Interesting article from the Economist:

http://www.economist.com/opinion/dis...ory_id=4079027

Here are some extracts:

The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops

...some housing booms have now fizzled out. In Australia, according to official figures, the 12-month rate of increase in house prices slowed sharply to only 0.4% in the first quarter of this year, down from almost 20% in late 2003. Wishful thinkers call this a soft landing, but another index, calculated by the Commonwealth Bank of Australia, which is based on prices when contracts are agreed rather than at settlement, shows that average house prices have actually fallen by 7% since 2003; prices in once-hot Sydney have plunged by 16%.

...house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.

...contrary to conventional wisdom, it does not require a trigger, such as a big rise in interest rates or unemployment, for house prices to decline. British home prices started to fall in the summer of 2004 after the Bank of England raised rates by a modest one and a quarter percentage points. Since 2002, the Reserve Bank of Australia has raised rates by exactly the same amount and unemployment is at a 30-year low, yet home prices have fallen.

In Australia, the 12-month rate of growth in retail sales has slowed from 8% to only 1.8% over the past year; GDP growth has halved to 1.9%. In Britain, too, a cooling of the housing market has been accompanied by an abrupt slowdown in consumer spending. If, as seems likely, home prices continue to fall in both countries, spending will be further squeezed.

Appears to be less Britons posting on Expats wanting to cash out their house equity and flit off.

This chart from the above article, shows the % change for each country from 1997 to 2005.

Britain at 154%, Ireland at 192% and Australia at only 114% ?

I'm not sure I would call a 1.25% rise in interest rates modest, especially when compared to something like 4%.

One thing a lot of these articles fail to analyse is the stabilising effect of fixed rate mortgages. These were very rare in the UK at the time of the 89/90 crash; they are much more common now. I can't comment on Aussie but I assume the situation is similar.

A.

I was looking at an Australina web site a few minutes ago (The Parliamentary Library) that quotes "During the last ten years 17 per cent of borrowers have taken out other than variable rate mortgages" I assume these will be fixed rate.
http://www.aph.gov.au/library/pubs/r...-04/04rn21.htm
This was in 2003. But at the beginning of 2004, I know of many people, who switched to fixed rates at 5.9%

Might that be the Q1 05 figure dragging down the average?

The Canada figures look more sustainable.

I take your point about 1.25 / 4 being a rise of over 31%.

The really cheap fixed rate deals from a couple of years ago are mostly coming to an end; 2 or 3 year fixes are what 99% of those taking fixed rates tend to opt for, unlike the USA and Continental Europe where 25 year fixed rates can be obtained.

To balance fixed rates you have self-cert (UK parlance) or low-doc (Ozzie parlance) mortgages and interest only mortgages.

In any house price crash most people who can keep on paying the mortgage will be OK. It's those forced to sell at a loss that drag down the prices and who suffer personally. I reckon a lot of those people would have:

1. Entered the market at the peak.
2. Overstretched by taking out interest only and/or self-cert mortgages, having lied about their income.

I heard an economist saying that a neutral or average base rate for the UK was 5% so at 4.75% we're still slightly under that. The prospects of a reduction in rates are becoming less certain here because inflation is just about at its target and there's talk of rising raw material costs.

So were those fixes that people took out at 5.9% generally for 2 years? What would they get another 2 year fix for if rates stay the same for 6 months?

There's a danger here that those who took out v. cheap fixes 2 years ago (for under 4%) don't qualify for another fix (reductions in their income) and so end up on the standard variable rate which is around 6.75%. Now that's a hike!

It was back in Sept 2003 and the 5.9% was for 5 year fixed rates. It was a big topic of conversation back then, as that rate went up to 6.29% by October, and there was a lot of activity in getting the lower rate in time.

What an interesting article, we have just been pouring over it together as we are hoping to buy in a few weeks. Thing is we *need* a house, to settle here, but things are looking very uncertain. Hmmm......

Perhaps the best advice is simply don't overstretch and think very carefully if you are at all uncertain about your ability to carry on paying the mortgage, eg, if there are any job security doubts.

If you carry on paying the mortgage and aren't forced into selling then you can ride out any fall. You might be riding it out for quite some time, though.

I just did some checking on http://www.commbank.com.au/propertyvalueguide/ and the metro city areas are going up or staying still. No collapse yet.

I remember most of the fixed mortgages being for 5 years. Some of the low start ones (e.g. 0.75% interest payments) had periods up to 2 years. I agree with sackofspuds point on low doc mortgages being a danger, but I still think that the higher use of fixed mortgages now compared to 15 years ago will have a stablising effect (although it doesn't completely remove the potential for a crash).

Regards
A.

prices in Perth are far to high. At the end of the day most people come here because they belive prices are quite cheap. When the prices start to become less cheap people will start to look at other destinations .At the end of the day perth can offer very little apart from cheap housing. Other parts of Australia can also most of the lifestyle options Perth does and more.
One Major worry if you own property in Perth would have to be the ammont of property brought by investors, these properties are brought with one objective Capital gains and rental income . If things change slightly the local market could well find itself with a glut of property for sale all at the same time thus causing a adverse effect on prices which would already be falling in any normal market correction. A colapse in the housing market has to be a real concern with so much land for sale a limited supply of first time buyers,
and investors who may want to consolidate gains at the first signs of trouble.

Still with so much sand about there`s always the option of sticking your head in it and hoping for the best

Something is going to have to give at sometime and there will always be casualties, we are waiting it out for a while.

M

We said that back in '99 when it seemed that house prices were over inflated. People were then bemoaning the prices and the earnings ratios needed to get a house but what happened? prices doubled or more over 5 years and we missed out on the leading edge of the rise. The situation isn't the same as the late 80's when the market crashed, interest rates are historically low at the moment and whilst people can afford their mortgages there isn't going to be the mass rush to sell by the majority. Investors may dump their properties lowering prices somewhat but those cheaper properties will soon be bought stabilising prices.