Louis Christopher: Property prices are crashing

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David Llewellyn-Smith
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  1. Time to update the evolution of expert commentary:

    – House prices in Australia only ever go up, they will never fall.
    – OK, maybe they will fall, but only in a few regional markets, never in Sydney or Melbourne.
    – OK, maybe in pockets of Sydney and Melbourne, but not in the good suburbs.
    – Ahem. The current softening in Sydney and Melbourne prices, including in the good suburbs, is minor. House prices will bounce back fast, they will not fall far or for long. They will not crash.
    – Err… ok. The current widespread falls in Sydney and Melbourne will go on for longer and a bit deeper than we originally forecast. But this is a healthy correction. House prices will not crash.
    – Umm… well. Actually, there are a few scenarios in which prices could crash. But we don’t think they are likely. I repeat, house prices will not crash.
    – Oh dear. Well, this is awkward.


    • You watch what happens over Xmas
      On the way up prices used to open after Xmas break 10% higher
      You watch this Xmas into feb March April 19 there will be around a further 10% fall from nov dec

    • Wasn’t housing in syd/melb massively overvalued in 2013, and we were going to have a slow melt to correct it?
      When we get to 2012/13 prices we still aren’t there yet.

    • Out with the old:
      * Australia is different
      * Prices may plateau but they invariably keep going up
      * These people are so smart, they bought in blah blah and blah and now the prices have gone up in blah blah and bla
      * You need to scrape up every penny and get in now or you will never get into the market

      In with the new:

      Well, this time it is different:
      – Australia house prices are not overly special to the rest of the world or at least to property cycles and reality
      – Some Australia property prices are getting hit hard and may do so for many months yet
      – Prices will not keep going up if wages don’t keep up & the gig economy prevails over long term job security
      – Prices will not keep going up forever if bank lending keeps tightening
      – Australia is not a get rich quick property scheme

    • You forgot “We’ve had a bit of a pull back, but this was inevitable after the unsustainable years of booming prices”. Yeah … NOW you say it was inevitable. Back then it was only doom’n’gloomers who would point it out.

      • Speaking of ‘pull back’, that reminds me of an old quote, as valid as ever: “let us pull back the foreskin of ignorance and apply the wire brush of enlightenment”…

  2. *Any* popcorn will do for a once in a lifetime Event like This.

    Q: What’s the best popcorn in the world when you need it?

    A: Whatever you have on you 😉

    • Don’t eat your popcorn too early as we’ve been here before.
      Marshmallows is what you want. Wait till this whole thing burns down to the ground, then sit back and toast a few marshmallows over the smoldering ruins.

  3. At this very moment there are plush white cats purring contentedly as they receive a fulsome stroking from their bank cartel owners.

    Auction Action – 03/11: We will make you pay!

    Another week, another miserable “hammer time” performance across the Post Codes of the Emerald City. The “Siege of Sydney” by the private banks continues with credit creation remaining on a very tight leash. When will the banks decide that enough punishment has been dispensed and the lesson has been learnt? When will they recommence dispensing abundant bank credit to those property punters they deem worthy?


  4. The real question is: Will we use a crisis to reform the system? Save primary residence ownership, hit speculators, fix the distortions that favour speculative housing bets, bail out workers not banks … or will we just do what we (and the world) has done every time before?

      • C’mon Eggy, enjoy this ride. You’ve done the hard work riding uphill, it’s all down hill from here now.
        Down, down, prices are down. This is only the beginning, Eggy, you bring the popcorn, I’ve got the wine.

      • What’s that you’re saying? I’m a bit deaf, so you’ll need to wipe that protein that’s all over you face, so that I can read your lips!

    • aj…if what just happened at APRA is any guide, nothing will be done. The APRA top guy was just given another five years in the job. In the US after the GFC, nothing changed and housing there is also back where it was. No sub prime that I know of, but bankers regulators walked free.

    • Aj – my money is on households to be allowed to tap into their super to help keep making mortgage repayments.

      • darklydrawlMEMBER

        You can already do this, although there are caveats about where, when and how much. I knew a few people who have already tapped their super to prevent their house from being repossessed by the bank.

    • Easy. Pollies are up to their collective eye-balls in IPs.

      Will Turkeys vote for Christmas? I doubt it.

  5. Why the f does it take months to get the state valuer general to disclose prices??
    Seems like a conspiracy of lack of info if u ask me

    • In Brisbane, it is only Anna’s cashed up public servants in the 7-12 km circle keeping things moving. Outside those speculative areas the first price drop earlier in the year was $20,000………there has just been a second one of $15,000. This is the bog standard workers home for those on lower wages ( not minimum age obviously ) Getting close to 10% off now

      • Interesting about Newcastle, hard to see prices holding up there with Sydney falling at such a rate. Not sure whats held up the Newcastle economy since BHP left but suspect its a proxomity to a debt driven Sydney economy and the local university. Likely price falls will accelerate to reflect Sydneys declines

      • House sales in Indooroopilly are less than 50% at same time last year. 67 vs 140 – previous 5 years averaged at 130.

        Seems like demand in the more premium suburbs is drying up as well.

      • “Not sure whats held up the Newcastle economy since BHP left ”
        Mining in the hunter valley?
        huge volumes of coal flowing through, and a constant stream of ships waiting to go in, at least for the last few years.

    • The Penske FileMEMBER

      5 auctions in the Port Stephens area on Saturday all held at the same spot… not sure how or why it’s done like this . Anyway, I can confirm there was a total of 0 bids. Interesting read there.

    • Talking to someone in the industry who deals with a lot of agents, apparently open homes are dead quiet. Apparently some agencies are restructuring and putting workers on as independent contractors now, fearing a downturn.

      I also keep hearing of settlement failures from colleagues, where buyers can’t get financing — in the rare circumstances someone actually does show interest in buying.

      GIven this is the 4th month of falls for Newcastle, and it’s already falling quicker than Sydney which has been falling for over 13 months now.. I wonder if falls will accelerate hard.

  6. Really looking forward to the RBA’s “happy pills” tomorrow and Friday… I am sure that they will continue to tell us that everything is fine. Jesus they are screwing things up….

    Households are seeing their major asset fall in value. They will respond by attempting to stabilise their savings ratio and as they do so, household consumption expenditure growth will slow towards disposable income growth (or below) and this will in turn lead to a slump in residential investment. Tax revenues will be hit by a fall in property tax, slowing GST receipts and a slowdown in PAYE income tax and while government is slow to react, react they will… further weakening the economy.

    Are the RBA so silly they don’t see this? ??

    • You’re right Pete.

      My proprietary business confidence indicator is actually at levels not seen since 2009. Whilst I am confident that there will be a “save” coming, I acknowledge that the risks are there and visible.

      Carn the flaming inferno!

    • Yeah could happen but you’ve also got the opposite effect coming from Boomers unwinding their little RE empires.
      If they get out in time they’ll pocket the biggest pay packet of their lives and they’ll have nowhere (investment wise) to put those unearned gains, because they know absolutely nothing about actual investing.
      The outcome for the broader economy depends on how boomers spend their windfall, I wouldn’t hold my breath waiting for them to seek out an under-capitalized Start-up and provide much needed development capital. nope that won’t happen.
      But I suspect we’ll see a lot more Boomers “discovering Europe…huh?” and “Adventuring on the Silk Road”, or Cruising the Mediterranean in the style that they deserve.
      We’ll also see bald fat 60+ guys cruising the RSL parking lots in brand new Porsche’s, their equally chubby wives (soon to be Ex’s) squeezing into something expensive and fashionable especially if they just got replaced by the latest Import model golddigger.
      Divorce Lawyers and Gigoloes will think all their Xmases have come at once
      As for Sydney’s hard working well they’ll just need to work a little harder.
      Yep…that about sums it up….now which group’s hand do you believe the RBA is holding when they say they’re correctly taking the pulse of the nation.?

      • Do you reckon Nathan Birch would get better CashFlo in a future job as a gigolo or a parking valet?

      • Parking valet for sure. Why pay for him when you can get a delectable piece of not overweight vibrancy for free? He could get a few pity fcks from some misguided sympathetic souls though

      • Begging for pity F’s from blue rinsed CashFlo’s what a fitting end.
        Who ever said there was no such thing as Karma.

      • greedypuppyMEMBER

        Nathan will probably survive..as for all his believers well they will be collateral damage. While they are drowning he’ll be looking for the next big opportunity..Hey Guys and Girls….

      • When you think about it that way, our economy = young people forced to borrow obscene sums to pay for the Rhine cruises of old people because they were born later. And it’s a once only deal.

    • What can the RBA do? They are jammed by economic, fiscal and monetary policy over the last 60 years.

  7. Apartment prices are now more-or-less fair value, given where interest rates are (I am not being sarcastic).

    Do some simple mathematics. The standard housing price model uses the real interest rate, other ‘user costs’ (e.g. rates, insurance, depreciation etc.), real rental yields and capital gain expectations to estimate prices. At equilibrium, the expected gain is zero (0). So with rental yields at about 3.5%, other user costs at about 1% and the real mortgage interest rate at about 2.5%, apartment prices are fair valued.

    Happy to explain the maths / the model if others don’t follow but it’s well accepted.

    I am clearly not a housing market bull / proponent. My point is this, the escalation in house prices was bound to happen given the HALVING of interest rates between 2013 to now. What did people think was going to happen? If the cash rate was back where it was then (3%) at the so called ’emergency post-GFC levels’ (so what does that make 1.5% btw?), the equilibrium prices goes down 25%. Said another way, the slashing of the cash rate accounted for 25% of the gain.

    Yes, house prices have been fueled by the expectation of continued gain (aka Ponzi model). But when you strip out this effect, it is very clear they have been driven by interest rates. If rates stay “lowering for longer”, or go even lower as predicted by our good friends here on this blog, be prepared for falls to subside as we hit fair value, and then maybe recover again.

    • That model has another assumption, which you do not list – all income and cashflow not committed to other essentials is devoted to housing.

      Housing is therefore the “catch all” or “plug”.

      No wealth can be built outside housing (by definition, given that assumption).

      This is the model that the last 20 years of Australian life has played out in. It is pretty sad.

      • Model caters for it.
        Alternative investments earn a potentially higher return but:
        – at higher risk and therefore demand a risk premium (besides all asset values are currently inflated)
        – you can’t live in those investments (and earn a nice imputed rent)
        – some alternatives like bank deposits or bonds give you a zero real return.

    • If you ignore the fact that most of these apartments are constructed from particleboard, kerosene fumes and the bones of Chinamen, then yes I agree: fair value says a screaming buy

      Knock yourself out buying them up

      • Well yeah. But the alternative is having nowhere to live.

        Sooooo, what do you think most people are going to do? (hint: what have they been doing?)

      • I tell you, if interest rates turn out to be as per MB predictions and prices fall just another 10%, I might buy.
        But I hope rates don’t fall.

    • “house prices have been fueled by the expectation of continued gain (aka Ponzi model). But when you strip out this effect, it is very clear that” …

      … that in fact you need to build a minimum 20% capital loss into your model, potential interest rate rises from the big banks, and further falling rents as oversupply hits combined with unemployment from the faltering construction and retail sectors…

      … and when you apply a discount for all that, you can see that buying an apartment right now is a ticket to a decade of negative equity, if not outright bankruptcy.


    • IMO the flaw in your model is few people have the money to buy these things outright. Nobody going to borrow $500k at 4.5% and invest it in something yielding 2.5%. If the asset has no capital appreciating then the yield needs to be a lot higher.

    • wasabinatorMEMBER

      How about when a pricing model that assumes a house or apartment is a dwelling purchased by someone to simply shelter themselves? A radical concept I know!

    • Other costs are about 1%….ahh maybe in a supply constrained market but once Landlords need to plan for 1 month per year vacancy rates that whole equation changes.
      In a down market you also get tenants telling you sob stories about lost my job, so I’d like to reduce the rent to half for the next 6 months (and than???) all these are real “other costs” that suddenly appear when the market changes or the economy tanks.

      • “Imputed rents” ? Implies that upward / sustaining price pressure is coming from owner occupiers.
        In an upwardly trending market I can understand why you might make this assumption because Credit is the only limit setting mechanism, however when the markets Animal spirits are tamed by Fear then you’ll observe a different but equally market defining phenomenon where Bankers sphincters pucker up and they become Colder than an Asian in-law

    • “Fair value” is determined by incomes. On that metric, as it equates to debt levels, we are off the scales. You’re right in that easy credit, justified beneath the umbrella of falling interest rates, is the vehicle through which the bubble was inflated. “Fair value” acting as a floor beneath falling prices is a loooooong way off. The only thing that will arrest falls is reigniting negligent credit.

      • I agree and this is my point.
        If interest rates “revert to mean” then prices will “revert to mean”.
        Those here believing in continued falls with falling rates – You are absolutely dreaming. You are lapping up whatever is being served up here on this blog and not thinking for yourselves.
        Interest rates were always the problem and they will continue to be.

      • The rates are already priced in; they’ve been at this exact same rate for over 2 years. Yet prices have already fallen 8.2% in Sydney in little more than a year. Your model on that alone is busted beyond all recognition. It ignores all the lessons of previous long term debt cycles. We are in no way unique. We’ve taken on too much debt in a frenzy of easy credit. Having effectively topped out on this credit expansion, we’re now slipping into a deleveraging cycle. Economic activity will be constricted, asset values will plunge (commiserate with the gains they had on the way up over the last couple of decades). Time to look, not at this website, nor at MSM, but at literature surrounding long term debt cycles.

      • “Yet prices have already fallen 8.2%”

        Yes, because prices were over-inflated even for the super-ultra low interest rate environment. But now some of this over-inflation has been corrected away.

        Think about where the cash rate is (1.5%). People are almost getting paid to borrow. If rates go lower, it would be stupid not to borrow more money. Credit would almost be free.

    • Yes correct

      I’ve been arguing this point for years
      House prices are a rational function of yield spreads

      Prices won’t fall significantly unless rents fall, or rates rise

      However , if the average punter can’t get access to credit , it leaves room for some falls (as we have seen)
      But the wealthy will be aware of the arb opportunity and put a floor under prices (like black rock did in the USA)

      • If price falls mean existing renters buy houses to live in at a greater rate than currently that will cause rent falls because the remaining renters will have lower incomes.

      • Not hard.
        If an IP is sold to an FHB who was a renter, they will have been amongst the highest earning renters. Hence, theorem landlord is looking at replacing someone on a very good income with someone on a lesser income. If it’s widespread, the average renter income will move away from well paid professional towards Uber eats driver, and rents will fall.

      • Apart from this making no sense , you have misrepresented my position

        The home is not sold to a FHB
        It’s sold to a rich(er) investor who isn’t constrained from access to credit (or cash)

      • Investors are fleeing the market, or being prevented from participating by lack of credit – it is more likely that the home is sold to an owner occupier than an investor at this point. That’s the core of what is happening – during the bubble, homes were being transferred from owner occupiers to investors. In a falling market, they move the other way.

        I don’t misrepresent your position – I’m saying it’s wrong, because if ‘It’s sold to a rich(er) investor who isn’t constrained from access to credit (or cash)’ prices would still be rising.

      • Jes us Chr ist

        Look at what happened in the US

        Blackrock and other vulture capitalists bought the foreclosed houses as a yield play

        You are just fabricating up your fantasy scenario


    • Market is never perfect even though we read in economics. Market is ruled by Fear and Greed. Greed has seen price increase because of CGT, Negative Gearing and availability of credit. Fear is creeping in as cycle goes downward. Theoretically you are right but crash in other countries suggest market does go below equilibrium in fear just as it goes above. All economic models are ignored by behavioral finance. Less rental yield was okay because of Negative gearing and prospect of capital gain. As it is said by Ken Fisher – Don’t catch the falling knife. Let it fall and settle down on the floor before you grab it. Job losses, less retails sales, restructuring of big companies, etc fear factors comes in play.

    • Do you mean fair value compared to wages…which themselves are very strong functions of the ludicrous inflation in said property?

      I suggest to you that your “fair value” also implies a financial and economic stability that doesn’t actually exist because of the strong interdependency of the property value and wages…

      Hence, a broader notion of “fair value”, as I’ve suggested, reveals that value is only good if the price of the property can keep feeding the wages that buy it, which assumes that history keeps repeating as it recently has…

      My 2c

      • There is also an intrinsic assumption that Real AND Nominal interest rates will remain at these low levels forever.

    • Yup!!! SOME of us in here, including peachy, predicted this damned bubble as soon as the RBA started dropping rates. This bubble IS RBA POLICY! We copped a fair bit of flak for our alternate observations!

      • I wish I had picked it.
        You live, you learn.
        And history will repeat, if they cut again. The correlation between prices and rates is so strong … You could almost call it a ‘fundamental’ relationship (lol).

  8. It certainly looks like this could be the big unwind . The piece falls to date are tiny in comparison to the run up. Even Perth needs the median price to halve from where it is to become affordable for single people and people with children .
    The political crisis nationally is also making t more likely. The feds will change government in around May. It will take BS 6 months to do anything , which time we will have Brexit and a financial shock, several more US rate rises and quantitative tightening.
    It’s a room loop !
    Like my mate said to me recently our parents bought homes and circumstances were right for them to increase in value for 40 years now the reverse will happen

    • This isnt the big unwind.

      This is a voluntary credit crunch imposed by the banks until the pollies extend additional protection and guarantees to their lending (banker pseudo fiat / money creation) practices.

      The big unwind will not be voluntary and will look like this

      1. The AUD falling with momentum past 60 cents

      2. The cost of the capital required by our CAD rising.

      Just imagine a sinking AUD, rising interest rates and inflation. Things will be crook in Tallarook.

      At this point there are only faint signs of both.


      • Agree with this. If the banks turned around tomorrow and said that our credit tightening worked, its corrected the market and we feel we can relax on lending again, the house price drops would be erased in 6 months. The question is, would the banks relax lending? And if so would they announce it or do it in stealth?

      • Ask the agents if they know of any brokers have more ‘luck’ with getting finance approved. The agents learn very quickly if the tap is being turned on again and will point you in the right direction.

        It becomes more general knowledge eventually but it takes longer than you might imagine and by then the market is back on the way up and all the insiders are in position.

      • If the banks, APRA and the government ALL said, “Phew, that was close. We were very naughty boys, but we’ve learned our lesson now. Thanks, Commissioner Hayne! Normal service can now resume.” You watch the nation rejoice and pile in again.

      • At the same time, it’s probably out of the banks hands now – it’s too late to make a change that will make a difference to how retail goes at Christmas, so they no longer control the risk that the reverse wealth effect crosses over into big falls in consumer spending.

        The banks may have entered into this situation voluntarily, but that doesn’t mean they can just exit it when they want, like many situations in real life.

      • I’m inclined to agree, the real crunch will be externally imposed upon us, what we have here is just a little fad diet, we’ll soon get sick of the diet and binge to make up for lost time.
        Although it might also happen that our self imposed diet causes others to take a closer look at our ever expanding midriff and “recommend” that we lay off the lollies. It’s dangerous territory if this goes much further. The idea of Private money creation only works if WE believe the collective assets are worth more than the debts..If we ever begin to believe that this simply isn’t true, than watch out below. (10% of additional debt taken on at revalues all our existing assets.. debt create the asset and all that)…this whole wealth creation engine works great in reverse too.

  9. Crashiness is in the air.
    No panic yet. I think that comes next year, unless there is a save first

    • Yes it will be interesting to see which major party yields first and starts to make promises designed to underpin house prices. I’m currently living overseas so not at the coal-face but my bet is that punters will be allowed to dip into their super to meet mortgage payments.

      Also interesting to see whether Labor has the minerals to scale back on negative gearing, as it has promised……I’m expecting some kind of watered-down implementation at best, complete abandonment at worst. I’m leaning towards the latter….

    • ErmingtonPlumbingMEMBER

      Everyone is holding their breath,…affraid to breath save it brings down house prices more.
      Once many people start gasping for air, thats when you know the mass panic attack has begun.

  10. wasabinatorMEMBER

    We need some Reject the House Price Crash dancers on morning TV. It’s literally all that’s missing.

    • Good thinking. The Reject the Recession dancers are probably all full of pot bellies and cellulite now.

  11. – When Is Christopher going to use the word “Downturn” instead of “Correction” ? He didn’t want to use that one word when was interviewed by “60 Minutes”.

  12. What’s the definition of a crash? Is it counted as a crash if prices fall by 20% when they were 50 – 75% overvalued?

    • Exactly. Not much of a crash is it?

      We will never erase the 50 – 75% under current interest rate settings.

      Imagine if that happened. Rental yield would jump to about 5-7%. While the real interest rate stays at, what, 2.5% (i.e. 4.5% – inflation)?

      • Rental yield would jump to about 5-7%. While the real interest rate stays at, what, 2.5%

        Just imagine – under those conditions building new houses would be a reasonable investment even without the expectation of asset appreciation, as long as rents didn’t fall.

    • 10% decline in bear market, 20% decline is crash in general terms regardless of the growth before. Keep in mind, not everyone gets the maximum gains as some people dont buy right at the bottom or sell right at the top. Also after, duties, taxes, fees and ongoing cost associated with investing a property, your gains are less.

      • Love this logic!
        Prices 50 times income are the new normal. Get used to it idiots! Don’t wish for a retracement because you losers missed buying at the bottom.
        Oh, and if you could please say that near zero real rates are the new normal too that would be great. Thank you kindly.

  13. At this stage of the game Philip Lowe is in trouble.
    Scomo is standing on his fingeres,
    Coreman has him in a headlock and a frydenberg has his knuckledusters on.
    “We have an election round the corner. On cup day I want to see them go down”

  14. Don’t know why everyone is taking strips off these people…. fine upstanding examples of homo economicus if there ever were one.

    Lmmao… your all a bunch of commies….

  15. Sydney is only about 5% above pre-2015/2016 correction peak, and falling at 2% per quarter – if the falls aren’t arrested pretty quickly there will be a four year period with no appreciation. That should concentrate some minds.