The future of Australian property prices

[Tysonboss1]

Indeed.

What's the feeling out in the mortgage belt I wonder?

I am not sure, I haven't interviewed any.

But I would think that the 25% reduction in the interest rates over the past couple of years would be putting a smile on their face.

That has got to be giving the Exponential decay of there loan principle a real boost.

When a person took out a $300K loan back in 2008 they would have done it thinking it was going to take them 29years and 7 months to repay it at $2,212 per month

Now with the reduced interest rate they will pay it back in 18years and 3 months.

that is a big noticable difference, they will probably not notice their house price volitility as much.

 

[Julia]

When a person took out a $300K loan back in 2008 they would have done it thinking it was going to take them 29years and 7 months to repay it at $2,212 per month

Now with the reduced interest rate they will pay it back in 18years and 3 months.

That's minimal comfort to anyone who bought at the peak of the bubble, borrowing 100% of the purchase price and whose property is now worth about 25% less than they paid for it.

That's a real definition of negative equity. There are several such properties near where I live. They have been on the market for about three years with no hope of a sale anywhere close to what they paid and what they therefore owe the bank.

 

[McLovin]

I am not sure about the accruracy of that report or the article.

Actually, it's the accuracy of the article that should be questioned. The report states that 1/3 of homes purchased in 2008 or after have negative equity or very limited equity, pp15.

http://www.scribd.com/doc/110148635/Australian-Mortgage-Industry-Volume-16

 

[Tysonboss1]

That's minimal comfort to anyone who bought at the peak of the bubble, borrowing 100% of the purchase price and whose property is now worth about 25% less than they paid for it.

.

Well yes and no,

When they original signed up for the loan at 7.99% interest, the total they had to pay over the life of the loan was $786,852.

With current interest rates the total amount they have to pay has dropped to $485,829, thats nearly 40% less.

So even if the 25% drop in house prices is permanent they are still much better off.

 

[againsthegrain]

Well yes and no,

When they original signed up for the loan at 7.99% interest, the total they had to pay over the life of the loan was $786,852.

With current interest rates the total amount they have to pay has dropped to $485,829, thats nearly 40% less.

So even if the 25% drop in house prices is permanent they are still much better off.

Except most of them like the respectable prof robots only had a short term plan of buy-hold-sell-quickprofit
Now they are locked in for life, repayments are less but profits are nowhere in sight.

If they sell now they are at loss, if they keep living with 100% loan its not much of a life

 

[Tink]

I suppose it depends on how you look at it too, you either have to pay rent or mortgage to live somewhere, I would rather be paying off my own home than paying someone elses.

You would hope you bought at a good price and you worked out your figures.

I am not one to sit and analyse how much my house is worth, though we all know roughly how much houses are in the area etc.

 

[Tysonboss1]

only had a short term plan of buy-hold-sell-quickprofit

Gamblers get Gamblers results, regardless of asset class.

Now they are locked in for life, repayments are less but profits are nowhere in sight.If they sell now they are at loss, if they keep living with 100% loan its not much of a life

Home owners normally plan to hold for long periods and rarely if ever used 100%LVR interest only loans. They will be paying down principle.

Here is any interesting thought experiment,

Work out how much it would cost you to rent a $300K home for 30years, Be sure to allow for rental increases with inflation, and then compare it to the $185,829 of interest + $150,000 rates etc you would pay over that time.

 

[prawn_86]

Well yes and no,

When they original signed up for the loan at 7.99% interest, the total they had to pay over the life of the loan was $786,852.

With current interest rates the total amount they have to pay has dropped to $485,829, thats nearly 40% less.

So even if the 25% drop in house prices is permanent they are still much better off.

If it was an investment property then in the 18 yrs between now and when it is paid off the price still needs to rise 61% to cover the cost of interest. Admiteddly tennants are paying some of it off, so say half, it would mean they still need a 30% gain.

Or assuming $300pw rent, then it would take 6 years of cashflow on top of that 18 years of paying off just to break even

 

[prawn_86]

Work out how much it would cost you to rent a $300K home for 30years, Be sure to allow for rental increases with inflation, and then compare it to the $185,829 of interest + $150,000 rates etc you would pay over that time.

Quick back of the envelope shows it to be very similar, with the home owner having an assett in the end, and the renter having nothing if they are not saving anything additional.

Interesting

 

[Tysonboss1]

If it was an investment property then in the 18 yrs between now and when it is paid off the price still needs to rise 61% to cover the cost of interest. Admiteddly tennants are paying some of it off, so say half, it would mean they still need a 30% gain.

Or assuming $300pw rent, then it would take 6 years of cashflow on top of that 18 years of paying off just to break even

18 years at $300 / week generates $280,800 in rent, thats more than the total interest bill, And thats not factoring any rental increases.

 

[againsthegrain]

Currently where I am renting the rent is significatly cheaper then repayments would be on the property. Due to cheap quality of the building which was bought off the plan from one of those metricon type of builders there is some major repairs that need to be done which are looking to wipe out the the last 2 years rent. Hoping for the landlords sake that his insurance will cover it since warranty is out. However for the period of the repairs rent will have be deducted so either way there is some unexpected loses.

At the moment renting is a much better option then struggling on a 100% lvr loan much like those fho have been birbed at the peak with the grant.

The money I am saving far outweights any slow repayments which would be mostly covering interest. Who knows few more years and I might be buying with 50% deposit.

Each to their own, need to have a plan and stick by it. Nobody wants to be 50 and renting, but nobody wants to be 50 and still seeing repayments going to the bank that might be passed down to their kids.

 

[Tysonboss1]

Currently where I am renting the rent is significatly cheaper then repayments would be on the property.

It normally is, I can't speak for where you live, But in general it takes about 7 years before the cost of owning becomes less than renting and from that point the cost of owning keeps dropping and the cost of renting keeps climbing

At the moment renting is a much better option then struggling on a 100% lvr loan

I would never recommend anybody get a 100% loan.

 

[McLovin]

18 years at $300 / week generates $280,800 in rent, thats more than the total interest bill, And thats not factoring any rental increases.

Nor is it factoring in any capital maintenance, tax, strata levies, agent's commission, insurance, land tax etc. Those are real costs.

 

[prawn_86]

18 years at $300 / week generates $280,800 in rent, thats more than the total interest bill, And thats not factoring any rental increases.

Yes it pays the interest and costs but then assuming the owners are contributing the difference to make up the 2k pm mentioned in your post, it's going to take them a lot longer than 18 yrs to completely pay off the property.

As i have said in this thread. You can currently get properties where income pays off all the bills and interest, ie nuetrally geared, its just a matter of if you feel the growth prospects are there to take advantage of the leverage.

PPOR is different obviously as you can usually contribute more to it if you are renting + saving

 

[Tysonboss1]

Nor is it factoring in any capital maintenance, tax, strata levies, agent's commission, insurance, land tax etc. Those are real costs.

yes they are real costs, and you would have about $100,000 left over to deal with that,

But remember that is without ever raising the rent, after 18 years that rent would have doubled to $600 / week.

and at the 30 year makr the rent will be closer to $1000 / week, and this is just based on inflation, and no doubt through the ups and downs of the property market the house price would have also increased with inflation.

If you plan on living for the next 40 years or so, do some calcs as to the rent you will pay and factor in rent doubling every 15years or so, the numbers are astounding.

 

[CanOz]

With only some rough 'back of the envelope' math, It seems to me at this point that a one bedroom apartment with a car park in the CBD is the still the best value when you compare, serviced apartments and more than one bedroom.

Still early days, lots more research left to do yet.

We want something that is the easiest to rent, but will still appreciate in value over the next ten to twenty years. The rental yield needs to be over 6% net, to make this worth while in IMO.

Anyone here have any properties in the sydney CBD?

Cheers,


CanOz

 

[Tysonboss1]

Yes it pays the interest and costs but then assuming the owners are contributing the difference to make up the 2k pm mentioned in your post, it's going to take them a lot longer than 18 yrs to completely pay off the property.

There would be neg cashflow for probably the first 7 years or so, at which point the rental increases would have bridged the gap.

No, land lord is going to rent a property for 18years without putting up the rent.

 

[McLovin]

yes they are real costs, and you would have about $100,000 left over to deal with that,

But remember that is without ever raising the rent, after 18 years that rent would have doubled to $600 / week.

and at the 30 year makr the rent will be closer to $1000 / week, and this is just based on inflation, and no doubt through the ups and downs of the property market the house price would have also increased with inflation.

If you plan on living for the next 40 years or so, do some calcs as to the rent you will pay and factor in rent doubling every 15years or so, the numbers are astounding.

I'm not disputing what you're saying I just think the return on property is pathetic and in no way commensurate with the risk, mainly because it has been sold as a safe path to wealth. And let's face it, if you bought property in the last 25 years, you looked like a genius.

The reality is that the risks facing housing as an asset class are centered around those who are in years 0-5, not the guy who is in year 18+ and has seen his income to service the debt rise threefold over the period since he took out his mortgage. Those poor FHOB's bought at heavily inflated prices, essentially competing against eachother. I've seen stats that say 40% of them are in mortgage stress. It seems to me that it won't take much to tip them into default, they're probably only a couple of pay cheques away from it.

The risk is of a large shock to the prospective buyer/new buyer from either unemployment, interest rates or inflation (I guess you could lump the baby sonic boom on its way into the mix too) means they can longer support the "ladder".

 

[young-gun]

All this is assuming that the interest rate is going to remain at it's current level. Granted that in the next few years it will remain here or lower. That's not to say that in 7 years time interest rates don't hit 10%+. Then what?

Rental yields don't move in tandem with interest rates. Sure if rates are higher so to is inflation usually. But if inflation got to out of hand land lords wouldn't be able to increase rent accordingly. Just as they aren't lowering rents as rates are eased and inflation softens. So were they to rise in the future your example comes under some strain TB.

 

[Tysonboss1]

I'm not disputing what you're saying I just think the return on property is pathetic and in no way commensurate with the risk,

there are two ways to look at property, One is as a place to live. I believe it is by far cheaper to Buy than it is to rent when you look at the long term picture of owning for say 40years compared to renting over a similar time frame.

Then there is investment.

I think property like any asset class can perform badly as an investment if you over pay. However, it comes back to expectations, The fact that I get weekly revenue from my properties, I control the cashflow ( no one can cancel a dividend etc), and the cashflow is likly to grow with inflation while the capital is also likely to atleast keep pace with inflation means I am happy to pay 25 times earnings, So what some people class as overvalued when they are comparing it to stocks may not be over valued at all.

I see a good property like a good Bond paying 4% that is inflation hedged, and has some good tax advantages.

The reality is that the risks facing housing as an asset class are centered around those who are in years 0-5, not the guy who is in year 18+ and has seen his income to service the debt rise threefold over the period since he took out his mortgage.

Yes, especially if he his funding the purchase with debt, But I don't think the effect of inflation is going away. And this kind of plays into the property investors hand.

I've seen stats that say 40% of them are in mortgage stress. It seems to me that it won't take much to tip them into default, they're probably only a couple of pay cheques away from it.

The same was probably true for the genius (your word) who bought 25 years ago, no doubt as rates hit 18% there was some pretty big mortgage stress.

The risk is of a large shock to the prospective buyer/new buyer from either unemployment, interest rates or inflation (I guess you could lump the baby sonic boom on its way into the mix too) means they can longer support the "ladder".

this is true, You will find though that I have never proposed people take on large amounts of debt to finance property, I always recommend low lvrs.

But also, commiting yourself to rent that $300K house for the next 40 years means you are subjecting yourself to payments of upto $2,340,000 over that 40 years, The cost of owning that home comes no where near that amount, Plus you end up owning a house.