The future of Australian property prices

[Klogg]

I'll respond with a famous phrase; liquidity doesn't solve insolvency, and much of the world is insolvent.

Australians have close to 100% mortgage debt to GDP. It doesn't take a rocket scientist to understand that this has a limit and can't go up forever.

Yep, I agree that the debt to GDP can't go up forever - that's why debt to equity ratios have been changing recently (as can be seen in many of the disleveraging posts on MB) and will positively effect the debt to GDP.

However, I have a slightly different view of the insolvent part. Insolvency is "the inability to pay one's debts as they fall due". While there are European countries that fall under this category, the majority (I don't know exact stats) of Australian home-owners do not.

 

[young-gun]

There is a simple maths to this and most people cant really understand...
Your mortgage repayment would probably go down over time but your rent

will just keep going up and up until you reach an interception where
your mortgage repayment is bugger all compared to rent.

When I start out I can rent for $180 a week or pay $250 in the mortgage
fast forward now 12 years later rent $400- $450 a week .. I pay no rent
magical number.

and there is something money cant buy that is a place you call home
and you live there as long as you like, do what the hell ever you want without
asking for permission and a roof over your head no one can take it away once you paid it off of course

apples and oranges ROE. given your figures im assuming you bought a long long time ago. let me give u the scenario for the present.

mortgage 350k for 3 bedroom = 2766p/m
rent i pay on a 3 bed room worth 350k approx(maybe more) = 1360p/m 20 mins from bris cbd.

the above figure is on a 20 year loan. in 12 years your still paying it off. you cant afford to pay it off earlier as repayments are simply to high in this day n age. the tenant in the current economic climate sits it out as property is slowly sliding. if the property bubble does burst youll be paying off a house worth 40%(or more) LESS than you paid today in 4 years time. the tennant will have a stack of cash saved(1400$ a month?) and then can enter the market at an affordable level with a comfortable deposit.

lets say property doesnt continue its downward spiral, you wait for for the right signals and get in a little off the trough. its a no brainer.

 

[Uncle Festivus]

Here’s what usually happens. We had the BER pump in funds that grew a lot of these building companies. Large contract work slows up and they get caught out on cashflow after paying out on ongoing expenses. Same thing happened roughly ten years back to a few builders (more a construction boom/bust that time). The majority don't know when, or simply can't adapt because they are too big and geared to a specific market.
A lot of those big guys are also badly managed on job sites to the point of sending the company broke in good times. OHS laws and the usual bureaucratic bs applied to construction doesn’t help.
For us smaller guys (NSW), well I'm flat out with work.

I am also seeing a massive exodus of experienced tradies leaving for the mines mainly because it's stable work and no more paperwork, customers, OHS, quoting, or long days and then bringing home the paperwork. If anything getting a decent tradie will be next to impossible in years to come.

Will be interesting to see if NSW follows on with those increases. I'm seeing some really good bargains out there at the moment and would buy more housing if I wasn't such a tightass regarding leverage.

Closer to home, all of the BER projects have completed or will be completed within the rest of the year. Now combine this with the latest poor, abysmal actually, building starts, both resi & commercial, and you have the foundation for substantial job losses, and possibly interest rate cut's, although the market is pricing in more rises. There is a shadow recession going on around the world but when has the real economy mattered when it comes to the illusion of 'green shoots' & a 'global recovery' that manifests itself in a rising stockmarket?

I posted that back in April 2011 so it didn't take much to work out what would happen when all the stimulis money was exhausted?

As for the bit about OH&S being a bit of a pain, it's a pity that we need laws to prevent employers from risking the health of their employees - we don't live in 19th century England, although a few employers would gladly like a return to those times.

OHS&E laws are what differentiates us from somewhere like China or India.

The big mining companies are probably more OHS&E compliant and aware than almost any other industry.

With regards to house prices, now that the property bubble has burst in China, expect to see an accelerating negative price trend here in AU.......

 

[Miss Hale]

Article here claiming real estate is looking up in Melbourne:

http://www.heraldsun.com.au/news/mo...t-on-hot-pockets/story-fn7x8me2-1226287796606

Meanwhile we have been advised that are landlord is selling and we may have to move when our lease is up in three months (only been here for 9 months so far). Good news is that, looking around at what's available, we should be able to rent something equivalent for less than what we are paying now. Really no incentive for us to buy just yet. What we pay in rent would only cover half of what we'd have to pay in mortgage payments for the same property. (I'm talking eastern suburbs of Melbourne).

 

[Glen48]

Cheaper rent are the way of the future as house prices die you will be able to live in a better class of home for less as the land lord get desperate to keep money coming in.

 

[medicowallet]

"Saturday 3rd March 2012

The auction clearance rate recorded today was 62 per cent, compared with 61 per cent last weekend, and 64 per cent this weekend last year.

Today's result indicates that the improved demand recorded last weekend has been sustained and that will help improve confidence over autumn and into winter.

There were 748 auctions were reported to the REIV today with 464 selling and 284 being passed in. Of those 176 were passed in on a vendor bid

The number of auctions drops next weekend to around 200 due to the long weekend.

Enzo Raimondo
CEO REIV"


Just thought I'd post this for the true believers.

Sunshine and lollipops

MW
The original Robot destroyer.

 

[ROE]

apples and oranges ROE. given your figures im assuming you bought a long long time ago. let me give u the scenario for the present.

mortgage 350k for 3 bedroom = 2766p/m
rent i pay on a 3 bed room worth 350k approx(maybe more) = 1360p/m 20 mins from bris cbd.

the above figure is on a 20 year loan. in 12 years your still paying it off. you cant afford to pay it off earlier as repayments are simply to high in this day n age. the tenant in the current economic climate sits it out as property is slowly sliding. if the property bubble does burst youll be paying off a house worth 40%(or more) LESS than you paid today in 4 years time. the tennant will have a stack of cash saved(1400$ a month?) and then can enter the market at an affordable level with a comfortable deposit.

lets say property doesnt continue its downward spiral, you wait for for the right signals and get in a little off the trough. its a no brainer.

That is the life style choice, you pay a price for that, who said you have to buy close to the city? I don't live any where near the city...

Maybe place I live people called Gheto or Boganville

you guys wants everything cheap, easy, convenience without sacrificed
I can tell you THERE IS NO Such thing in life

you can wait for the market to crash, you can pray rent will plummet or you actively doing something that required sacrificed but that will bear fruit in future years or it may not ...but unless you doing it you cant really tell

I catch buses when I have a mortgage, I have a car that in winter I have to start it 20 minutes early before I can drive to work....My best holidays are the one at local beaches....I watch free to air TV as my entertainment....

I know people with kids yes very young kids with mortgage don't even own a car
and that was 20 years ago....they caught public transport for 5 years, shopping with grocery on public transport weekly anyone? Are they doing tough? are they doing it tough now? no they retire at 50.....oh wait god damn baby boomers they have everything cheap

Each generation faces different challenges and possibilities...it is up to you to take on that challenge no one will help you....

I know housing is expensive but praying for crash or watching people over leverage burned isn't the right idea and no I don't have multiple investment properties so I don't care if it crash or it keep going up... if it crash I may buy some but until then I'm doing something by investing in the stock market

If you want another example in life, when I study IT, jobs aren't plentiful, in fact there are more IT graduates than job so I face prospect of not having a job when finish, people advices I shouldn't do it... I like IT that the only thing I'm good at so I continue the journey....now I get pay 3-4 times above average pay

how things turn out for better when you doing something and work at it...

 

[lurker123]

Making the big assumption that the interest rate remains stable and the price of a property only goes up with inflation.

The maths says the best time to buy rather than rent is when your [yearly rent > or = (yearly interest amount you pay on theoretical mortgage) + (yearly interest amount you make from your deposit as cash in bank after subtracting inflation) - (yearly tax you pay for earning interest) - (yearly tax deductions you can get for buying property as a investment) - (yearly rent collected from tenant)]

Assuming you buy the property as a place to live or your income tax bracket is low then (yearly tax deductions you can get for buying property as a investment) = 0. Assuming you live there and don't have or won't rent out extra rooms then (yearly rent collected from tenant) = 0.

Which leaves:
[yearly rent > or = (yearly interest amount you pay on theoretical mortgage) + (yearly interest amount you make from your deposit as cash in bank after subtracting inflation) - (yearly tax you pay for earning interest)]

After inputting some numbers into this equation it is apparent that for the majority of people rent is less than the other side of the equation, which means it is more logical to rent.

This equation however assumes that interest rates remain stable. If interest rates decrease then it benefits the buying side of the equation. Because the interest rate falling is a big possibility it is safer to use a conservative small interest rate for the calculation rather than the current relatively high interest rate. Even when using a conservatively small interest rate i believe it will still remain true that rent is less than the other side of the equation for the majority of people.

The above equation assumes that you would at least save the same amount in a year as your theoretical mortgage repayment minus rent. Which means this doesn't apply if you can't save money and need to be forced through payment of a mortgage.

The only scenario where this equation is completely not applicable is when the price of property rises well above inflation in which case you are speculating that house prices will only go up. The reverse is also true, this equation also doesn't apply if the price of property falls.

It is my belief that the equation will yield renting as the more logical thing to do for the majority, even after using a conservative low interest rate. This is in complete opposition to your view ROE that people should sacrifice.
One can only speculate that:
a) you want people to sacrifice more than they have to e.g. you work at a bank and want their money
b) you are a speculator and think house prices will continue to rise above inflation forever
c) your message is only for those fools who can't save.

 

[young-gun]

That is the life style choice, you pay a price for that, who said you have to buy close to the city? I don't live any where near the city...

Maybe place I live people called Gheto or Boganville

you guys wants everything cheap, easy, convenience without sacrificed
I can tell you THERE IS NO Such thing in life

you can wait for the market to crash, you can pray rent will plummet or you actively doing something that required sacrificed but that will bear fruit in future years or it may not ...but unless you doing it you cant really tell

I catch buses when I have a mortgage, I have a car that in winter I have to start it 20 minutes early before I can drive to work....My best holidays are the one at local beaches....I watch free to air TV as my entertainment....

I know people with kids yes very young kids with mortgage don't even own a car
and that was 20 years ago....they caught public transport for 5 years, shopping with grocery on public transport weekly anyone? Are they doing tough? are they doing it tough now? no they retire at 50.....oh wait god damn baby boomers they have everything cheap

Each generation faces different challenges and possibilities...it is up to you to take on that challenge no one will help you....

I know housing is expensive but praying for crash or watching people over leverage burned isn't the right idea and no I don't have multiple investment properties so I don't care if it crash or it keep going up... if it crash I may buy some but until then I'm doing something by investing in the stock market

If you want another example in life, when I study IT, jobs aren't plentiful, in fact there are more IT graduates than job so I face prospect of not having a job when finish, people advices I shouldn't do it... I like IT that the only thing I'm good at so I continue the journey....now I get pay 3-4 times above average pay

how things turn out for better when you doing something and work at it...

you make alot of incorrect assumptions. and the fact is even moving further out from the city eg caboolture, the houses arent much cheaper anyway. maybe 50k? as i said above, i am not 'waiting' for a crash. i am expecting one. once the signals are there as i said above, and the market stops going down, then i will buy. your simple philosophy of just working at something isn't the greatest, you can work as hard as you want but if you don't analyse, research and actually think about your choices then hard work is pointless. work smarter not harder.

i work hard at my job, i save plenty, and i catch the train to work. once again, this is a different day and age, and what you and your friends and relatives did, will not work nor is it applicable to the current economic climate.

 

[moXJO]

With regards to house prices, now that the property bubble has burst in China,

Is that regarding price or the fact of all those empty new houses they have?

Chinese investors actually wont move anyone into the house to keep the 'new' tag. Once someone lives in it the price drops. Which is why you get suburbs of empty houses.

 

[Gerkin]

c) your message is only for those fools who can't save.

this is the problem, id suggest 75% of Australians cant save, and 95% of renters cant save and dont put excess cash into other investments.

 

[Gerkin]

id also suggest the clearence rate is overinflated, i went to two auctions yesterday, both did not sell at auction or after and were not disclosed to REIV????

 

[Glen48]

http://www.chrismartenson.com
This report has all the news about USA housing .

 

[robots]

http://www.chrismartenson.com
This report has all the news about USA housing .

hello

yeah start a new thread, this one about AUS housing

how much is housing in Australia down since the GFC? anyone got a graph

thankyou
professor robots

still ASF Investor of the Year 2005-2011

 

[young-gun]

hello

yeah start a new thread, this one about AUS housing

how much is housing in Australia down since the GFC? anyone got a graph

thankyou
professor robots

still ASF Investor of the Year 2005-2011

since? gfc aint over yet robots....

 

[robots]

hello,

hasnt even done anything to the housing market

i know i know i know, its coming

thankyou
professor robots

 

[Beej]

Take the first offer or any offer and get out now.

Glen you have been giving this exact same advice on this forum for at least the past 4-5 years! I ignored your advice 4-5 years ago (thank goodness!), and will continue to ignore it now!

 

[Miss Hale]

Just an observation, but there seems to be more houses in my area these days that are advertised as 'Price on Application'. Now I used to interpret this as 'You can't afford it so don't bother with this one', but I am seeing this on properties that I know would be in the lower end of the market (e.g. 2 bed villa units) so I am wondering if agents are doing this so as not to advertise that the market has dropped a bit? Just a thought...

 

[Beej]

Which leaves:
[yearly rent > or = (yearly interest amount you pay on theoretical mortgage) + (yearly interest amount you make from your deposit as cash in bank after subtracting inflation) - (yearly tax you pay for earning interest)]

No - this equation is short sighted, and will lead to incorrect financial decision making.

1) You need to add "+ nominal capital appreciation of house" to the second term in your equation.

2) You are only considering year 1 in a 30 or even a 50+ year scenario. You need to factor in the reality that you will always be paying rent at current market prices in the future. So the cheapest rent you will ever pay for that house will be today. When you buy the MOST you will ever pay in interest will be today (assuming your stable interest rate scenario).

In the long run, when it comes to PPOR, in pure financial terms owning will always come out better vs renting the equivalent property - certainly in most places in Australia at current rental yields right now. If you won't buy until cost of renting is more expensive than the cost of purchasing in the first year, then you will be waiting for a VERY long time, as I'm pretty sure that situation has not arisen broadly in the market at any point in my lifetime so far (I'm Gen-X).

PS: My comments apply to PPOR purchase only - the equation for property investing is different.

 

[lurker123]

No - this equation is short sighted, and will lead to incorrect financial decision making.

1) You need to add "+ nominal capital appreciation of house" to the second term in your equation.

2) You are only considering year 1 in a 30 or even a 50+ year scenario. You need to factor in the reality that you will always be paying rent at current market prices in the future. So the cheapest rent you will ever pay for that house will be today. When you buy the MOST you will ever pay in interest will be today (assuming your stable interest rate scenario).

In the long run, when it comes to PPOR, in pure financial terms owning will always come out better vs renting the equivalent property - certainly in most places in Australia at current rental yields right now. If you won't buy until cost of renting is more expensive than the cost of purchasing in the first year, then you will be waiting for a VERY long time, as I'm pretty sure that situation has not arisen broadly in the market at any point in my lifetime so far (I'm Gen-X).

PS: My comments apply to PPOR purchase only - the equation for property investing is different.

It is pretty evident that:
1) you didn't read my post correctly, from my post:
"The only scenario where this equation is completely not applicable is when the price of property rises well above inflation in which case you are speculating that house prices will only go up. The reverse is also true, this equation also doesn't apply if the price of property falls."
2) you are a speculator and think house prices will continue to rise above inflation forever
3) you do not understand properly what this equation represents, this equation assumes that you are NOT a fool who can't save and would at least save the same amount in a year as your theoretical mortgage repayment minus rent. What this means is as you are renting your savings (deposit on a house gets bigger and bigger).
Because your deposit on the house gets bigger and bigger as you rent, this:
(yearly interest amount you pay on theoretical mortgage) gets smaller and smaller.