# Sydney house prices due for 87 style meltdown?



## markrmau (4 April 2005)

Hang in there Krisbarry.

I am renting an older style 2 bedroom house in a quiet street in a good suburb (Oatley, Sydney) for $280 / week. My partner keeps it very clean and it has a great backyard for the kids, dog, cat and now chickens to run around. The kitchen is on the small side, but that is fine as I prefer to outsource a lot of the cooking (LOL). 

When we moved in (beginning 2003), I asked the R/E agent how much it would be to buy. He replied that with the size of the block and location, about $680,000.

You see the annomoly?

For the sake of argument, lets say the house is really worth $580,000, and we could have the rate increased to $300 p/w. The return on investment is only 2.7% (ignoring council rates). Hardly inspiring if further capital gains are uncertain as they are now.

Now the real rub. Everyone is focussing on interest rates with regards to house prices. But there is another even more important factor - unemployment rates.

We are currently sitting on record low (for recent times) unemployment rates. It is widely accepted that we are somewhere near the peak of our economic cycle, and we could expect unemployment to start increasing - especially if housing construction comes of the boil.

You now see whats wrong? For us electrical engineers, it is a classic (unstable) positive feedback oscillator.

A lot of the capacity constraint that the reserve bank is worried about has come from construction in this housing boom. But now the bank is increasing interest rates to over come this supply problem. When the scales tip, they COULD tip quite rapidly with devastating consequences for the economy.

And if unemployment rises 3-4% over the next few years, the banks and house prices are rooted.

I don't think interest rates will go up on wednesday.

Also I can only speak from my experience in Sydney. If I desperately wanted to buy a house now, I might look at Perth.

Also, I liked this quote from ABC business program on sunday.

"The meek shall inherit the earth, but not its mineral rights"


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## wayneL (4 April 2005)

I think the whole anglosphere is in store for a house price shock.


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## Smurf1976 (4 April 2005)

IMO the whole housing market is like a complex mechanical / electrical system running with zero margin for error. As any tradesman or engineer will confirm, if you try and do that then sooner or later something goes wrong and the whole thing comes to a dramatic stop, explodes, catches fire, crashes, sinks or whatever. 

The housing market has long past the point of sensible operating conditions. Pedal is firmly to the metal, gauges are well past the red line, things are getting hot and some rather nasty sounds are being produced. It might come to a halt peacefully, but would YOU like to be standing next to it if it doesn't?

Real estate always goes up? And money really does grow on trees...


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## DTM (12 April 2005)

Thought this link might of interest to people.  Study done on property cycles. 24 pages of reading but interesting if you are into property.

http://137.151.62.168/finance/journal/papers/pdf/past/vol18n01/v18p151.pdf

Also quoting from the other link I posted (https://www.aussiestockforums.com/forums/showpost.php?p=9989&postcount=27) it didn't take much of a rate rise (6%) for the Japanese property to go bust.

"After the September 1985 Plaza Accord, the yen's appreciation hit the export sector hard, reducing economic growth from 4.4 percent in 1985 to 2.9 percent in 1986 (EIU 2001). The government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987. During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed.

The Nikkei stock market index fell more than 60 percent-from a high of 40,000 at the end of 1989 to under 15,000 by 1992. It rose somewhat during the mid-1990s on hopes that the economy would soon recover, but as the economic outlook continued to worsen, share prices again fell. The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession-by 80 percent from 1991 to 1998 (Herbener 1999)."

Although the interest rate rise rose by over 100% in Japan, 6% is still low.  Even though Japan is a different kettle of fish compared to Japan, Japan sounds very similar to the current US situation (battling inflation).  We won't experience the same amount of pain but if if inflation becomes a big worry, a rates rise to 6% (.5% increase) would mean a lot of people could be left hurting.  As austrian theory points out, the longer the delay in going through the pain and the necessary recession/correction, the bigger the blow up.  Also look at the result of the effect it had on the Japanese stock market.  As said before, different kettle of fish compared to Australia but we do have an over inflated property boom.

Just my thoughts.


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## ROE (12 January 2008)

We Aussies are a special lots even though we are less than a few percent on the world economy scale  .. House price never go down, resource super cycle is here to stay... Leverage to the hill as there are always jobs around.

When think don't work out like default on your loan, blame the government  

Amen


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## tech/a (12 January 2008)

Smurf1976 said:


> IMO the whole housing market is like a complex mechanical / electrical system running with zero margin for error. As any tradesman or engineer will confirm, if you try and do that then sooner or later something goes wrong and the whole thing comes to a dramatic stop, explodes, catches fire, crashes, sinks or whatever.




A jet engine falls into that category the odd one fails but 99.9% keep flying for life!



> The housing market has long past the point of sensible operating conditions. Pedal is firmly to the metal, gauges are well past the red line, things are getting hot and some rather nasty sounds are being produced. It might come to a halt peacefully, but would YOU like to be standing next to it if it doesn't?




Did in the 80s a well just wait until the crap hits the fan as it will and everyone will be patting themselves on the back.
A few of us will be looking for signs of stability and taking advantage of any anomaly.



> Real estate always goes up? And money really does grow on trees...




In the long term it sure does and in 15 yrs time these prices will be insanely cheap and the "House Prices to Stagnate" thread will have 2 million posts.A few will find that money does grow on trees if you can find plant and harvest the tree but most will keep on doing what they do best---sweet FA.


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## theasxgorilla (12 January 2008)

ROE said:


> We Aussies are a special lots even though we are less than a few percent on the world economy scale  .. House price never go down, resource super cycle is here to stay... Leverage to the hill as there are always jobs around.




Group think is such that only simple ideas can be communicated, understood and held.  The same group think occurs in the realist camp aka. the bear camp, only the rhetoric is along the lines of what a previous poster alluded toward: look at what happened to Japan nearly 2 decades ago, that's what all asset bubbles become.

"Men go mad in crowds, but come to their senses slowly, and one by one."----Charles Mackay.

How many of the-sky-is-falling property realists gave in and bought property during the last three years I wonder?   One by one...

ASX.G


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## Flying Fish (12 January 2008)

Get this, the bank rang me the other day asking if I would like to purchase an investment property thru one of their financial advisors


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## Mofra (12 January 2008)

markrmau said:


> Now the real rub. Everyone is focussing on interest rates with regards to house prices. But there is another even more important factor - unemployment rates.



The real villan will be the _under_-employment rate, which is harder to calculate but have read reports this is in the double figures. 

I can relate to your argument, as I bought an investment property a 2 minute walk from the house I rent. Earning almost double rent to what I pay (sharing with 1 other person), however I am paying 2.2% yield & earning 4.3% yield, and my holding costs & loan are tax deductable unlike a PPOR.
My situation is not uncommon amongst many I know, a form of slow moving property semi-arbitrage.


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## markrmau (12 January 2008)

Hello all, don't forget I wrote that almost 3 years ago.

Just an update: that house was sold 1 year ago for about $560k. 

And yes, I was completely wrong about the economic cycle - 3 years later we are still booming along with unemployment rates still apparently dropping.

I rent a slightly bigger house in an adjacent suburb for $290/wk. I could easily afford to buy a house but choose not to.

Cheers,Mark


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## Tysonboss1 (12 January 2008)

markrmau said:


> Hang in there Krisbarry.
> 
> 
> You see the annomoly?
> ...




What you are missing is the fact that rental yields and the value of the land operate in different circles,

Picture if for some ungodly reason a 1/4 acre block with a 4bedroom house was still available in sydney cbd, the house might only be able to be rented for $1000 a week but that doesn't mean that the land isn't worth $50million,


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## Happy (13 January 2008)

With 100,000 + migrants and 80% of them ending up in big cities, will keep big cities prices higher, longer.
Also let’s not forget that SMH was $0.20 in 1980 and now is $2.
Tim-tams were $0.60, so safe to say that $1,000,000 house is worth mere $100,000 to $200,000 in 1980 terms, hardly a fortune.

Yes, money grows on trees, but it also shrinks with time too.


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## tech/a (13 January 2008)

Plant more trees.


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## theasxgorilla (13 January 2008)

Happy said:


> With 100,000 + migrants and 80% of them ending up in big cities, will keep big cities prices higher, longer.
> *Also let’s not forget that SMH was $0.20 in 1980 and now is $2.
> Tim-tams were $0.60, so safe to say that $1,000,000 house is worth mere $100,000 to $200,000 in 1980 terms, hardly a fortune.
> *
> Yes, money grows on trees, but it also shrinks with time too.




Yes, half a mil' used to be something too...now it's just the price tag on granny's old house somewhere way out in the suburbs.  You can see strange impact of periods of excessive inflation here in Sweden.  My house is valued at several million....sheesh, I'm rich as hell!  But a beer costs 50 kr a pint and petrol is 12-13 kr a litre too, hehe.  It messes with you mind.  But people feel richer when they hand over a piece of paper with 500 or 1000 written on it, and so they spend like dutiful little mass-consumers.

ASX.G


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## insider (14 January 2008)

The Yields in Australia are not as good as many overseas.

This Website (www.globalpropertyguide.com) is tops for property investment research. I think that it illustrates either one of two things... rents are too cheap or prices are too inflated... You choose...

Aussie yeilds are about an average of 5%, Thailand is about 8%, Brazil is 7.5%, Dubai is 10.2%. So prices in Dubai would have to double for it to reach the levels Australia has...

If property falls then I will get a house of my own sooner...


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## theasxgorilla (14 January 2008)

insider said:


> The Yields in Australia are not as good as many overseas.
> 
> This Website (www.globalpropertyguide.com) is tops for property investment research. I think that it illustrates either one of two things... rents are too cheap or prices are too inflated... You choose...




Rents are cheap.  Have been for a long time and continue to be, in spite of recent years where tenants are climbing over one another to get a lease contract.


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## nizar (14 January 2008)

insider said:


> The Yields in Australia are not as good as many overseas.
> 
> This Website (www.globalpropertyguide.com) is tops for property investment research. I think that it illustrates either one of two things... rents are too cheap or prices are too inflated... You choose...
> 
> ...




Dubai property market is booming.
A friend of mine who has been living there bought an investment property for AU$100k. Sold it 3 months later and doubled his money.


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## KIWIKARLOS (14 January 2008)

I dont think house prices will decline they may stay the same for a while but the reason i believe they will stay like this is becuase inflation will do the job of in real terms reduce the value of the housing market. 

Lets say house prices remain the same for 3-5 years and inflation stays at 3% which is a good chance thats essentially a loss in value of 9 - 16%. 

Because we have low vacancy rates and not enough supply it is highly unlikely that we will see a large reduction in prices as the US is. 
There is still plenty of money out they looking for a home to invest in as the share market declines in many places around the world wheres the cash gonna go?

Just my opinion could be wrong. But i think with urban consolidation petrol price increases and cost of services rising there will be areas close to public transport and the cities where house prices go up. Western sydney and the outer burbs are screwed IMO if anything is going to go down its these places.


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## Judd (15 January 2008)

I'm never sure we always talk about exactly the same thing (not even sure if this is the correct thread).  When we bought our home it was a three bedroom.  It still is.  However, since that time various "improvements" have been carried out: lounge/dinning area extended to about three times the original size; full length deck; landscaping; central heating installed; air-conditioning installed; rainwater tanks; solar heating; cellar.  Definitely not the same house we originally bought.

Bit like buying a property for $800k, undertaking $400k of renovations and then, due to market conditions, selling for $1M.  A real-estate agent would spruik "Look, a 20% capital gain!"

Way too many variables between individual properties, especially stand alones, to give an absolute view on what will or will not meltdown.


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## Happy (15 January 2008)

Judd said:


> Way too many variables between individual properties, especially stand alones, to give an absolute view on what will or will not meltdown.





Suddend drop of demand will do the trick.


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## aleckara (1 October 2008)

Happy said:


> Suddend drop of demand will do the trick.




What will do the trick is affordability, particularly for low income areas. That's where it will start if it does, and if prices go down in low income areas then expect the problem to spread later to higher class areas. It depends a lot on many factors though.

All the same I'm happy to wait for now. I definitely feel that houses are overvalued atm and there are signs that people on current real wages can not take anymore debt strain. In other words no one to finance my capital gain.

I see money supply increasing; I don't want to jump in and finance the profits of generations before me.

Besides why do that when I can enjoy myself for awhile? When and if the market picks up again and is on a 'trend' I can jump in. Sure maybe a little bit higher but then I have more certainity in regards to the investment.

EDIT: If I don't see incomes rising (due to economic conditions deteriorating) or debt levels being able to be increased even in times aplenty then where is my capital appreciation going to come from?


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## Glen48 (1 October 2008)

Bank card debt is still going up but are home owners using it to make house payments or buying Plasma TV's?


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## Beej (1 October 2008)

Sorry the title and content of this thread confuses me. In 1987 and 1988 Sydney house prices MORE THAN DOUBLED! That's not a meltdown folks....

In 1989/1990 they pulled back by about 10%-20%-ish depending on the area, then had a basically flat year in 1991, then started heading up again in 1992 onwards.

In terms of where we are at right now (late 08), I believe we are around late '89 or early '90 by the '87 Sydney property clock.

Cheers,

Beej


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## pepperoni (1 October 2008)

Beej said:


> In terms of where we are at right now (late 08), I believe we are around late '89 or early '90 by the '87 Sydney property clock.




I would consider this a real possiblity, but then how do you reconcile being well into 10-20% falls with all the amazing sales you are seeing


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## white_goodman (1 October 2008)

is it true in 87 there was a vast supply of housing on the market? (i know this to be true for commercial) cos atm we arent seeing the large amount of supply on the market..


comparing apples with oranges perhaps?


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## alwaysLearning (1 October 2008)

The way I see it, prices for housing will come down. Global Recession is on the cards at the moment.


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## cuttlefish (1 October 2008)

Sydney seemed to have its run earliest - peaking around 2003 in terms of hype - and doesn't seem as overheated now as it was a few years ago. Vacancy rates have tightened pushing up rents and making yields a bit more realistic though still fairly low by historical standards. I still can't see prices going anywhere but flat to downward over the next few years unless we get some sort of inflationary scenario.

The level and pace of decline depends a lot on how well Australia weathers the US/European fallout - which also ties to consumer confidence and job security.

In 1987 I think we were leading the race in leverage and stupidity with "Bondy" winning America's cups and outbidding the rest of the world for Picasso's etc. I think our big 4 banks still have some corporate memory from those days so hopefully they've been a bit more prudent this time around.

I'm not so sure with the smaller banks and building societies/credit unions and also worry about the quality of loans written by the banks via third party mortgage brokers - but I don't think we've been anywhere near the level of excess of the US.


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## Beej (2 October 2008)

On rent returns, you guys all realise that for an owner-occupier a rental return rate of say 4% or better beats having your cash sitting in the bank (earning say 7.5% BEFORE TAX) and renting the equivalent house right? 

This is because you have to pay tax on any $$$ earned from cash in the bank at your top marginal rate (40% pr 45% for high income earners). Rent has to be paid with AFTER TAX income. In Sydney rent returns are for most area's past the 4% point. So an owner with no mortgage, or who is thinking ahead towards their position when they have paid off the mortgage, is in a very strong position right now in terms of "return" on their investment at it's current value, and would be worse off if they sold and rented instead. That only becomes more tha case if you think prices are going to fall (which is of course why they won't!).

CHeers,

Beej


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## Nyden (2 October 2008)

Beej said:


> On rent returns, you guys all realise that for an owner-occupier a rental return rate of say 4% or better beats having your cash sitting in the bank (earning say 7.5% BEFORE TAX) and renting the equivalent house right?
> 
> This is because you have to pay tax on any $$$ earned from cash in the bank at your top marginal rate (40% pr 45% for high income earners). Rent has to be paid with AFTER TAX income. In Sydney rent returns are for most area's past the 4% point. So an owner with no mortgage, or who is thinking ahead towards their position when they have paid off the mortgage, is in a very strong position right now in terms of "return" on their investment at it's current value, and would be worse off if they sold and rented instead. That only becomes more tha case if you think prices are going to fall (which is of course why they won't!).
> 
> ...




If said person is saving specically for a house ... no longer the case 
Look up the first home buyers savings account ... I could be wrong though  It's either taxed at a flat 15%, or not taxed at all; seems rather unclear.

At any rate, I personally wouldn't use it simply because it's locked up for 4 years, there's a cap, and it can only be used for one purpose. The market would generally offer higher returns over 4 years ... imo


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## Glen48 (2 October 2008)

IF you own a house outright which is going down in value why not cash it in and buy back later IF you think the market has bottomed.
Mortgage insurance is now paying out 446 Million PA compared to about 46 a few years ago.
It is always better to rent than to buy.
If the USSA share market can affect us here over night and 12 senators in USSA can decide on the World economy why won't OZ houses fall?
In Los Vegas they are forclosing on 250 house a day and casino's are going broke.
Houses dropped 16% in July biggest even and they look like over shooting the nmark.


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## dubiousinfo (2 October 2008)

Beej said:


> On rent returns, you guys all realise that for an owner-occupier a rental return rate of say 4% or better beats having your cash sitting in the bank (earning say 7.5% BEFORE TAX) and renting the equivalent house right?
> 
> This is because you have to pay tax on any $$$ earned from cash in the bank at your top marginal rate (40% pr 45% for high income earners). Rent has to be paid with AFTER TAX income. In Sydney rent returns are for most area's past the 4% point. So an owner with no mortgage, or who is thinking ahead towards their position when they have paid off the mortgage, is in a very strong position right now in terms of "return" on their investment at it's current value, and would be worse off if they sold and rented instead. That only becomes more tha case if you think prices are going to fall (which is of course why they won't!).
> 
> ...





Where are you getting your 4% rental return for Sydney residential property. All the evidence I have seen points to less than 3%.  Commercial property is definately getting better than 4% (currently around 6% to 8% yield), but not residential.


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## pepperoni (2 October 2008)

Beej said:


> On rent returns, you guys all realise that for an owner-occupier a rental return rate of say 4% or better beats having your cash sitting in the bank (earning say 7.5% BEFORE TAX) and renting the equivalent house right?
> 
> This is because you have to pay tax on any $$$ earned from cash in the bank at your top marginal rate (40% pr 45% for high income earners). Rent has to be paid with AFTER TAX income. In Sydney rent returns are for most area's past the 4% point. So an owner with no mortgage, or who is thinking ahead towards their position when they have paid off the mortgage, is in a very strong position right now in terms of "return" on their investment at it's current value, and would be worse off if they sold and rented instead. That only becomes more tha case if you think prices are going to fall (which is of course why they won't!).
> 
> ...




You are not better off when you consider holding/transaction costs and you are tied in to what is now probably the most illiquid asset known to man after super yachts.

As for prices "of course" not falling, you said on this thread yest that we are in the middle of 10-20% falls   We have posted the falls on the property price falls thread.

But ignoring the capital losses, some people do WAY better renting.

Im earning $2880 interest on $2m ... say $1500 after tax.

Im renting my dream $4m home that I couldnt currently afford in my wildest dreams 300m from balmoral for $750.  

I pay no rates, maintenance, gardening so Id have to be $800 a week better off ignoring caital gain/loss ... and more importantly Im not sacrificing lifestyle in the mad hope for a capital gain.

Total no brainer.

With that $800 I could buy some crap property and rent it ... but I think that would be mad as its guaranteed to do worse than cash after considering interest/holding costs/transaction costs and a lacklustre property market at best.


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## pepperoni (2 October 2008)

dubiousinfo said:


> Where are you getting your 4% rental return for Sydney residential property. All the evidence I have seen points to less than 3%.  Commercial property is definately getting better than 4% (currently around 6% to 8% yield), but not residential.




As you move up from the bottom of the barrel el cheapo rentals returns trend down to below 1% for some $4m plus properties.

It almost never covers the 1.6% land tax let alone give a return ha ha.


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## gfresh (2 October 2008)

As a potential investor, still much better return on my money in the bank short term (1-2 years). It's not too difficult to build a spreadsheet to compare various scenarios... yes after tax, gearing, blah. 

I think it was when rates are back down to under 8% and capital growth is above 4% p/a it makes sense again. And that was with a 5% yield too. Otherwise my money is better in the bank, and no doubt there are a lot of people sitting on this position right now also. They're getting ahead by *not buying* as their cash is building for the time when the market ticks up. No nonsense, no fuss. 

Some may mention inflation, well unless the property is tracking at least CPI, then your real money is getting eaten away just as quickly as in the bank. So no difference there. 

A simple spreadsheet will do the trick ..

Been having a look over the property investment forums. Some obviously have an idea, but some of the newbies, their sums are way out of whack. Mainly the extras they forget to consider, or afraid to even think about. If that's your typical "investor" then erk.


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## Beej (2 October 2008)

dubiousinfo said:


> Where are you getting your 4% rental return for Sydney residential property. All the evidence I have seen points to less than 3%.  Commercial property is definately getting better than 4% (currently around 6% to 8% yield), but not residential.




Lot's of stat's around - average Sydney rental yield = ~4+% right now, and well above that in many area's. http://www.smartcompany.com.au/Premium-Articles/Top-Story/20080908-Australias-property-hotspots.html has some info. Inner Sydney is averaging 6% yields according to those guys.

Two properties I am aware of intimately - current rental yield (based on estimated values) on one = 5.2% (unit), 4.1% on the other (more expensive house). Of course the lower the "supposed" value the higher those numbers get. Another example; my sisters house (Sydney lower north shore renovated 2 bed semi) - was rented out for $625/week, just sold 2 months ago for $837.5k = gross rental yield of just under 4%. It was her PPOR for some time as well so is a good example. My own PPOR, based on what I know it would cost to rent right now and estimated value, rental return = at least 4%.

Re price falls those are short term considerations only - in the long term, prices will rise, forever. Given the buying selling costs the worse thing you can do is try and "time" the property market and enter/exit all the time. Hardly anyone get's that right for shares and it is almost impossible to get it right for property. Some people here reckon they picked a good exit point and they may be right, but let's see if they pick the right re-entry point or will they miss out on the market turn? 

Pepporoni - your multi-million dollar examples are different - what sort of capital gains have those properties got over the past 10 years and what are they likely to get in the next 10??

Re holding costs - if you own your own home you are still way better off. Holding costs on my house are around $2k per year (water rates, council rates and building insurance). Capital improvements and most maintenance add at least the same amount to value so you don't count them as holding costs. 

Gfresh believe me I have spreadsheets as well for all this  Whether you are currently "in" the market, and how long you have been in, makes a big difference compared to looking for an entry point. Remember MOST people are already "in" - ~67% of houses owned by their occupiers, half of those owned OUTRIGHT (no mortgage). And the spreadsheet doesn't factor in the intangible value of owning your own home - no landlord, no unplanned moves, security for your family, even being able to do what you want with the place in terms of decoration or improvements etc etc.

So as you can see the rent side ALONE justifies owning your own home. If you make a capital return over the long term as well (which you WILL, at least inflation, probably more if you buy well), then you end up way better off. The capital in the bank will not go up with inflation if you have to use the entire after tax return to pay your rent.

Cheers,

Beej


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## dubiousinfo (2 October 2008)

I disagree there are lots of stats around reflecting your claims. Your information posted amounts to little more than opinion, and in my view is not reliable as to the valuations. I stand by my original call.


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## Beej (2 October 2008)

pepperoni said:


> You are not better off when you consider holding/transaction costs and you are tied in to what is now probably the most illiquid asset known to man after super yachts.
> 
> As for prices "of course" not falling, you said on this thread yest that we are in the middle of 10-20% falls   We have posted the falls on the property price falls thread.
> 
> ...




Yes it works if you can get that Balmoral dream house for $750/week. But how many people get that deal? You are WAY under the market there - all advertised similar places are asking at least TWICE that rent. I also noticed you said in the other thread you are considering moving - to a 2 bedroom flat no less for not much less $$$ - why is that?? The sweet deal coming to an end? Owner wants to move back in as they were o/s for a short while or something similar? I bet it would be hard to repeat your current deal!

Cheers,

Beej


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## Beej (2 October 2008)

dubiousinfo said:


> I disagree there are lots of stats around reflecting (Beej: presume this should be rejecting!) your claims. Your information posted amounts to little more than opinion, and in my view is not reliable as to the valuations. I stand by my original call.




Your prerogative, but you are wrong. My data and examples are good, and based on ACTUAL rent being achieved vs estimated property value (which means the numbers are probably conservative unless you think I am UNDER valuing our properties!), or actual rent achieved vs actual sale price achieved very recently - indisputable.

Cheers,

Beej


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## aleckara (2 October 2008)

Beej said:


> Gfresh believe me I have spreadsheets as well for all this  Whether you are currently "in" the market, and how long you have been in, makes a big difference compared to looking for an entry point. Remember MOST people are already "in" - ~67% of houses owned by their occupiers, half of those owned OUTRIGHT (no mortgage). And the spreadsheet doesn't factor in the intangible value of owning your own home - no landlord, no unplanned moves, security for your family, even being able to do what you want with the place in terms of decoration or improvements etc etc.




What we have here is a severe case of wealth redistribution. Since the income in the economy has been growing very little compared to house prices over the recent years it is simply debt driving the prices up. Basically someone has to buy it for more than you bought it for the profit to be had. Where does that money come from? If 67% of people have a paid off house as you claim then it is the other 33% approx that are giving them the eventual profit. They enter the market now; it may give them a return it may not. More likely it will stay stable and interest will kill them (i.e negative return).

However houses are illiquid and this is the paper profit that people have on their houses. Just like shares when they reach a peak, the people who bought last tend to sell first, driving prices down to the point where the people who bought second last no longer have a profit starting a trend. In other words there is not enough money floating in the economy probably to support house prices (houses x average price).

What's even worse is that all this borrowing didn't create any new houses, it just bid up existing housing stock. As a nation we are not any richer in terms of assets, but we are definitely in a lot more debt. Housing policies in my opinion have been the most self serving, and will probably prove to have a range of social factors including intergenerational wealth divides, homelessness, and many other factors. If we are destroyed by the sub prime crisis it will be because our banks are too exposed to debt due to a housing bubble.


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## Beej (2 October 2008)

aleckara said:


> What we have here is a severe case of wealth redistribution. Since the income in the economy has been growing very little compared to house prices over the recent years it is simply debt driving the prices up. Basically someone has to buy it for more than you bought it for the profit to be had. Where does that money come from? If 67% of people have a paid off house as you claim then it is the other 33% approx that are giving them the eventual profit. They enter the market now; it may give them a return it may not. More likely it will stay stable and interest will kill them (i.e negative return).
> 
> However houses are illiquid and this is the paper profit that people have on their houses. Just like shares when they reach a peak, the people who bought last tend to sell first, driving prices down to the point where the people who bought second last no longer have a profit starting a trend. In other words there is not enough money floating in the economy probably to support house prices (houses x average price).
> 
> What's even worse is that all this borrowing didn't create any new houses, it just bid up existing housing stock. As a nation we are not any richer in terms of assets, but we are definitely in a lot more debt. Housing policies in my opinion have been the most self serving, and will probably prove to have a range of social factors including intergenerational wealth divides, homelessness, and many other factors. If we are destroyed by the sub prime crisis it will be because our banks are too exposed to debt due to a housing bubble.




Houses have always been bought with debt always will. You can call it what you like but things that have intrinsic value (assets) go up in value over time. You can't stop it. You have 2 choices - save your whole life and buy a house at the end when you retire and don't have as much income any more, or borrow and buy now and pay of the mortgage off before you retire. The latter option gives you the added security of owning your own home and all the intangibles mentioned earlier that go with that.

You are completely missing the point though that the cost of the house is not really the issue, especially for existing owners. It's about the cost of the alternative to owning - Ie renting. If house prices fall as you seem to think they should it only makes the case for owners of existing property to hold even stronger, thereby ensuring that prices won't actually fall, as no-one will sell (in established area's where people already own and live)! There is nothing that can be done about this unless you legislated to cap rents or something which will never happen.

PS: The stats for home ownership are approximately 1/3 rented, 1/3 owned with mortgage, 1/3 owned outright.

Cheers,

Beej


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## pepperoni (2 October 2008)

Beej said:


> Yes it works if you can get that Balmoral dream house for $750/week. But how many people get that deal? You are WAY under the market there - all advertised similar places are asking at least TWICE that rent. I also noticed you said in the other thread you are considering moving - to a 2 bedroom flat no less for not much less $$$ - why is that?? The sweet deal coming to an end? Owner wants to move back in as they were o/s for a short while or something similar? I bet it would be hard to repeat your current deal!
> 
> Cheers,
> 
> Beej






Owner wants "a bit more" but for $200 I can get a removalist for a change of scenery/new life experience and walk or train to work .... the options are ...

Waterfront 2 bedder at mc mahons pt for 650 a week or 2 bedder with opera house views for $495 ... .  Not alot for what you get.

The house Im in has gone down over 20% over the last year ... they would love to sell but cant find a buyer.

Yes it will be harder to recreat the deal in rentals now (they are stronger) but easier to get a similar bargain buying 

There are a flood of new listings this week ... sellers hoping for good news are biting the bullet in droves.

Looking like ideal low balling conditions in the next 2 months for non auction properties ... think of a reasonable price, multiply by .8 and offer away.


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## pepperoni (2 October 2008)

Beej said:


> You can call it what you like but things that have intrinsic value (assets) go up in value over time. You can't stop it.




Incorrect eg they have been flat in germany for decades.

Your confusion seems to arise out of some imagined "magic hand" that keeps pushing prices up which is nonsense.

Prices go up because of supply and demand ie higher demand at a higher price.

That demand at a higher price only exists when capacity to pay increases.

Wages arent going to do anything special, credit will have issues for years to come, and most of the money going around is old money that will be diluted in ineritances. 

Flat or falling real prices for are clearly a possibility and IMO a probability ... we have seen it already for 5 years since affordability died


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## Happy (2 October 2008)

pepperoni said:


> Prices go up because of supply and demand ie higher demand at a higher price.
> 
> That demand at a higher price only exists when capacity to pay increases.





Some property's uppward pressure is contributed by replacement cost being pushed up higher: land, materials, labour; where inflation takes part too.

Even if price of property doesn't fall and stays flat, value decrease.


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