply a link to the amount of monetary debasement which showed the amount of money in Australia increased from 750 Billion to 2000 Billion dollars in 10 years. Thing is people are looking at bubbles in the wrong things such as property and stocks, the real bubble is in the value of the currency, the currency keeps falling against asset prices. Government says inflation is 1%-2% while they allow the money supply to increase around 8%. I wonder where that missing 6% goes ????

  • Reveal55 on 02/01/2017 - 20:50

    The only bubble is new estate's being built with hundreds of houses at the same price level and the over supply of apartment building. Blue chip suburbs, large blocks are all about supply and demand, and demand always wins as even if prices fell or rates increase these home owners can either
    a) afford rate increases
    b) don't sell, hold till the market value increases

  • zealmax on 02/01/2017 - 23:36
    +5

    I am no economist, but I feel some people believe the term bubble is when the property they want is affordable to them or feel there is no value. I am pretty sure this isn't what a bubble is. If it is, I am in a Lamborghini bubble. If you are buying your primary property, then stop worrying about whether there is a bubble and concentrate on your serviceability. Everyone needs a place to live, and even if the prices fall it won't stay there forever. Over extending your finances is a proven method of losing money in the market. Nobody is going to sell their property at a loss if they could hold out until when a profit can be made.

    • [Deactivated] on 07/01/2017 - 12:17
      +1

      'feel some people believe the term bubble is when the property they want is affordable to them or feel there is no value'

      You made an argument on an assumption. The fact is that this bubble is debt fuelled to the point a lot of people won't be able to afford it when either unemployment goes up, a recession kicks in or interest rates go up. Even the RBA says they are worried about reducing interest rates further because it will produce housing speculation. Bit late aren't they?

      Housing to income ratio is higher than any other country. That is a bubble. Another definition is Price to earnings, that is way too high, rental yields of 4% in the city makes no sense based on historical data across the world. Also, there is no other asset class that consistently grows by 10 percent or more every year without it being a Ponzi scheme. Just basic investment knowledge.

      Vancouver's housing bubble popped recently and what did the government do? Interfere by providing 5 year interest free loans to first home buyers to continue fuelling the bubble.

      • zealmax on 07/01/2017 - 21:28

        Can I assume you believe you have enough evidence and knowledge to state that there is in fact a bubble and that you believe sooner or later it will pop? You just made an assumption that historical international data is adaptable to Australia. It is anybodies guess what is going to happen in the future. Everyone has a right to an opinion.

        • [Deactivated] on 09/01/2017 - 22:32

          So my assumption is that economics also applies to Australia…

  • congo on 03/01/2017 - 08:35

    I recalled the news mentioned that Melbourne is expected to grow 5% in 2017 while Sydney 3%.

    • bargaino on 08/01/2017 - 13:16

      Melbourne is expected to grow 5% in 2017 while Sydney 3%.

      Says who? People selling real estate?

      What is the rental yield for Melbourne apartments? Last I saw, about 2% net after immediate expenses, so basically zero after depreciation of the building.
      The only way that makes sense is if people expect rental returns to be much higher (in real terms) in future. (And in the shorter term, capital gains reflecting that expectation of higher rental return getting closer).

      Houses are different: one house can be replaced by a block of flats, giving a much higher rental return for the same land. But how can all those tower blocks in Melbourne double their rents? Will they be occupied by a new wealthy elite, while the current tenants are pushed out to the suburbs? Seems unlikely.

      • congo on 08/01/2017 - 19:19

        It was on channel 7 news in Sydney.

  • JV159 on 03/01/2017 - 09:39

    Old news.

  • edgar28 on 16/03/2017 - 11:45

    http://www.news.com.au/finance/real-estate/buying/the-foreig…

    latest report stated foreigners are good

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