The future of Australian property prices

[Bill M]

Hmmm there are some baby boomers that might expect more than what they have saved and then there are others that are quite switched on.

In my case, the house I live in, I don't care if it goes up or down. I got somewhere to live mortgage and rent free. With my rental property, I just raise the rent each year. This boomer is interested in income, not so much the capital gains. Nothing to worry about here and I do not expect a pension of any sort later in life but I will gladly hold my hand out if some government of any persuasion in the future is willing to give it to me.

 

[Mr Z]

Mr Z,
In your opinion, when do you think we will see this shift? In the next 5 or 10 years? Or further out?

I suspect that we will see a weak property market for close to a decade, we have unprecedented private debt levels to work off and an unprecedented demographic headwind with the boomers moving into old age. Bear markets being what they are price should shift down quickly then stay lack luster for a while. So while the bottom might be say 3 to 5 years away it may be 10 years before it is really starts to recover in real terms.

That said, it all depends what our fearless leaders get up to, how much new money they print, how they respond to the baby boomers nadir with things like immigration policy etc...

When you are reading articles about how buying a house is a bad investment in comparison to stocks and interest rates are at eye watering levels then lever up and buy everything you can...

 

[Mr Z]

PS> Its been almost 5 years and the US looks to be finding the floor in its property market. IMO they will not come back strongly quickly but the value buyers seem to be coming out of the wood work slowly. I can't see why we would stray too far from their lead, though I suspect it will be a softer bust here.

 

[Mr Z]

I just raise the rent each year. This boomer is interested in income, not so much the capital gains.

Historically the issue with real estate in an inflationary (stagflationary) environment is that rents cannot be repriced quickly enough to keep pace with general cost increases. With the amount of money being pushed into the system globally it is only a matter of time before it manifests itself in significant price inflation. This will be the challenge, and it is very much a double edged sword, while initially it will help to "inflate the debt away" it will quickly translate into price pressure as all staples rise and start to stretch budgets, then when rates rise in the fight to kill the beast the screws will really tighten. So while you may find yourself getting a higher nominal rent it might not be covering the costs that it once did, you may not end up as self funded as you are at this point. It is sobering to remember that under 1% of retirees make it fully self funded. I know a pilot that retired with 1m+ 20 years ago, he was very comfortable, now he is still OK but on a part pension and rather surprised that it came to this. 1m was a heck of a lot more 20 years ago...!

 

[Bill M]

I know a pilot that retired with 1m+ 20 years ago, he was very comfortable, now he is still OK but on a part pension and rather surprised that it came to this. 1m was a heck of a lot more 20 years ago...!

Poster tech/a often talks about this and it is what I fear most too. It's probably why I tend to be a bit frugal even though right now I don't need to be. Point taken very well.

 

[Julia]

It is not the PPOR that is the issue, the boomers own large amounts of investment property, it is the one investment that has become religion to that generation. They will divest the investment property and they will also downsize the PPOR as the financial pressure of retirement comes to bear.

Can you provide a link to stats that demonstrate your claim that "the boomers own large amounts of investment property"?
I know this is a popular generalisation. It's not something I've observed in reality. Certainly a small proportion of boomers own several IPs, but your claim here is in opposition to your earlier claim that boomers will have to liquidate or downsize their PPOR in order to fund the standard of living they want in retirement.

the only thing i would say against your argument which i agree with largely is that for some more financial engineering in the reverse mortgage space

Good point, and one which is largely overlooked in these discussions.

PS> Its been almost 5 years and the US looks to be finding the floor in its property market. IMO they will not come back strongly quickly but the value buyers seem to be coming out of the wood work slowly. I can't see why we would stray too far from their lead, though I suspect it will be a softer bust here.

I can't see how you can compare the US property market, with all their subprime fall out, with that of Australia.

It is sobering to remember that under 1% of retirees make it fully self funded.

I've just done a search to substantiate this figure and cannot find any such validation. Perhaps you can provide a link to it?
(Wouldn't at all be surprised if it's true, but would like to see where the percentage came from.)

 

[sydboy007]

some interesting stats in an article in the SMH today:

* the avg mortgage size has flat lined since 2009. This has never happened since the stats were first started to be recorded in the early 90s.

* house prices don't look so over priced when you include super into incomes for Australians.

 

[young-gun]

PS> Its been almost 5 years and the US looks to be finding the floor in its property market. IMO they will not come back strongly quickly but the value buyers seem to be coming out of the wood work slowly. I can't see why we would stray too far from their lead, though I suspect it will be a softer bust here.

Let's not forget what bernanke is trying to do, that is, inflate a new housing bubble. It's no real surprise prices are starting to climb, but it's not a genuine recovery, they are setting themselves up for another fall. Billions are being pumped in.

 

[Uncle Festivus]

PS> Its been almost 5 years and the US looks to be finding the floor in its property market. IMO they will not come back strongly quickly but the value buyers seem to be coming out of the wood work slowly. I can't see why we would stray too far from their lead, though I suspect it will be a softer bust here.

Let's not forget what bernanke is trying to do, that is, inflate a new housing bubble. It's no real surprise prices are starting to climb, but it's not a genuine recovery, they are setting themselves up for another fall. Billions are being pumped in.

Billions are being pumped in, but nothing to show for it.....top end sales skewing prices up.....

 

[Mr Z]

Can you provide a link to stats that demonstrate your claim that "the boomers own large amounts of investment property"? I know this is a popular generalisation. It's not something I've observed in reality.

It is certainly the norm among the people that I know to own at least one IP, by far the minority own just their PPOR.

No I'm not going to spend time digging up proof for you, take it or leave it, I really don't mind.

Certainly a small proportion of boomers own several IPs,

The number of IP's is not the main issue so much as the size of the generation, if on average they all only own one it is still a large supply... I actually doubt that the average is that high but that doesn't alter the fact that 50% of the working population own a lot of property collectively and are moving toward retirement.

but your claim here is in opposition to your earlier claim that boomers will have to liquidate or downsize their PPOR in order to fund the standard of living they want in retirement.

I never suggested that they will have to liquidate their PPOR, I suggested that they will, on average, downsize. That one you should be able to "see". I know many that have down sized, sea changed or tree changed.... and I know a good number of the latter two that have realized it was a mistake, the kids are too busy to come and stay/holiday etc and they now seek to swap the tree/sea change for a low maintenance townhouse near the grand kids. Looking that the relative stregths of some these markets I would s

Good point, and one which is largely overlooked in these discussions.

I doubt it will be a major thing, after all what lender really wants the property at the end of the day? If they are unsure of the prospects for liquidation they be more circumspect with their lending in this area. JMO

I can't see how you can compare the US property market, with all their subprime fall out, with that of Australia.

We are just as extended as they where, the level of debt is the key issue. Besides their issues started in sub-prime but they extended into all other areas of lending. We have bucket loads of "liars loans" etc and a hell of a lot of people that where prime that are now not... do you know any worried middle management... I certainly do! No matter the details it is the level of debt overall that is at an extreme and needs to contract... as sure as you breath in you must breath out.

I've just done a search to substantiate this figure and cannot find any such validation. Perhaps you can provide a link to it? Wouldn't at all be surprised if it's true, but would like to see where the percentage came from.)

No I can't, that number comes from a relation who ran a very successful investment firm. Now he is well and truly self-funded, he sold out to a much bigger operation.... for all the good that has done him as he is now fighting cancer.

Keep in mind that is a historic figure, it covers a period where we came from defined benefit pensions and have transitioned to defined contribution schemes. It will likely change, but enough to make a difference... I doubt it.

The thing with the boomer's is that whatever investment was popular among them, just due to the sheer size of the bubble in the population, has had a massive tail wind and conversely will run into the same head wind as they exit it... which they will,...even if it is only estate liquidation! Talk to a boomer about property, they all most all believe whole heartedly as it is the only sure bet that they have seen across their lives in this country. They are a self fulfilling bull and bear market, they will also be an issue when it comes to super liquidation... but that is probably an issue for the future.

take it... leave it.

 

[Mr Z]

Billions are being pumped in, but nothing to show for it.....top end sales skewing prices up.....

Pumping it is easy, controlling it's flow is another issue altogether!... eh?

 

[Mr Z]

Let's not forget what bernanke is trying to do, that is, inflate a new housing bubble. It's no real surprise prices are starting to climb, but it's not a genuine recovery, they are setting themselves up for another fall. Billions are being pumped in.

There is true value to be found in that market, I know a guy in a forces town that can achieve a 20% returns with a constant supply of GI's as tenants. They have to leave the properties in good nick, their commandeers make it so. The houses are well below replacement value and high yielding. Given what you can invest in the US it is a monty... stuff all downside and big yield! Yet look at UST's, seriously you would have to be a mug to walk past RE for T's in that market.

+ the rumors are that the bulk of the money moving is smart money, not end user money.... they still can't lend that easily despite Ben's efforts.

 

[Uncle Festivus]

Pumping it is easy, controlling it's flow is another issue altogether!... eh?

A bit like a muffin top held in by a pair of traccy dacks, like you see in Go Lo patrons - eventually somethings gotta give, and it aint gonna be pretty

 

[Mr Z]

The number of IP's is not the main issue so much as the size of the generation, if on average they all only own one it is still a large supply... I actually doubt that the average is that high but that doesn't alter the fact that 50% of the working population own a lot of property collectively and are moving toward retirement.

To be clear I'm actually referring to boomer households as opposed to individual boomer's, and yes the average ownership will likely be a low fraction but it illustrates the point that it is the large size of the generation having similar investments and needs across the same time span that produces the issue, not extremities in individual positions.... though they exist!

As and aside the boomers are also a challenge to our medical system.... not only do they represent a good % of the talent and are looking to retire, they are also becoming an increasingly larger part of the demand as age takes it toll. We are going to import more doctors and nurses! We have to! If you have had a look around nursing homes recently you will have noticed a majority immigrant staff, at least at everyone I visit..... less and less this year, they are all dying! Its an epidemic!

 

[Mr Z]

A bit like a muffin top held in by a pair of traccy dacks, like you see in Go Lo patrons - eventually somethings gotta give, and it aint gonna be pretty

What has been seen cannot be unseen.... yeesh... my minds eye has been damaged!

 

[Mrmagoo]

3 bed one bath house in the outer suburbs shouldn't cost more than 250k.

200k if it is just a basic no garage job.,

180k if it is more or less just the house.

Within 20kms of the CBD should not be more than about 350k and if supply and demand limits this then they should build apartments to make up for lack of land. 350k is about 117k per bedroom which is still a lot of money.

If you track historic wage to earnings ratio this is about where they should be.

Earn 90k (which is a good wage) a 2 time multiplier for the family home on the city fringes is about right. Pay it off in under 5 years, just like people did in the 90s.

Yes - that is how cheap houses used to be.

For 450k you should be able to get a decent house say 20kms from the CBD. As that is still a hug amount of money. The difference would be a 15 year mortage instead of a 30 year one, so it would still cost people money from their pay packets.

As I said if land supply becomes an issue, you just build density so people buy apartment for even cheaper.

The system is obviously corrupt

People scoff at the 450k figure, but go on, save up that much and while you're at it pay 6% interest on 450k.

Not an easy task.

 

[tech/a]

Poster tech/a often talks about this and it is what I fear most too. It's probably why I tend to be a bit frugal even though right now I don't need to be. Point taken very well.

Passive income and ability to stay in front of inflation---when it comes it will come hard.
Cash will erode exponentially!

Negotiating on a property for development now.
First in 6 yrs.

 

[medicowallet]

Passive income and ability to stay in front of inflation---when it comes it will come hard.
Cash will erode exponentially!

Negotiating on a property for development now.
First in 6 yrs.

Absolutely true, unless a property crash comes beforehand...

MW

 

[sydboy007]

Interesting to see how much land banking some of the developers have been up to.

Saw this in an article on macrobusiness last year - the below chart

In another interesting article on macrobusiness they show (from RP Data based on Census data)

Median rental payments as a % of income have increase from 18.5% in 2001 to 23.1% in 2011

Median multiples of income to dwelling prices increased from 4.5 in 2001 times to 6.3 times in 2011

Median mortgage payments as a % of median household income increased from 25.6% in 2001 to 33.7% in 2011

So median mortgage repayments have increased by 32% in a decade, and median rents have increased just under 25%

A household spending 33.7% of their pretax income on the mortgage must be living it tough I'd say, and 50% of the mortgage market is ABOVE that rate. That's even scarier.

 

[sydboy007]

Another scary statistic.

Australian residential mortgage debt currently sits at 80% of GDP