House prices to keep falling for years

[numbercruncher]

It's often quoted all over the place - a quick Google gave me a few hits that refer to this stat as follows:

http://mrmortgage.com.au/mortgage-rates.htm
http://www.rebatehomeloans.com.au/introductory-honeymoon-interest-rates.htm
http://www.news.com.au/business/money/story/0,25479,23026800-5013951,00.html

They all refer to this, and the fact that the AAPR rate must be quoted based on a 7 year period for this reason as well.

Cheers,

Beej

None of those links say the average mortgage is " paid off " in 7 years .... One article specifies repaid or refinanced, the latter making the bulk im sure !

You were being intentionally misleading to make us think the average person paid off a property in 7 years from what I read

 

[professor_frink]

I would take what ever you can get and get out.
I had a house on 1313 SQM on the beach paid $72 10 yr late it was worth $100
The best thing is to live in the barest housing and invest your money in items which pay a better return.... which is hard to pick now ...DVD shops because every one will be at home waiting for their Dole chq.

holy crap man, lighten up!

 

[Beej]

None of those links say the average mortgage is " paid off " in 7 years .... One article specifies repaid or refinanced, the latter making the bulk im sure !

You were being intentionally misleading to make us think the average person paid off a property in 7 years from what I read

No intentional misleading going on - I agree you are right that the stat is that on average a mortgage is "paid out" within 7 years, not necessarily paid off. My original point still stands though.

Personally, back when I was earning around the average wage give or take, I paid off my first mortgage in 7 years, so I know it can certainly be done! I was single then mind you, which helped! However, doing that really set me up well for later in life......

Cheers,

Beej

 

[robots]

No intentional misleading going on - I agree you are right that the stat is that on average a mortgage is "paid out" within 7 years, not necessarily paid off. My original point still stands though.

Personally, back when I was earning around the average wage give or take, I paid off my first mortgage in 7 years, so I know it can certainly be done! I was single then mind you, which helped! However, doing that really set me up well for later in life......

Cheers,

Beej

hello,

got a link for that?

hahahahaha

thankyou
robots

 

[chops_a_must]

LOL - so you are prediciting $0 as the national average wage figure?? Even with 10% unemployment that means 90% of people have a job...... might halt wage growth for a little while but, really, I can't see it going down to zero!!

Nice strawman argument. How on earth did you come to conclusion that that was remotely what I was suggesting?

And LOL indeed at the suggestion that 10% employment means 90% of people have a job. No wonder you can't see many down side risks in property if that's what your knowledge base tells you.

Well not really: 33% of houses are owned with no mortgage at all still. Then, for the other 2/3 (of which half are rented out for all the property bears to live in! ), the AVERAGE time for a mortage to be paid off is 7 years. So in fact virtually no one has the same mortgage for 30 years - that's just the contracted maximum term of the loan.

Turns out that that is just BS obviously.

 

[hotbmw]

its virtually identical. ok they had wooden floor boards mine has carpet.
same views, same furniture as part of the off the plan purchase with freedom furniture as designer

PPS: You may not have "lost" as much as you think - there just may be reasons why the neighboring property was worth more than yours - is it identical? Eg, Same views? Same aspect? Exact same size/layout? Or are there differences?

Beej

 

[hotbmw]

hey robots

if i invested 433k into shares 5.5 yrs ago, and 9 months ago they were 900k, i would sell out

ill sell out of property now for 50k profit

hello,

i just got a valuation on my shares from Commsec I purchased 6yrs ago and its not looking too flash, gone nowhere as well hotbeemer

thankyou
robots

 

[hotbmw]

Beej, im going to have to read your comments a few times to understand it

i have bought and sold with this agent a few times in the past 6 years so surely he would settle for 2% as a return client.

i lived in the apartment for 2 years and rented it out for last 3 yrs.
i didnt revalue it after first 2 years, where the original growth was, i dont think there has been much increase in growth since then. im not sure how cgt will work. 50% rule and then only 3 yrs worth....?

tough times ahead. my friend borrowed 100% 3 months ago, he could be in real trouble in a year its his first home and has no other major assets. if bank come knocking in a year asking for 50k to keep the loan ratio lower he would sell, have nothing and owe 50k. must be many people with this scenario

Agents commissions can ALWAYS be negotiated. Offer as low as you want and then see what is the minimum they will take. In that price range pay no more than a total of ~$10k/2% including advertising costs.

PS re your profit - not the best market timing, you will have a MINIMUM of $50K (net) profit from your numbers, maybe as much as $100k. If it's your PPOR then that's a tax free annual capital appreciation/return of 2.5% -> 4% pa. Depending on your marginal tax rate, that's equivelant to a minimum of 3.5% effective gross return and a maximum of 6.5%. Add to that the rental return (either realised while you were away or effective when you were living there) of another 4% gross pa, and that's a 7.5% -> 10.5% gross annual return. Not that bad really. Of course if you have borrowed to buy then the actual return you have achieved on your directly invested capital would be several multiples of that again due to your leverage. Of course the bottom line is that unless you time things perfectly this would be a typical return from residential property over a relatively short period of time (5-ish years). At least you are in the black! Unlike most peoples share portfolio's acquired anytime in the last 3-4 years.

Cheers,

Beej

 

[Beej]

i have bought and sold with this agent a few times in the past 6 years so surely he would settle for 2% as a return client.

i lived in the apartment for 2 years and rented it out for last 3 yrs.
i didnt revalue it after first 2 years, where the original growth was, i dont think there has been much increase in growth since then. im not sure how cgt will work. 50% rule and then only 3 yrs worth....?

tough times ahead. my friend borrowed 100% 3 months ago, he could be in real trouble in a year its his first home and has no other major assets. if bank come knocking in a year asking for 50k to keep the loan ratio lower he would sell, have nothing and owe 50k. must be many people with this scenario

A home loan is not like a margin loan for shares! Ie the bank WILL NOT come knocking asking for extra cash because they think the value of a security has fallen! As long as the required loan repayments are kept up, the bank leaves the borrower alone. Given that interest rates are already 2% lower than 3 months ago, and likely to drop another 1+% before the end of the year, your friend is now paying 2/3 the interest that he was at the start, and therefore paying down the loan principle (unless interest only?) faster now by keeping up the same original payments. As long as he has income (Ie keeps a job etc), he will be fine, as will 90% of other people in the same situation, who as a whole only represent a very small proportion of existing home owners anyway, which means the market will also be fine.

There are certainly a lot of misconceptions around about how mortages work!

PS: As far as your property goes, usually if it was your Principle Place Of Residence (PPOR) through the entire period you owned it (ie you never owned another property at the same time to which you would be entitled tax free capital gain), and it was rented for < 6 years, then you should not have to pay any capital gains tax at all. Consult your accountant/tax advisor to confirm!

PPS: Sounds like you are quite the property trader if you have bought and sold a few places through the same agent over only a 6 year period!! How much commission did you negotiate with him for those other sale transactions??

Cheers,

Beej

 

[hotbmw]

i dont recall what i paid as i probably didnt really care back then.
i had a good paying job with NAB and i bought a house and apartment within a year. i left the bank 2 yrs later and had to sell the house and 3 yrs later it looks like im selling the apartment. i have travelled for 7-8 mths a year the past 3 years, and the 4 mths ive been here i have just lived at my mums as i wasnt here for long and she liked to have her son around so i left the apartment rented.
so does this still clasify? i own the 1 apartment, no other property. i rented it out for last 3 yrs of 5 yrs owned. i thought id still pay cgt for the 3 yrs MINUS 50% rule.

p.s. i dont know why but my friend locked his loan in for 5 yrs , 3 months ago......

it would cost thousnads to break this contract i imagine.

A home loan is not like a margin loan for shares! Ie the bank WILL NOT come knocking asking for extra cash because they think the value of a security has fallen! As long as the required loan repayments are kept up, the bank leaves the borrower alone. Given that interest rates are already 2% lower than 3 months ago, and likely to drop another 1+% before the end of the year, your friend is now paying 2/3 the interest that he was at the start, and therefore paying down the loan principle (unless interest only?) faster now by keeping up the same original payments. As long as he has income (Ie keeps a job etc), he will be fine, as will 90% of other people in the same situation, who as a whole only represent a very small proportion of existing home owners anyway, which means the market will also be fine.

There are certainly a lot of misconceptions around about how mortages work!

PS: As far as your property goes, usually if it was your Principle Place Of Residence (PPOR) through the entire period you owned it (ie you never owned another property at the same time to which you would be entitled tax free capital gain), and it was rented for < 6 years, then you should not have to pay any capital gains tax at all. Consult your accountant/tax advisor to confirm!

PPS: Sounds like you are quite the property trader if you have bought and sold a few places through the same agent over only a 6 year period!! How much commission did you negotiate with him for those other sale transactions??

Cheers,

Beej

 

[singlefished]

As long as he has income (Ie keeps a job etc), he will be fine, as will 90% of other people in the same situation, who as a whole only represent a very small proportion of existing home owners anyway, which means the market will also be fine.

Beej, are you trying to suggest that 90% of income earning individuals represents only a small proportion of existing home owners???

I'm guessing not but that's how I'm reading it... :

 

[Pommiegranite]

This article is from a couple of days ago, and pretty much sums up what we are facing:

http://www.businessspectator.com.au...the-debt-delusion-LKS2C?OpenDocument&src=srch

End of the debt delusion



The problem with debt is that it makes you feel richer than you really are.

Eddy Groves felt rich – he drove a Ferrari and in 2006 topped the BRW Young Rich List. Now it turns out that not only he was not rich at all, but his business wasn’t actually making money. In fact many of ABC Learning’s childcare centres are losing money and will have to close without government support.

Phil Green and everyone at Babcock and Brown felt rich: last year Green was officially worth $442 million. This year Babcock has turned into a smoking ruin in the hands of its bankers and seems certain formally to go into receivership today or the next day.

Australia’s car dealers all felt rich too. They arrived at work each morning smiling the satisfied smiles of the well-to-do as they surveyed the serried ranks of their gleaming stock.

In fact we now discover that the stock is all owned by finance companies and has been overvalued. We know it is overvalued because now that two of the financiers with 40 per cent of the market are pulling out nobody else wants to take over that debt and the industry is in crisis.

The dealers need the government to step in and finance the overvalued cars on the showroom so they don’t have to be sold for what they are really worth.

That’s already happening with housing debt. This week the Australian Office of Financial Management announced two mandates totalling $996 million for the issue of residential mortgage backed securities under the government plan to buy $8 billion of the things.

It’s a worthy, but ultimately futile, attempt to keep the housing illusion going a bit longer. If the RMBS were worth their current face value, banks would buy them and the government would now not have to.

It’s not that banks don’t have any money – it’s that they no longer trust the value of the security, and the ability of the customers to repay the loans.

The housing and car industries, as well as the childcare industry (we now discover), have been propped up by debt for a decade. They were movie sets of plywood and polystyrene, appearing solid, but merely façades.

Governments must now replace the banks in propping up the plywood – or not.

More broadly, global economic growth has been fuelled by asset price inflation and rising debt for more than two decades.

In a sense the entire world felt rich like Eddy Groves and Phil Green: driving a Ferrari and spending up large. But when the debt stops coming, the illusion disappears and the true value of the assets and the true cash flow become clear – and therefore the true wealth.

In the past year, asset price deflation around the world – of shares, businesses and property – has been dramatic and devastating, especially for those with margin loans (as opposed to mortgages).

This is now being joined by recession and deflation in the prices of consumer products, which will begin an awful process of increasing the value of debt at the same time as the value of the assets declines.

It will also lead to rising unemployment and falling incomes, which will lead to 'margin calls' for those with mortgages. Many of them will join margin borrowers in distress.

Since it launched exactly 12 months ago, and especially in recent days and weeks, Business Spectator has been looking closely at many aspects of this process, 24 hours a day.

For example, yesterday I wrote about the appearance of consumer price deflation (Everything must go, November 20) and Robert Gottliebsen discussed the number of Australians who have borrowed big sums relative to their incomes in the expectation of an everlasting boom (The unlucky country, November 20), while both he and Stephen Bartholomeusz focused on the problems of the over-geared media companies, and in particular Fairfax Media (Fairfax situation critical, November 20). Separately our banking and finance editor, Tony Boyd, focused on Macquarie Group and Babcock and Brown.

The day before I examined the amazing world of synthetic CDOs, that have been used by banks to insure themselves against the very defaults they encouraged by lending too much against inflated asset values (A tsunami of hope or terror?, November 19).

But really, every story these days is about the same thing: the unwinding of the great debt delusion.

Today in Australia it will be the collapse of Babcock – the biggest and messiest so far; in the US it is the crisis at Citigroup, as its shares fall more than 20 per cent in a day despite Vikram Pandit’s announcement on Monday that 52,000 staff will go.

It shows that even as phase two of the crisis – recession and deflation – get underway, phase one – the unravelling of the financial sector – is still playing out.

As I suggested the other day, perhaps the vast bank insurance scheme known as synthetic CDOs will recapitalise the banks and end phase one. Many expert correspondents to Business Spectator’s The Conversation tell us that it won’t be that simple.

Nothing is these days.

 

[prawn_86]

Nice article there Pommie. I particularly liked this:

the true value of the assets and the true cash flow become clear

Cash flow is very important in these times, and i am now only buying stocks that i think will have relatively steady earnings and pay a healthy dividend. Im not looking for capital gains in the short term.

With regards to housing, i have always said, and will continue to say, it makes very little sense (in theory) to be buying an asset which has a negative cashflow. You wouldnt buy a business ike that unless you saw potential to turn it around, same should go with housing. (Neg gearing muddies the waters a little though)

 

[chops_a_must]

With regards to housing, i have always said, and will continue to say, it makes very little sense (in theory) to be buying an asset which has a negative cashflow. You wouldnt buy a business ike that unless you saw potential to turn it around, same should go with housing.

I'm of the same opinion as you Prawn my man.

You wouldn't take out a margin loan to reduce your tax, so why on earth would you do it with property? It has always had me totally stumped. It really is an all in bet on capital gain, and with little downside protection.

Never understood it. Owner occupied excluded obviously.

 

[Pommiegranite]

I'm of the same opinion as you Prawn my man.

You wouldn't take out a margin loan to reduce your tax, so why on earth would you do it with property? It has always had me totally stumped. It really is an all in bet on capital gain, and with little downside protection.

Never understood it. Owner occupied excluded obviously.

For investment properties, it comes down to a simple premise that someone else will pay off your investment loan. At the end of the term, you are left with and asset which you haven't paid for. At the same time negative gearing gives a tax break.

Unfortunately, for the masses, they are not accountants and are gambling on inflation and 100% occupancy for the term of the mortgage. Some of them do not even understand negative gearing and many are over negatively geared to even benefit from 'making a loss'

 

[prawn_86]

For investment properties, it comes down to a simple premise that someone else will pay off your investment loan. At the end of the term, you are left with and asset which you haven't paid for. At the same time negative gearing gives a tax break.

I have to admit i know very little about property, partly due to my age, partly due to not caring too much, but what you have stated above would not be the case very often in the current envirnment would it? You would need a cash flow positive or at least neutral property for this to happen, otherwise you would be dipping into your own pocket to help pay it off.

 

[Beej]

Beej, are you trying to suggest that 90% of income earning individuals represents only a small proportion of existing home owners???

I'm guessing not but that's how I'm reading it... :

No no What I am saying, is that of all the very unwise people who may have taken out 100% LVR loans in the past say 1-2 years (Ie those who may face a negative equity situation currently), 90% of them will be fine, as their costs are now way down (due to falling interest rates) allowing them to build equity or reduce payments. I am suggesting that only a small proportion of that group would be likely to get in to trouble from here on (say if they lost their job etc, remembering that a significant majority will not lose their job, or will be able to find more work straight away if they do).

Then the second part is I am saying that this groups (Ie 100% geared borrowers who bought in the past 1-2 years) represent only a VERY small proportion of existing property owners. Which is why the whole potential forced sale causing a market crash scenario is way over-blown IMO.

Capisce?

Beej

 

[numbercruncher]

A home loan is not like a margin loan for shares! Ie the bank WILL NOT come knocking asking for extra cash because they think the value of a security has fallen!

Do mortgage documents specifically say this ? Has it never happened before ?

 

[cuttlefish]

Prawn, Chops - as well as capital gains its important to consider how rent fits into the equation.

Simple example - here in Sydney (where prices boomed till 2003 but have been far less heated since), down the road a few blocks from me - there are second hand studio apartments for sale for $240k - they are pretty much the same price now as they were 5 years ago. 5 years ago the rents were $220/week, now the rents are $330/week.

If you got a place for $220k (assume some further price reductions) then add on $10k buying costs to make $230k purchase. The net interest cost on $230k at 7.7% is $17710/year. Add on $2k levees and rates to get $19710 per year as net 'cost of ownership', which is $380/week. That is based on 100% cost of borrowing.

So if you were a young bloke, fed up with living with flatmates (share accom in the area is about $200+/week) and wanting to get into a place of your own, then the cost of renting a studio is $330 while the cost of owning one is $380. (based on 100% borrowing).

By the way - in the mid 90's those same apartments were available for $80k to $100k and the rents were around $120 to $150 a week.

In the 70's you could pick one up for $20k - I bet the rents were lower back then as well.

In 20 years time I'll be very surprised if you can rent one for only $380/week or buy one for only $240k.

Not trying to spruik property, but its worth having a balanced view. Location, demand, rents, land supply etc. all factor into the equation. Like any investment class, just because it might be starting to appear cheap now, doesn't mean it won't get cheaper, and I wouldn't be encouraging knife catching in the property market any more than I would in the stock market - but its also important not to write it off altogether. The expression 'safe as houses' didn't come about for naught.

 

[Beej]

I have to admit i know very little about property, partly due to my age, partly due to not caring too much, but what you have stated above would not be the case very often in the current envirnment would it? You would need a cash flow positive or at least neutral property for this to happen, otherwise you would be dipping into your own pocket to help pay it off.

With mortgage interest rates about to hit 5% right now (fixed rates of 5.99% already available) there are many properties on the market that will provide positive cash-flow from day 1 on an LVR of 100%.

Having said that, most investors are long term - you use the negative gearing/negative cash-flow situation AT FIRST, with the tax benefit helping make up the difference. Over a period of time, the RENT goes up - your interest payments GO DOWN (as the principle is paid off). At some point all investment properties will turn cash-flow positive - at that point the property investor is sitting pretty..... Get it yet??

You guys here deride property investors so much,as if they are all a bunch of idiots. But I think the vast majority are actually well aware of their cash-flow position, state of the market, and how you actually make money from property etc. The key though is a LONG TERM VIEW.

Cheers,

Beej