House prices to keep falling for years

[UBIQUITOUS]

the average mortgage is 240,000....at 10% interest thats 24,000 pa , at 5% interest its 12,000....whats the big deal/ noise about people losing jobs and therefor their house ??? the cost has reduced...made it cheaper to stay in the home....how much to go out and rent the same thing ???? it would probably cost you more to rent....

I could be wrong..but gained the impression some on here just read headlines...and the media pick out the bad parts for the headlines..and ignore the positive news in the story
aarrhh traps for players

NOT TRUE!!

I could be wrong (doubt it though), but gained the impression some on here (and the media) like to throw about figures, conveniently ignoring some very important house ownership costs i.e :

1.council rates
2.maintenance costs
3.mortgage insurance
4.mortage costs
5.buildings insurance
6.stamp duty

AND MOST IMPORTANTLY

7.borrowing cost over the FULL TERM of the loan (not just this month's interest rate) during an asset deflationary environment!!

THE GRIM REAPER IS SHARPENING HIS BLADE!!!

 

[prawn_86]

^^ I agree with most of the above.

What i dont get is if you buy say a $400k house you actually pay a hell of a lot more than that if you pay the whole thing off over say 20 years, so your house value has to rise A LOT for you to even break even. If it was worth sya 500k when you retired you have still lost out as you have paid more than 500k if you take into account the mortgage and all other yearly fees.

That is of course from a purely financial perspective, not taking into account the emotonal benefits...

 

[So_Cynical]

^^ I agree with most of the above.

What i dont get is if you buy say a $400k house you actually pay a hell of a lot more than that if you pay the whole thing off over say 20 years, so your house value has to rise A LOT for you to even break even. If it was worth sya 500k when you retired you have still lost out as you have paid more than 500k if you take into account the mortgage and all other yearly fees.

That is of course from a purely financial perspective, not taking into account the emotonal benefits...

This is where inflation works in your favor...that's the bit ive only recently come
to understand....over the first 10 years of your loan, if inflation is reasonably high
the asset value rises over 100% while the debt (principle) stays the same....this is
how it worked in Aust during the 70 > 90's.

 

[prawn_86]

This is where inflation works in your favor...that's the bit ive only recently come
to understand....over the first 10 years of your loan, if inflation is reasonably high
the asset value rises over 100% while the debt (principle) stays the same....this is
how it worked in Aust during the 70 > 90's.

True, but if people bought in the last 18 months they wont have the same benefits, in fact the value of thier homes will be falling while they pay off a huge mortgage. Like any asset class it comes back to timing really

 

[kincella]

median house price in 1986 was 80,000....in 2006 it 396400...lets say 400,000
so increased 5 times or 500%....
have a look at what inflation does for you...look at the disposable incomes all those years....note fhb prices were lower but still managed to go from 67400 to 350,000

the house price rise over the years sure out strips the balance on the mortgage...
friend that bought the house for 12,000 in 1970...lets say borrowed 10,000
then sold by 1986 for 80,000 would be quite happy with the result
or if still holding until 2006....
so lets see cost 12,000 in 1970....mv 400,000 in 2006.....an increase of 388.000...would they care what the loan and interest cost them...

in a few years time..when things get back to normal...that 400k loan today
will dwarf the house price of say 1 mill....only 2.5 times growth instead of the 5 times growth...in real prices of the 20 years noted....
if prices continued at 5 times over 20 years...you are looking at mv for a house of 2 mill.....

http://www.aph.gov.au/library/pubs/RN/2006-07/07rn07.pdf

 

[Beej]

NOT TRUE!!

I could be wrong (doubt it though), but gained the impression some on here (and the media) like to throw about figures, conveniently ignoring some very important house ownership costs i.e :

1.council rates
2.maintenance costs
3.mortgage insurance
4.mortage costs
5.buildings insurance
6.stamp duty

AND MOST IMPORTANTLY

7.borrowing cost over the FULL TERM of the loan (not just this month's interest rate) during an asset deflationary environment!!

Some on here like to throw figures around related to the financial benefits/pitfalls of PPOR ownership, but ignore the RENT that would otherwise be paid, plus the impact that INFLATION over the LONG TERM will have on both rents, and house prices, even ignoring all other variables, market timing etc etc.

Plus some of your costs like stamp duty is zero for FHB, and mortgage costs (other than interest which you list separately) should be zero also. The rest are minor - just noise in the scheme of things.

And by the way, the easiest way to avoid the interest cost over the loans full term is pay it down as soon as you can. My first mortgage was paid of completely in 7 years. That's when I started living rent AND mortgage free. It's not rocket science......

^^ I agree with most of the above.

What i dont get is if you buy say a $400k house you actually pay a hell of a lot more than that if you pay the whole thing off over say 20 years, so your house value has to rise A LOT for you to even break even. If it was worth sya 500k when you retired you have still lost out as you have paid more than 500k if you take into account the mortgage and all other yearly fees.

That is of course from a purely financial perspective, not taking into account the emotonal benefits...

Ah grasshopper have you learnt nothing??? How much RENT would you otherwise be paying? Subtract that from the interest you pay on the mortgage, and that is all the increase in absolute capital value you need to be getting ahead. This difference is usually a lot less than just the inflation rate....

Eg, an inflation rate of just 3%pa over 20 years will turn your $400k house into a $725k one, ignoring all other factors that can and do push property values up ahead of inflation. At the same time, your rent of say $400/week would after 20 years be $725/week. Even if you had only paid interest on your mortgage over that 20 years, you would now be paying heaps less than what it would cost to rent the same house, plus if you sold it you would pocket $325k (less selling costs) to boot.

Another rule of thumb, you can effectively cancel out interest rate movements/variability in your calcs as well because rising interest rates = rising inflation, meaning your interest payments are higher but at the same time your absolute house price increases at a higher rate as well. On average over the long term it always works out this way.

And as So_Cynical points out below understanding the impact of inflation over the long term on both rents and house prices (plus prevailing interest rates) here is the key to unlocking your future financial freedom:

This is where inflation works in your favor...that's the bit ive only recently come
to understand....over the first 10 years of your loan, if inflation is reasonably high
the asset value rises over 100% while the debt (principle) stays the same....this is
how it worked in Aust during the 70 > 90's.

At last someone is starting to get it!

Cheers,

Beej

 

[kincella]

should have added in my last post...that friends house was actually worth 1 mill in 2006....remember it cost 12,000 in 1970.....the land alone is worth about 800.000...they just tore down the old house and built a new one...cost 700,000 to build the house....its in a nice suburb

I know of another example...same cost, very different location...in 2006 this house only 240,000...a fhb suburb..with some problems

very different results for very different locations...

 

[UBIQUITOUS]

Some on here like to throw figures around related to the financial benefits/pitfalls of PPOR ownership, but ignore the RENT that would otherwise be paid, plus the impact that INFLATION over the LONG TERM will have on both rents, and house prices, even ignoring all other variables, market timing etc etc.

Some like to use recent history as a guide to future performance. If only things were that easy. What guarantees do you have that there will be enough inflation over the long term to negate any benefits of renting. Let me guess.....recent performance over a timescale to suit your pov?

Plus some of your costs like stamp duty is zero for FHB, and mortgage costs (other than interest which you list separately) should be zero also. The rest are minor - just noise in the scheme of things.

Oh, so its 'noise' when it suits you. Try telling someone who has to pay, that these costs are just noise. Looking down your nose again Beej?

And by the way, the easiest way to avoid the interest cost over the loans full term is pay it down as soon as you can. My first mortgage was paid of completely in 7 years. That's when I started living rent AND mortgage free. It's not rocket science......

You're right, its not rocket science, but it cetainly is someone who 'accidently' timed the market right, once again giving their own example as a 'crystal ball' to the future.

Ah grasshopper have you learnt nothing??? How much RENT would you otherwise be paying? Subtract that from the interest you pay on the mortgage, and that is all the increase in absolute capital value you need to be getting ahead. This difference is usually a lot less than just the inflation rate....

As someone who has made a tidy some from investing in property over the years (and has now sold out), I know a LOT more about financial modelling then your simple arithmetic bold above.

Infact, I am very surprised at your obvious lack of understanding, as I thought you had a level of understanding that your average property investors does not.

Beej, if only maths were as simple as your, 'subtract dot from dash = guaranteed profits', way of thinking.

Eg, an inflation rate of just 3%pa over 20 years will turn your $400k house into a $725k one, ignoring all other factors that can and do push property values up ahead of inflation. At the same time, your rent of say $400/week would after 20 years be $725/week. Even if you had only paid interest on your mortgage over that 20 years, you would now be paying heaps less than what it would cost to rent the same house, plus if you sold it you would pocket $325k (less selling costs) to boot.

IF..if...if. Hello, do you pay attention to anything happening which doesn't suit your own point of view.

What are your views on the deflation? Why do you think the governemnt, RBA are battling deflation of asset values. Do you know something that they do not?

It seems as though inflation is what your entire investment decision hinge on. If you've had your head in the sand for the last few months, you are going to be in for a big, big shock.

Another rule of thumb, you can effectively cancel out interest rate movements/variability in your calcs as well because rising interest rates = rising inflation, meaning your interest payments are higher but at the same time your absolute house price increases at a higher rate as well. On average over the long term it always works out this way.

and falling interest rates = deflationary pressures (I cannot believe that you don't 'get' this part of the equation!).

Also, what do you have to say to those FHBs whose new home payments are dependent on them keeping their jobs? Let me guess, in Beej world unemployment is decreasing, so they'll have no problems in paying of their homeloans.

And as So_Cynical points out below understanding the impact of inflation over the long term on both rents and house prices (plus prevailing interest rates) here is the key to unlocking your future financial freedom:

Not understanding the other side of the inflation argument (deflation) is the key to unlocking financial ruin

At last someone is starting to get it!

...but its not you. I'll give you some help - Property can and will be a great investment, and agree that it usually is 'time in the market and not 'timing the market'.

However, there sometimes are times when you should NEVER buy. This is one of them.

 

[UBIQUITOUS]

should have added in my last post...that friends house was actually worth 1 mill in 2006....remember it cost 12,000 in 1970.....the land alone is worth about 800.000...they just tore down the old house and built a new one...cost 700,000 to build the house....its in a nice suburb

I know of another example...same cost, very different location...in 2006 this house only 240,000...a fhb suburb..with some problems

very different results for very different locations...

Roll up..roll up!!! Past performance = Future performance

Oh how easy life is.

If your shares double in price, buy twice as many!!

for you.

 

[joeyr46]

should have added in my last post...that friends house was actually worth 1 mill in 2006....remember it cost 12,000 in 1970.....the land alone is worth about 800.000...they just tore down the old house and built a new one...cost 700,000 to build the house....its in a nice suburb

I know of another example...same cost, very different location...in 2006 this house only 240,000...a fhb suburb..with some problems

very different results for very different locations...

Ah yes house prices to fall for years and years It's the land value that appreciates that is why location location location is so important the actual house is second hand as soon as someone moves in probably also why as Beej says top end is so much more volatile

 

[robots]

Roll up..roll up!!! Past performance = Future performance

Oh how easy life is.

If your shares double in price, buy twice as many!!

for you.

hello,

spot on there ubiquitous, life is the best thing going around, easy as man for most who put in

all the more reason to concentrate on your income and anything else a bonus

sunshine and lollipops

thankyou
robots

 

[Beej]

As someone who has made a tidy some from investing in property over the years (and has now sold out), I know a LOT more about financial modelling then your simple arithmetic bold above.

Infact, I am very surprised at your obvious lack of understanding, as I thought you had a level of understanding that your average property investors does not.

Beej, if only maths were as simple as your, 'subtract dot from dash = guaranteed profits', way of thinking.

I never said anything about guaranteed profits. Simply showing that to be getting ahead you don't require massive capital gains, only enough to offset the difference between the interest, (plus other costs if it makes you feel better that I put this here, although interest is the major one), and the rent you otherwise would have to pay. We are talking about PPORs here remember - not pure investment.

You can build as complex a financial model as you like, but the MAJOR factors that impact the outcome are those I am pointing out. Certainly good enough for a back-of-the-envelope explanation on an internet forum!

IF..if...if. Hello, do you pay attention to anything happening which doesn't suit your own point of view.

Ummmmm it was a simple EXAMPLE - hence the 'ifs'. How else do you work up a simple example scenario?

What are your views on the deflation? Why do you think the governemnt, RBA are battling deflation of asset values. Do you know something that they do not?

It seems as though inflation is what your entire investment decision hinge on. If you've had your head in the sand for the last few months, you are going to be in for a big, big shock.

and falling interest rates = deflationary pressures (I cannot believe that you don't 'get' this part of the equation!).

Inflation is the natural order of things. Deflation is rare and economically damaging, hence unlikely to occur and if it does will be short lived due to government and central bank intervention. Also I don't see over-all deflation occurring in the AU economy at the moment? Deflationary pressures yes - resulting in economic growth slowing/contracting, but still moderate underlying inflation over-all. As you point out both fiscal and monetary policy levers are being yanked hard at the moment to avoid deflation and restore the "natural inflationary order" of things.

I think one the problems of the last 10 years is we are victims of our own economic success - 10 years if historically LOW inflation has unmasked non-inflationary asset price inflation more obviously than has been the case in the past, causing a lot of the current angst.

Also, what do you have to say to those FHBs whose new home payments are dependent on them keeping their jobs? Let me guess, in Beej world unemployment is decreasing, so they'll have no problems in paying of their homeloans.

At the moment their cost of interest vs rent would be about the same, so what difference does it make? At least by buying they have a chance of future financial security and their own roof over their heads.

Not understanding the other side of the inflation argument (deflation) is the key to unlocking financial ruin

...but its not you. I'll give you some help - Property can and will be a great investment, and agree that it usually is 'time in the market and not 'timing the market'.

However, there sometimes are times when you should NEVER buy. This is one of them.

The things you argue are exactly what some people were saying to me back in the early 90s when I bought my first house.....So I guess we have to agree to disagree on that one!

Cheers,

Beej

 

[robots]

As someone who has made a tidy some from investing in property over the years (and has now sold out), I know a LOT more about financial modelling then your simple arithmetic bold above.

However, there sometimes are times when you should NEVER buy. This is one of them.

hello,

you were lucky as well Ubiquitous, well done

thankyou
robots

 

[lioness]

Some like to use recent history as a guide to future performance. If only things were that easy. What guarantees do you have that there will be enough inflation over the long term to negate any benefits of renting. Let me guess.....recent performance over a timescale to suit your pov?



Oh, so its 'noise' when it suits you. Try telling someone who has to pay, that these costs are just noise. Looking down your nose again Beej?



You're right, its not rocket science, but it cetainly is someone who 'accidently' timed the market right, once again giving their own example as a 'crystal ball' to the future.



As someone who has made a tidy some from investing in property over the years (and has now sold out), I know a LOT more about financial modelling then your simple arithmetic bold above.

Infact, I am very surprised at your obvious lack of understanding, as I thought you had a level of understanding that your average property investors does not.

Beej, if only maths were as simple as your, 'subtract dot from dash = guaranteed profits', way of thinking.



IF..if...if. Hello, do you pay attention to anything happening which doesn't suit your own point of view.

What are your views on the deflation? Why do you think the governemnt, RBA are battling deflation of asset values. Do you know something that they do not?

It seems as though inflation is what your entire investment decision hinge on. If you've had your head in the sand for the last few months, you are going to be in for a big, big shock.



and falling interest rates = deflationary pressures (I cannot believe that you don't 'get' this part of the equation!).

Also, what do you have to say to those FHBs whose new home payments are dependent on them keeping their jobs? Let me guess, in Beej world unemployment is decreasing, so they'll have no problems in paying of their homeloans.



Not understanding the other side of the inflation argument (deflation) is the key to unlocking financial ruin



...but its not you. I'll give you some help - Property can and will be a great investment, and agree that it usually is 'time in the market and not 'timing the market'.

However, there sometimes are times when you should NEVER buy. This is one of them.

Ubquitous, You are one of the few here who get it.

I woke up to deflation happening and changed my mind on property and got killed for it on here. I stated deflation is happening now so why worry about inflation in 3 years time when property falls 50% in the meantime.

I am now selling my rental property to FHB in the 550K bracket and they are swarming over it as I write, good luck they can have it.

I will have my PPOR paid off and no debt ready for bargains in 3 years time.

People like beej and kincella never will get it as their argument soley relies on inflation which is yesterday's news.

 

[cwamit]

a good investing moto for houses is to buy the worse house in the best street...

 

[Beej]

I am now selling my rental property to FHB in the 550K bracket and they are swarming over it as I write, good luck they can have it.

And you still think asset prices will somehow magically deflate in an environment like that?

I will have my PPOR paid off and no debt ready for bargains in 3 years time.

Really our positions are actually not that different then, as I notice you are not rushing to sell your PPOR as many here using the deflation argument would advocate. It's interesting you are so certain 3 years will be the time for the bargains - how do you know it won't be in 2 years? Maybe 1 year? Maybe 6 months? Perhaps even right now?? The real problem is, nobody knows.....

Cheers,

Beej

 

[robots]

hello,

6mths ago could of been the time to buy, who knows

look at Sunshine on Saturday, record sale price for the suburb, not much of a collapse there fellow ASF members

thankyou
robots

 

[gav]

However, there sometimes are times when you should NEVER buy. This is one of them.

Really? Even for FHB's? After settlement my repayments will be on par with rent! Rents have gone up 20% in the past 2 yrs and rising. In less than 10yrs I'll have it paid off and own my own property with no debt, whilst those who continue to rent will have nothing to show for their money. And they will still be renting...

 

[numbercruncher]

Rents have gone up 20% in the past 2 yrs and rising

Rents arnt rising ... the economy is going to Sh**.

 

[gav]

I was wrong with the 20% increase. Rents have recorded their highest increase in 20yrs. (i knew there was a 20 in there somewhere

Looks like its going to get worse too.

http://www.news.com.au/business/story/0,27753,24977706-462,00.html

Keep renting and pay off someone elses mortgage? No thanks...