The future of Australian property prices

[Dowdy]

There seems to be a lot of arguments on shares v property on this thread. Arguments about the relevant superiority of asset classes are fairly pointless. Both have booms & busts & varying yields, just like all investments. I think the main things to keep in mind are your risk tolerance, your level of financial education and your trading frequency.

If you're a "set-and-forget" type, then you're probably better off in property. They call mortgages "forced savings for dumb people". You're forced to put money into something every month and it'll make money over the long term. But so would a savings account.

If you're an educated active trader, and can handle a bit of risk, then you're probably better off in shares. Buy on dips and sell on peaks. Or learn how to short-sell. You can make money when shares go up, or down, if you educate yourself a bit. Then a share crash becomes just another money-making opportunity.

Or in a booming housing market you can mix the two, and trade properties. "Flippers" made great money on property during the boom. Mate bought Gold Coast property on-line and sold six months later for $50k net profit. Besides a photo, he never even saw it.

But you don't really hear about "flippers" anymore. Not sure why?

While the property bubble here hasn't burst, sounds like its deflating now. Got mates offering cash bids with 3-month windows on properties at 20% discounts to advertised price. Amazing how keen RE agents are (esp. on properties on market for 6 months+), despite stubborn/romantic vendors still holding out.

Guess that pretty much sums up Aust property market at the mo.

Statically speaking, the share market has been historically the best long term investment.

If a house isn't paid off within 5-10years then it's a bad long term investment as over the 25year period of making payments off, you've paid a couple 100k in interest alone

 

[Tysonboss1]

If a house isn't paid off within 5-10years then it's a bad long term investment as over the 25year period of making payments off, you've paid a couple 100k in interest alone

if your paying $400 a week rent for 25years ( with zero inflation)
you will pay $520,000 in rent, I will take the interest thanks,

 

[medicowallet]

if your paying $400 a week rent for 25years ( with zero inflation)
you will pay $520,000 in rent, I will take the interest thanks,

say a $450000 house rents for $400 per week (as is one I am involved in)

450k *7% interest over 25 years

= $787500.

So at the moment, I'd take renting.

MUCH different to, for example, a house purchased in 1999 for $150000 which rented for 200 per week.

Once things start to come closer to realistic valuations and long term trends, then I would be happier to believe that owning in better than renting, but at the moment, the argument is difficult to make.

 

[medicowallet]

despite stubborn/romantic vendors still holding out.

Guess that pretty much sums up Aust property market at the mo.

A lot of them HAVE to believe it.

There are quite a few places around Australia now, where prices are down to, or below prices 5 years ago, but the great thing is that their owners do not know yet.

If they had to sell, they would be very disappointed.

 

[tech/a]

Is it time to buy yet???

 

[Tysonboss1]

say a $450000 house rents for $400 per week (as is one I am involved in)

450k *7% interest over 25 years

= $787500.

So at the moment, I'd take renting.

MUCH different to, for example, a house purchased in 1999 for $150000 which rented for 200 per week.

Once things start to come closer to realistic valuations and long term trends, then I would be happier to believe that owning in better than renting, but at the moment, the argument is difficult to make.

Hey Bud,

Not looking for a long winded exchange, But.

It wouldn't be $787,000 interest because the loan decreases as you pay off the loan.

and also as I eluded to earlier, $400 a week rent would increase significantly over 25 years with inflation.

But yes in a world where inflation didn't exist and people didn't pay off the principle of the loan ever you would be better renting.

 

[Tysonboss1]

Is it time to buy yet???

I don't know, whats the chart tell ya. :

 

[tech/a]

I don't know, whats the chart tell ya. :

Ask a fundamentalist

 

[medicowallet]

Hey Bud,

Not looking for a long winded exchange, But.

It wouldn't be $787,000 interest because the loan decreases as you pay off the loan.

and also as I eluded to earlier, $400 a week rent would increase significantly over 25 years with inflation.

But yes in a world where inflation didn't exist and people didn't pay off the principle of the loan ever you would be better renting.

If you paid off the principal, then it would be significantly more than $400 per week. Now we could go on about how a properly geared difference in investment will perform etc, but that has been done by professionals across certain asset classes..IMO, gearing crazily into a bubble asset hoping for it to grow is flawed.

It is really horses for courses. If you are a good investor, with access to some investments (eg business) which can easily outperform property, then go ahead and consider renting. If you think the herd will continue to ramp up gearing, then property over the medium term would be a good option.

I am not saying that property is a poor investment (or I would not be in it), but, AT THE MOMENT, the fundamentals are out of whack, and anyone wanting to challenge this need only check historic returns to confirm it.

Australian property investors will get a reality check, as have other investors world wide..

 

[Tysonboss1]

If you paid off the principal, then it would be significantly more than $400 per week.

Now thats sort of muddying up the waters.

consider the following and fill in the blank.

40 years of inflation adjusted rental payments = (blank)

Cost of home + 25years interest + 25 years rates maintaince - sale price of home inflation adjusted = (blank)

 

[Wysiwyg]

The obviousness is the sell price appreciates on the house but you have a house that is 25 years older and it will cost more to sell and upgrade to a modern house because everyone elses house has appreciated as well.. You don't really gain anything financially unless you sell and live in a caravan. It is a material gain through ownership while forking out hundreds of thousands in interest. Catch 22 with renting and saving. Interest on loan is dead money and so is rent.

 

[Tysonboss1]

You don't really gain anything financially unless you sell and live in a caravan. It is a material gain through ownership while forking out hundreds of thousands in interest. Catch 22 with renting and saving. Interest on loan is dead money and so is rent.

Well in retirement you get to live in it rent free, just paying rates and a bit of maintaince which is a fraction of the rent, and eventually you can sell it for a lump sum tax free and enjoy a higher standard of living in your later years.

It's not really a catch 22, Rent is dead money but.

Renting a house = ever increasing amounts of dead money due to inflation adjusted rent

renting money over 25 years = ever decreasing interest payments, that are made easier to pau due to inflation.

 

[Tysonboss1]

The obviousness is the sell price appreciates on the house but you have a house that is 25 years older and it will cost more to sell and upgrade to a modern house because everyone elses house has appreciated as well..

What, and it doesn't cost more to rent a better home?

Remember any maintaince costs, rates, insurance etc.etc is covered by rent.

 

[jbocker]

Do you remember when the big banks raised the interest rates higher than the RBA rate last year? Well it has come to bite the CBA chief on his backside.
Due to customer disatisfaction he had dropped his bonus by nearly half! The bank has dropped from 2nd to 4th in customer satisfaction and the CBA chief (Norris) bonus has gone from 16.1Million to 8.6Million.
SUCK EGGS Norris!!!.. HA HA HA..

...ha

.....ha

**sigh** guess it wouldnt really hurt that much...

 

[FxTrader]

consider the following and fill in the blank.

40 years of inflation adjusted rental payments = (blank)

Cost of home + 25years interest + 25 years rates maintaince - sale price of home inflation adjusted = (blank)

Such a calculation must be based on the past performance of property prices, interest rates etc. Relying on past performance as a gauge for future performance is of course a fallacy. However, let's reflect on a recent example of a relative in the U.S. since the Australian property market will never go down in the long term say the property bulls here, just look at the past.

First, let's frame the calculation correctly...

(Current Valuation) - (Cost of home + 8 years interest + maint)

($300,000) - ($700,000 + $192,000 + 8000) = - $600,000 in 8 years approximately

Renting the same home for 8 years = $190,000 approximately.

So they would have been ~$410,000 better off after 8 years of renting. However they stopped paying their mortgage a year ago now so that would distort the calculations a bit and they hope to stay another 12 months before being evicted.

Is this an extreme example? Unfortunately not in the U.S. but then they thought the same about property "secure as houses" as the saying goes. In this case, and many millions of others, renting was definitely not dead money, rather it was smart money.

 

[medicowallet]

Now thats sort of muddying up the waters.

consider the following and fill in the blank.

40 years of inflation adjusted rental payments = (blank)

Cost of home + 25years interest + 25 years rates maintaince - sale price of home inflation adjusted = (blank)

Muddying up the water????? YOU put that variable in, NOT me.

You also made an error:

40 years of inflation adjusted rental payments +return on alternative investment = (blank)


As I said, this has been done to death by people smarter in the area than us, but I only replied due to you claiming that I muddied the analysis, something you did to make your point seem more convincing.

The variable which really puts pressure on the whole thing is potential for capital gain, and to return to the long term trends, it needs to keep outperforming the world for many years to make a new trend, or to stagnate or fall to a more reasonable trend... I know what my money is on.

 

[medicowallet]

What, and it doesn't cost more to rent a better home?

Remember any maintaince costs, rates, insurance etc.etc is covered by rent.

Um.... wrong.

See, the thing that property spruikers tend to forget is the capital component, as you seem to be doing.

If we go to the above example, $450k loan, $400/wk rent.

How can the rent cover the interest costs AND the maintenance etc.

Of course, as you know, it does not. That is why there is such a thing as negative gearing, please stop playing us as fools.

Of course, if you make the assumption that the property is fully owned, then, please factor this capital into the calculations of a properly constructed alternative investment plan for the renter in question..

Otherwise your analysis is like comparing a millionare to a social security recipient

Renting a house = ever increasing amounts of dead money due to inflation adjusted rent

renting money over 25 years = ever decreasing interest payments, that are made easier to pau due to inflation.

Here's the hole in your argument dear TB, dear TB,
Here's the hole in your argument dear TB, the hole,

Seriously, where did you magically get the extra money to pay the P&I payments, when the person renting can only pay the minimum rent of $400 per week on a $450k house....

IF you pay $400 per week on the $450k loan, I can tell you that the power of compounding on the ever increasing debt will KILL the inflationary adjusted rent payments for the same house.....

 

[againsthegrain]

haha Think I said this a while ago but I have friends that bought a good 5 - 8 yrs ago and only manged to pay off something like 20k from the loan and the rest is all interest payments. Needless to say they have no savings because everything goes off to pay the bank....

They got suckered in by exactly the same pitch that Tyson is spinning up

 

[nomore4s]

haha Think I said this a while ago but I have friends that bought a good 5 - 8 yrs ago and only manged to pay off something like 20k from the loan and the rest is all interest payments. Needless to say they have no savings because everything goes off to pay the bank....

They got suckered in by exactly the same pitch that Tyson is spinning up

That's pretty standard. The pay off for them will be in 10 years time when they start making real inroads into the loan, and then in 20 years time when the debt is paid off they will have a lot more disposable income.

Also need to consider everything extra they put into the loan now pretty much earns them 7% on that money.

 

[againsthegrain]

In 10 years time they will probably pay off another 30 - 50k max so maybye by the time they are 60 more disposable income will come for the pokies