Real Estate Slump Down Under - Posted by Hank FL

Posted by Pat - HI on June 16, 2004 at 18:07:01:

“Appreciation sluts” - good one. LOL.

Real Estate Slump Down Under - Posted by Hank FL

Posted by Hank FL on June 16, 2004 at 09:50:10:

Down Under May Hint
At U.S. Housing’s Future


June 16, 2004 – Economists looking for clues about the future of the U.S. housing boom might want to take a look at Australia.

Like the U.S., Australia has enjoyed a spectacular run-up in home values over the past few years, with prices more than doubling in some parts of the country. The reasons for the boom are similar, too: low interest rates, relatively easy credit and buyers seeking to offset stock-market losses.

There is one critical difference, however. Home prices are still climbing in the U.S., but not so in Australia. According to Australian Property Monitors, a widely followed Sydney-based research firm, Sydney home prices fell 7.5% in the first quarter of 2004 and could tumble by 20% by the end of the year. Other Aussie cities are seeing price drops as well.

The divergence, many analysts believe, is the result of Australian policy-maker moves to rein in the country’s inflated property market, primarily by raising interest rates. The U.S., by contrast, has largely left the housing market to run its course. But with the U.S. economy seemingly back on track and inflation possibly on the horizon, many analysts believe the U.S. Federal Reserve will have to raise interest rates later this year.

Of course, there are some very important differences between U.S. and Australian real estate. Recent U.S. home-price gains, while striking, haven’t been as dramatic as those in Australia. Also, some unique factors have contributed to the Australian slowdown, including a new tax on investment properties that cooled speculative demand.

Still, the recent retreat of the Aussie property sector serves as a potent reminder that no housing market – even one insulated by relatively low interest rates and strong demand – is trouble-free.

Like the U.S., Australian home sales really began to heat up in the late 1990s. They got a boost from a rise in the number of mortgage brokers who, as in the U.S., provided a variety of new financing alternatives to buyers, including low-documentation loans.

By 2002, home values were rising faster than incomes, pricing many first-time homebuyers out of the market. Debt levels were soaring, and houses were moving surprisingly fast at public auctions, one of the more popular ways of selling a home in Australia. In April 2002, auction “clearance” rates soared to a record 80%, meaning that four-fifths of the homes offered for auction sold by the end of public bidding.

But as the market raced ahead, worries mounted. Much of the concern focused on the role of investors, many of whom had been burned by stocks and were pouring money into real estate. A report by the Reserve Bank of Australia noted that more than 40% of new home loans were being made to investors, compared with slightly more than 10% in the early 1990s.

“There is a common belief that house prices cannot fall,” the central bank warned.

The Reserve Bank raised its key interest rate twice in late 2003, to 5.25% from 4.75%. Although the increases weren’t dramatic, they were enough to knock some first-time buyers out of the market. They also had a big psychological effect, spooking home shoppers who were already anxious about the market and were watching for any sign that Australia’s business cycle was turning. Prices started to fall and clearance rates tumbled to as low as 32% – about the same as in 1989, just before the last property bust.

A new wariness was evident among buyers at a recent auction in Sydney. The house for sale, a Victorian home with molded ceilings near Sydney’s Centennial Park, was listed at about 1.1 million Australian dollars, or about US$765,000. About 20 or more people showed up, but many were onlookers who came simply to get a read on the uncertain market. One potential buyer, 53-year-old Brian Connell, put in a few bids but dropped out after the price rose. Despite the recent turn in the market, he said, many properties are still too expensive and prices could have more room to fall. The market “is like a game of musical chairs that everyone can play … and now they’re taking chairs away,” said Mr. Connell, an auto-parts importer. “I’m a bit nervous.”

The house eventually sold for roughly its asking price. But real-estate agents and the seller said the house probably would have nabbed a lot more, perhaps US$100,000 more, just a few months earlier.

Some Australian analysts are hopeful the market will soon stabilize. Interest rates remain low by historical standards. The prospect of massive foreclosures, a problem in the last housing slowdown, seems remote. “There’s no sign of panic selling,” says John McGrath, chief executive of McGrath Estate Agents, one of Sydney’s most prominent property companies.

But others are less sanguine. For one thing, more supply is on the way. In Melbourne, construction is under way on an 88-story apartment tower that will be one of the biggest residential buildings in the world. In Sydney, some real-estate agents have begun refusing listings in downtown areas where there has been a lot of new apartment construction because they fear the units will be too hard to sell.

The property market is now “the biggest single economic vulnerability” in Australia, says Rory Robertson, an interest-rate strategist at Macquarie Bank in Sydney. Indeed, growth slowed significantly in the first quarter, and some economists worry that consumer spending will weaken due to cooler housing activity. Whatever happens, he says, “it’s going to be quite a shock to some people that home prices actually can fall.”

Re: Real Estate Slump Down Under - Posted by Hank (MD)

Posted by Hank (MD) on June 16, 2004 at 23:08:23:

I’m not real clear on how I will be affected if this does happen (property values fall). I’m no appreciation slut – I buy strictly for cashflow. Even if property values fall rents shouldn’t go down – should they? It seems like rents could even go up since less people will able to buy their own homes.

Re: Real Estate Slump Down Under - Posted by Mike

Posted by Mike on June 16, 2004 at 10:44:04:

They should elaborate on the tax on Aussie investors since it sounds like that’s what killed the market. I wonder what % of new home loans here are made to investors.

Re: Real Estate Slump Down Under - Posted by Sean

Posted by Sean on June 16, 2004 at 10:23:40:

Hank, stop warning the appreciation sluts they are heading for ruin… I want to enjoy them calling me in desperation in a few years.