The future of Australian property prices

[againsthegrain]

Hahaha I have many friends, relatives like the ones you've described, lucky for most of them, they got into the market a while back. Being from an Indian background, I have lost count of the number of times I have been told to "buy your own house or IP or you're will be left behind."

I remember having a chat with a family friend who wanted to get an IP. He is a part of the family business and "their accountants" had suggested getting an Ip or doing a development to reduce tax and get easy capital gains. After about 10 mins of trying to convince him with back of the env figures that this is bad idea, he wouldn't budge (and his wife is an accountant).

They bought an IP apartment and an old house on a large block (to develop into town houses) without calculating cost etc (I think this was ~2009-2010). The apartment is loosing them money even at today's interest rates and I have no idea how much they will lose on the old house assuming they just sell it, probably ~$200K.

It is a irrational fear of missing out on easy quick money forced onto them by a panicked group mentality. Phrases like get left behind, rent money is dead money, it will never go down is the real estate agents and developers best marketting weapon against the gullable. The property market is here today and will be here tomorrow, there will always be good bargains and bad.

 

[WilkensOne]

I am really enjoying all this discussion about property prices and their valuations compared to shares.

But does everyone still have the same opinion if you are purchasing the house as a PPOR?

 

[FlyingFox]

I am really enjoying all this discussion about property prices and their valuations compared to shares.

But does everyone still have the same opinion if you are purchasing the house as a PPOR?

I do. The major reason I am not buying a PPOR is that I perceive them to be very bad value. Not comparing to anything but levels of income and rent.

Edit: I also believe that prices will ease rather than go up.

 

[WilkensOne]

I do. The major reason I am not buying a PPOR is that I perceive them to be very bad value. Not comparing to anything but levels of income and rent.

Edit: I also believe that prices will ease rather than go up.

Yeah I understand your thinking, I am in the position to buy a house at about a $25k discount (family sale) and have a $45k deposit saved up. I am torn between buying the house and living in it with my girlfriend and 2 other housemates (who are going to live with us) which will significantly reduce the mortgage payments.

Alternative is the keep learning more about trading and invest/trade the money over the next few years until I have a more stable job then use any profits I have made towards a house deposit then.

Both have upsides/downsides but choosing which one to decide on is proving difficult, especially with all of the uncertainty around the economic future at the moment.

 

[MrBurns]

buying the house and living in it with my girlfriend :

After 12 months she might have a claim to half of it.

 

[WilkensOne]

After 12 months she might have a claim to half of it.

Thanks MrBurns,

Luckily my sister is a lawyer and warned me of this, also a contract can be used to avoid this issue.

Wilkens

 

[MrBurns]

Thanks MrBurns,

Luckily my sister is a lawyer and warned me of this, also a contract can be used to avoid this issue.

Wilkens

Doesnt do much for the relationship I imagine but cant be avoided.

 

[WilkensOne]

Doesnt do much for the relationship I imagine but cant be avoided.

Yeah it wasn't the easiest subject to discuss, but luckily I have an understanding better half. Who understands the reasons for such things and agrees with it

 

[Bill M]

I've yet to be convinced that "capital" gains deserve to be treated differently to income earned stacking shelves at the local coles or driving a truck between states.

There is a reason for everything. Until 1985 everything was capital gains tax free. There were people speculating on property and stocks and some made a motza doing this and the Labor Government at the time thought it was unfair that these people were not paying their fair share of taxes. It was decided that the quarterly CPI figures that were recorded were going to be used for calculating capital gains. It was also decided that any capital gains above this was taxed at your marginal rate.

It was a taxation night mare working out your capital gains this way. It was particularly bad if you dividend reinvestment plans. You had to calculate each and every parcels capital gain adjusted to cpi.

After a few years the Liberal government brought in the 50% capital gains tax free system. This did away with the former more dificult calculations. It made it so much easier to work out your tax. It was a dead set pain looking up cpi tables in order to work out your capital gain.

So Labor bought it in and the libs streamlined it. Before 1985 no one paid any capital gains at all. The present system is the easiest I think and at least some tax is paid. Those that sell anything within 12 Months of purchase has to pay the full whack of tax even now.

Why isn't capital gains taxed the same as your salary? The answer would be to encourage investment in property, shares and business. A business owner would argue that it would be unfair to tax his/hers hard work in building up a business from scratch. Lets say someone starts a business from scratch, works 20 odd years at it with blood sweat and tears and turns it into a profitable business. Then they decide to sell it and it might be worth say $1 Million now. The business owner might say why should I pay capital gains tax on it if it was all my own hard word?

I think the system is quite fair now, do we really want to tax people to level where no one wants to invest in anything? The economy would be stuffed in no time, not good for Australia or it's people.

 

[Bill M]

I am really enjoying all this discussion about property prices and their valuations compared to shares.

But does everyone still have the same opinion if you are purchasing the house as a PPOR?

I would buy and have bought a house as a PPOR. I bought mine 3 years ago and I am now looking at upgrading but it all depends on the area. An area with high demand and low supply is best. No good buying out in woop woop if you want to move on a few years later and no one wants to buy it, you could well end up losing money that way.

 

[WilkensOne]

I would buy and have bought a house as a PPOR. I bought mine 3 years ago and I am now looking at upgrading but it all depends on the area. An area with high demand and low supply is best. No good buying out in woop woop if you want to move on a few years later and no one wants to buy it, you could well end up losing money that way.

Thanks Bill, appreciate the opinion. Have you experienced any capital growth on the property in that time period?

The house is in a developing area, there is a lot of redevelopment and building happening and is also about 8km from the Perth CBD. Surrounded by a school, university, parks and nearby shopping strip. I think that there is a lot of room for growing in the suburb personally otherwise I wouldn't have looked so much into it

 

[FlyingFox]

But does everyone still have the same opinion if you are purchasing the house as a PPOR?

I think you might want to rephrase this to :

But does everyone still have the same opinion if you are purchasing the house as a PPOR and it was your first property?

I would buy and have bought a house as a PPOR. I bought mine 3 years ago and I am now looking at upgrading but it all depends on the area. An area with high demand and low supply is best. No good buying out in woop woop if you want to move on a few years later and no one wants to buy it, you could well end up losing money that way.

The problem is that first home buyers have enough of a financial hurdle to buy in woop woop that buying in well established suburbs is out of the question.

Also prices in these areas of high demand and low supply can go down as well. They usually attract a certain demographic and events such as the GFC can dramatically alter their market values.

Some extreme examples http://www.propertyobserver.com.au/...w-no-post-gfc-recovery-in-sight/2011113052610.

 

[FlyingFox]

There is a reason for everything. Until 1985 everything was capital gains tax free. There were people speculating on property and stocks and some made a motza doing this and the Labor Government at the time thought it was unfair that these people were not paying their fair share of taxes. It was decided that the quarterly CPI figures that were recorded were going to be used for calculating capital gains. It was also decided that any capital gains above this was taxed at your marginal rate.

It was a taxation night mare working out your capital gains this way. It was particularly bad if you dividend reinvestment plans. You had to calculate each and every parcels capital gain adjusted to cpi.

After a few years the Liberal government brought in the 50% capital gains tax free system. This did away with the former more dificult calculations. It made it so much easier to work out your tax. It was a dead set pain looking up cpi tables in order to work out your capital gain.

So Labor bought it in and the libs streamlined it. Before 1985 no one paid any capital gains at all. The present system is the easiest I think and at least some tax is paid. Those that sell anything within 12 Months of purchase has to pay the full whack of tax even now.

Why isn't capital gains taxed the same as your salary? The answer would be to encourage investment in property, shares and business. A business owner would argue that it would be unfair to tax his/hers hard work in building up a business from scratch. Lets say someone starts a business from scratch, works 20 odd years at it with blood sweat and tears and turns it into a profitable business. Then they decide to sell it and it might be worth say $1 Million now. The business owner might say why should I pay capital gains tax on it if it was all my own hard word?

I think the system is quite fair now, do we really want to tax people to level where no one wants to invest in anything? The economy would be stuffed in no time, not good for Australia or it's people.

Agreed. Alternatively you can just tax at a fixed rate e.g 20% for all capital gains.

I think the increase in house prices should not be pinned down to just one thing. It is probably due to a combination of Negative gearing, CGT concessions, ability to borrow at high LVRs and the public perception (infatuation even) with housing and investing with housing.

 

[Bill M]

Thanks Bill, appreciate the opinion. Have you experienced any capital growth on the property in that time period?

The house is in a developing area, there is a lot of redevelopment and building happening and is also about 8km from the Perth CBD. Surrounded by a school, university, parks and nearby shopping strip. I think that there is a lot of room for growing in the suburb personally otherwise I wouldn't have looked so much into it

Ok, my present PPOR can be considered as far out but not quite woop woop. I am 100 kms north of Sydney in a cheaper suburb that a lot of young families and some retirees come to live. I watch the prices in this area very closely and I would say that prices have stayed the same. I would get exactly what I paid for mine, take on 20K of moving in and out costs I would lose at this point. In the last 10 Months or so prices have been firming and everything that comes on to the market gets sold rather quickly. They seem to be going to Auction now, I don't know if that is good or bad but everything gets sold pretty quickly at roughly the same prices as 3 years ago.

I don't know Perth at all but 8kms from the CBD is not far at all, sounds good, seems to have everything. It's up to you to make the call, drop into a few auctions just for fun and see what happens. Good luck with whatever you do.

 

[sydboy007]

Why isn't capital gains taxed the same as your salary? The answer would be to encourage investment in property, shares and business. A business owner would argue that it would be unfair to tax his/hers hard work in building up a business from scratch. Lets say someone starts a business from scratch, works 20 odd years at it with blood sweat and tears and turns it into a profitable business. Then they decide to sell it and it might be worth say $1 Million now. The business owner might say why should I pay capital gains tax on it if it was all my own hard word?

I think the system is quite fair now, do we really want to tax people to level where no one wants to invest in anything? The economy would be stuffed in no time, not good for Australia or it's people.

The prob with this argument Bill is that most "capital gains" occur on assets that already exist.

Now if the discount was limited to the formation of new assets then I could sort of accept that it has a place with encouraging NEW investments, but when it applies equally to assets that already exist, then to me it doesn't seem to really encourage investment. To me the repeated buying and selling of the same asset isn't really investing per se, more like the churning of money.

The problem is the vast majority of capital gains is made by the rich. Did some googling and couldn't find the exact figures, but I think most would agree that someone on less than the avg income is unlikely to have too many excess funds available to invest in assets that appreciate and take advantage of the CGT discount.

The issue I have is that the current regime does seem to pushing the churning of assets as the longer you hold it, the more the profit is eroded by inflation.

The problem is all levels of Govt are spending more than they tax. People are constantly complaining that infrastructure isn't good enough, public transport / hospitals etc are not good enough, schools need more funding. The list goes on. They also want family tax benefits, paid parental leave, baby bonuses, and other dollops of middle class welfare on top.

Someone has to pay it, or we have to accept that the levels of civil society we want can't be achieved so we'll need to lower our expectations. I just don't see why someone who works hard and puts their savings into a high interest savings account should have to pay more tax than someone who negatively gears an asset where the tax payer coughs up to nearly half the interest costs of borrowed money, and then on the sale of the asset the owner can get a 50% discount on the tax liable.

BOOM, there you have a housing bubble inflated to near Olympic gold proportions

 

[Miss Hale]

I do. The major reason I am not buying a PPOR is that I perceive them to be very bad value. Not comparing to anything but levels of income and rent.

Edit: I also believe that prices will ease rather than go up.

+ 1

 

[maffu]

Yeah I understand your thinking, I am in the position to buy a house at about a $25k discount (family sale) and have a $45k deposit saved up. I am torn between buying the house and living in it with my girlfriend and 2 other housemates (who are going to live with us) which will significantly reduce the mortgage payments.

Alternative is the keep learning more about trading and invest/trade the money over the next few years until I have a more stable job then use any profits I have made towards a house deposit then.

Both have upsides/downsides but choosing which one to decide on is proving difficult, especially with all of the uncertainty around the economic future at the moment.

Regardless of if the market is going to boom or bust, there will be good deals in both markets.
Getting a discount from the family due to mates rates and no agents fee's etc, and renting out to 2 friends would put you in a unique situation of dramatically lowering the initial cost, as well as improving your cash flow. Being able to share house and rent out to friends is an opportunity that you will only have for a few years, as when you are older and have children you may need that extra room for yourself.

Put together a spreadsheet looking through the numbers and how they work compared to your other options and see which looks the best to you. If you are renting out 2 spare rooms for an extra 15-20k a year, then that could definitely swing things towards buying as the best option in this case.

The other things to consider, how secure is your job, and how upset will you be if the house price does drop?

 

[sydboy007]

Some interesting stats from businessspectator today

Minsky’s financial instability hypothesis can help to integrate the occurrences seen in the data. The speculative financing phase likely corresponds to the 1996-2000 period, as housing prices steadily increased but rental income still covered mortgage interest repayments and rental expenses. This relationship, however, broke down from 2000 onwards as housing prices rapidly escalated. Investors were then dependent upon rising capital values in order to realise a profit at sale and to cover the cost of mortgage debt.

This resembles the terminal Ponzi phase, where housing prices and the household debt to GDP ratio have boomed while net income losses have escalated. Accordingly, by these measures, the evidence suggests that the residential property market is currently experiencing a bubble, with prices detached from fundamental valuations. This appears to be the largest bubble on record, orders of magnitude larger than all preceding bubbles. When it does burst, heavily indebted property owners (recent home-buyers, negative gearers) will experience financial trouble, including the economy at large.

It's scary that IPs still loose 5B a year. Add in 60% of IPs are running as IO loans and I do wonder how much longer it will be before the rush to get out of a loss making investment. Just converting those loans to P/I would be a huge drain on the economy - I'd say you'd add something like 50%+ to monthly repayments??

Interesting to note that net rental income has been negative since the halving of CGT on assets held for more than 12 months

 

[FlyingFox]

Curious as to how everyone thinks 2013 will pan out for housing given the all the recent redundancy announcements?

 

[young-gun]

Curious as to how everyone thinks 2013 will pan out for housing given the all the recent redundancy announcements?

Unfortunately redundancy announcements don't seem to reflect anything. We had a period of 6 months there not long ago where you couldn't take 10 steps without seeing job cuts in the paper, on the news, or on the net.

With seemingly tens of thousands getting chopped, the unemployment rate remained steady. As I'm sure you're aware job numbers aren't worth the paper they are written on, although perhaps slightly more credible than the US.

Unemployment may be the catalyst to trigger the bust, but I think there is also a large number of other contributing factors ie loose credit, a love of RE investing, speculation etc. 2013 could very well be the year, but I'm not holding my breath, I thought 2012 was the year

Prices stagnant to down....at best.jmo