House prices to keep falling for years

[kincella]

I am not saying we are heading for another boom...and the housing industry is not the only one...trying to stem job losses....hello banks have the biggest handouts...car industry...etc
the bottom of the housing market is going along ok...anyone working has more money...the gist of the post is the house to income ratio has been dropping...hence more disposable income available....
the young ones have been whinging about house prices...and how unaffordable they are....yet the truth is different.....
some of us show a different side of the argument.....thats all...
does not mean we are saying its going to boom this year or next......
but it will eventually....
bring on nationalising the banks...then we can get some sense out of this 'fraud based nightmare'...and get on with our lives....

 

[satanoperca]

Kincella,

So would you agree that the bottom end of the housing market is showing signs of growth due to government grants and historically low interest rates, the middle and top end of the market are falling and have not started to stabilize yet.

How is the affordability ratio calculated ? Median House Price $430,000 / Median Income $60,000 = 7.1. This was my understanding, while I now that low IR helps affordability, is it part of the calculation and if so then unaffordability must have been extremely high at the peak with high IR.

I believe strongly that no industry should recieve government handouts, the government should be building better schools, better healthcare, increase the pension, public transport infrastructure (can't do that who would buy the cars the government pays for) etc.

If I look at why housing prices can fall :

If public sentiment changes so that the vast majority believe that the property boom has completed this cycle and that CG will be non existent or small over the next few years, why would you go into a lot of debt to own an asset thats returns just cover the costs of ownership.
Or, remove the FHBG and NG and prices will fall. Increase IR, a must in the future if the economy is to grow again and property prices fall.

People will be more content with purchasing something smaller and cheaper and look at other ways of increasing their wealth without going into excessive debt.

Benjamin

 

[kincella]

Benjamin...the average mortgage is 240,000...as per rba / abs...fhb range 200- 300k's....at 5% interest thats 10.000- 15000 pa interest only....must be comparable with paying rent....housing in au peaked in 2003/04 a ratio of 15went flat for 2 years and climbed to a ratio of 10 in o7.....its since gone below the zero line to negative 3....lots of fhb purchasing now...its affordable and rates are low... ..probably by the end of this year that will be the bottom...and then interest rates will creep up again....
most fhb view the trade off rent versus buy..and buy at low IR....
others can afford to pay more off their loans ...most just want to say in their homes....70% of the population are home owners......
I want the govt to stop wasting money and throwing it around....who needs the 900 bonus from tax now...it would be better spent on rail etc...but thats just a ploy anyway...qld going to election...and probably the fed after that this year...
at some stage after this starts to recover....rates will go up again....none of us knows the future...
anyway..there are houses out there around 200-240k that are affordable, near freeways...doubt you will see massive falls....and if many sold ...where would they rent ??? rentals usually the first to go...and probably to fhb's
its a merry go round...and lots of perceived panic going on out there

 

[satanoperca]

Kincella,

So your are basing housing afford ability on the average mortgage?

Do you have a formula? How affordability is calculated seems to be a much debated topic and some formulas around are quite complicated.

If we were to return to the old banking rules to calculate how much you can borrow, 30% of main income earner in the household, I think you would find that most FHB could not afford to purchase a home. Most of the first home buyers need two incomes to own a home today, no good once you start a family. No kids, no population growth, no increase in property prices. Viscous circle.

I thank-you for your response, I did not think that there would be any houses in Melbourne under $300K but you are right there are. My target areas are in the bayside suburbs which are above this figure. Based on current IR rates, a $300K home, average income, yes it would seem to meet the criteria for being affordable, 30% of income on mortgage but interest rates would only need to go up 2% or more and it would become unaffordable again.

Benjamin

 

[kincella]

why bayside, it used to be more expensive...maybe not ? are you planning on the first home being your dream home...my generation bought what we could afford, if that meant the outer suburbs..thats what we felt we had to do...forget the dream home while raising the family...at least until they went to school...then the spouse could go to work part time...we needed 2 incomes in the old days too....spouses going to work started during ww2...

then as your children are nearing teenage years...most couples upgrade to the dream home...or closer to it..have the mortgage well and truly under control...and off you go
I suggested north of Melb...where ever the freeways are that take you into the city in a half hour or so....but Frankston's getting another freeway...so down that way or Dandenong should be cheaper...
when I looked there were typical 3 bdr 1 bath homes for around 200-240...much more affordable than 300 +

you lock in fixed rates for 5 years or more....or 10 if you are planning on staying that long...I notice CBA says the loan is portable now..you take it with you to the next house....
in the meantime how much do you pay on rent ???
old days they used to say you could afford 30% of your income to service the loan....you need to budget....should budget all your life

heres the link to 20 years of house prices..
look at the disposable income...thats money left net after tax..or your take home pay, less rent, food clothing basic living costs........explanation

Discretionary income is income after subtracting taxes and normal expenses (such as rent or mortgage and food) to maintain a certain standard of living.[2] It is the amount of an individual's income available for spending after the essentials (such as food, clothing, and shelter) have been taken care of:

Discretionary income = Gross income - taxes - necessities
Despite the formal definitions above, disposable income is commonly used to denote Discretionary income. The meaning should therefore be interpreted from context.
................................................................................................

...and note fhb prices slightly less than established houses

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

 

[knocker]

hello,

spot on Knocker, always offering the hand of help to those putting in and contributing in society,

sit down with people at work and assist with all things financial to make sure their life travels an easy path

thankyou
robots

How nice. So you are a construction worker and a finance planner. Do you have tea and biscuits whilst discussing your monetary policies as well lol

 

[satanoperca]

Kincella, thanks for the link, some interesting statistics, need time to digest.

But at quick glance on the issue of affordability this standards out :

Extract from Parliament of Australia
Department of Parliamentary Services - House Prices above link.

However, because households often consist of two income earners, and because house purchases are made from after tax income, a better indicator is the ratio of house prices to household disposable income. On this basis, the number of years of household disposable income needed to purchase a house has increased from 2.5 to 5.4 between 1986 and 2006. The current figure is somewhat down on the figure for 2004 when a peak of 5.7 years of household disposable income were needed to purchase a house.

Wouldn't this be an agreement for housing being move unafforable than 20 years ago.

On the assumption of my situation. Bayside, as I have lived and owned here most of my life. Our family, yes I have a child, my wife and I earn above the average household income, we both choose to work.

Again, thank-you for the link.

Cheers

Benjamin

 

[robots]

How nice. So you are a construction worker and a finance planner. Do you have tea and biscuits whilst discussing your monetary policies as well lol

hello,

no, just a cafe latte with fellow man and hope I can assist individuals with financial situations and taxation matters, its all fun nothing to serious

general things which most need to understand, savings, debt, risk & return, derivative products, bicycle insurance, life insurance, income protection etc etc

thankyou
robots

 

[knocker]

hello,

no, just a cafe latte with fellow man and hope I can assist individuals with financial situations and taxation matters, its all fun nothing to serious

general things which most need to understand, savings, debt, risk & return, derivative products, bicycle insurance, life insurance, income protection etc etc

thankyou
robots

So you admit to giving financial advice correct robots.

 

[singlefished]

even Mother Nature is on the side of Doom & Gloomers conspiring for a drop in property prices....

Humans facing huge population cull if global temperatures rise 4C in next 100 years
http://www.news.com.au/story/0,27574,25114359-5009760,00.html

Climate experts told New Scientist they were optimistic that humans would survive but would have to adapt.

Vast numbers would have to migrate away from the equator and towards the poles.

National borders would have to be knocked down and humans would become mostly vegetarian with most animals being eaten to extinction.

Real Estate Agents, REA's, would bear the brunt of the losses in the first instance as their desperate attempts to sell speculative investment properties in what are now the traditional "hot spot areas" would undoubtedly expose them to the harshest of environmental conditions.

 

[robots]

So you admit to giving financial advice correct robots.

hello,

of course Knocker, free of charge to, philantrophy

in most cases its like I am a surrogate parent to a lot of these people

thankyou
robots

 

[Aussiejeff]

REIV 5yr comparisons (2003-2008) out today. It's not all beer and skittles with many suburbs showing <+40% rise in median price over 5 years.

I would think that rising median home values in the order of +45% (or +9% p.a.) would be the minimum growth required over 5 years in order to barely maintain par value of a PPOR "investment" for your average mortgagee (after accounting for value losses of interest paid, council rates, running repairs, cpi inflation every year etc...).

With regard to the published 5yr median house price growth, of the 297 suburbs listed by REIV today in the Sunday Herald,

31 (or 10.4%) were below +20%. These included the suburbs of Ocean Grove -22.7%, Frankston Sth +1.1%, Invermay Park +3.6%, Kennington +4.7%, Mount Martha +5.6%, South Morang +4.7%, Strathdale +4.8% and Warrandyte +7.5%. In "real value" terms, many homeowners who retained homes in these suburbs over the past 5 years would have lost a significant amount on their capital investment value, since +20% growth would only represent a base +4% rise per year - nowhere near enough to compensate for the many p.a. capital value losses.

A further 108 (or 36.4%) had base growth from 20% up to +40%. Again in "real value" terms, many homeowners who retained homes in these suburbs over the past 5 years would still have lost a considerable amount on their capital investment value, since +20% to 40% growth would only represent a base +4% to +8% rise per year - still not enough to compensate most homeowners for the many p.a. capital value losses incurred in home ownership.

So almost half of the suburbs have been going backwards in today's dollars as far as "real value" is concerned. Of course, many of those affected would still be willing to pay the price in any case to have "ownership" rather than be renting. Horses for courses.

Good luck to the rest who managed +50% or more.....!



aj

 

[noirua]

Try as I might, there appears no where in the World where property prices are rising. Being caught in what looks like a Worldwide slide could be courting disaster.

 

[MrBurns]

Try as I might, there appears no where in the World where property prices are rising. Being caught in what looks like a Worldwide slide could be courting disaster.

Can't link to this but this guy reckons we now have a crisis of negative sentiment.

Stephen Long interviews Robert Shiller, an economics professor at Yale University who has a knack of predicting economic trends. Shiller also says the world has seen the bursting of the biggest housing market bubble in history.

If you want to hear the interview go here

http://www.abc.net.au/news/audio/

and scroll down till you get to this heading -

Yale economist 'predicted global crash'

It's 4 up from the bottom of the page.

 

[Beej]

REIV 5yr comparisons (2003-2008) out today. It's not all beer and skittles with many suburbs showing <+40% rise in median price over 5 years.

I would think that rising median home values in the order of +45% (or +9% p.a.) would be the minimum growth required over 5 years in order to barely maintain par value of a PPOR "investment" for your average mortgagee (after accounting for value losses of interest paid, council rates, running repairs, cpi inflation every year etc...).

With regard to the published 5yr median house price growth, of the 297 suburbs listed by REIV today in the Sunday Herald,

31 (or 10.4%) were below +20%. These included the suburbs of Ocean Grove -22.7%, Frankston Sth +1.1%, Invermay Park +3.6%, Kennington +4.7%, Mount Martha +5.6%, South Morang +4.7%, Strathdale +4.8% and Warrandyte +7.5%. In "real value" terms, many homeowners who retained homes in these suburbs over the past 5 years would have lost a significant amount on their capital investment value, since +20% growth would only represent a base +4% rise per year - nowhere near enough to compensate for the many p.a. capital value losses.

A further 108 (or 36.4%) had base growth from 20% up to +40%. Again in "real value" terms, many homeowners who retained homes in these suburbs over the past 5 years would still have lost a considerable amount on their capital investment value, since +20% to 40% growth would only represent a base +4% to +8% rise per year - still not enough to compensate most homeowners for the many p.a. capital value losses incurred in home ownership.

So almost half of the suburbs have been going backwards in today's dollars as far as "real value" is concerned. Of course, many of those affected would still be willing to pay the price in any case to have "ownership" rather than be renting. Horses for courses.

Good luck to the rest who managed +50% or more.....!

aj

Do those figures account for the rent that would otherwise have to be paid? The "required" return seems way too high to me if it does. I've got spreadsheets with these types of calcs in them (so does gfresh from memory and he has posted them) and the return you need to stay ahead is nowhere near 9% - it was more like 1-2% once you account for rent, inflationary effects, and tax payable on investment returns.

Cheers,

Beej

 

[kincella]

aussiejeff...
if you compare the growth rates with a similar investment in the stockmarket..assumed to return 5% pa on blue chips....the aussie homeowners have done very nicely....seems as good a bet to me...on comparison for income
as for a capital comparison....its done even better....
the stockmarket has lost 50% capital and 90% on the penny dreadfuls...

take out interest expense....assuming investors borrowed for the shares

then whats left in the cost of housing....insurance and some rates....no big deal
no wonder they like their bricks and mortar

 

[singlefished]

aussiejeff...
if you compare the growth rates with a similar investment in the stockmarket..assumed to return 5% pa on blue chips....the aussie homeowners have done very nicely....seems as good a bet to me...on comparison for income
as for a capital comparison....its done even better....
the stockmarket has lost 50% capital and 90% on the penny dreadfuls...

take out interest expense....assuming investors borrowed for the shares

then whats left in the cost of housing....insurance and some rates....no big deal
no wonder they like their bricks and mortar

Alan Kohler on Inside Business this morning stated that over the last 10 year period (even with the big 50% drops of the last year) stocks have returned just below 6% per annum when you include divvies, blah, blah... (I'm going to trust his numbers on this one...)

http://www.abc.net.au/insidebusiness/
(right at the start of the Robert Buckland Interview)


Some numbers from APM website http://www.homepriceguide.com.au/media_release/Home%20Price%20Guide%20Media%20Release%200506.pdf and using Sydney prices (since some people believe that anywhere else is not the real world)

Sydney Median Dec 1998 = approx $290K (interpolated from graph in above document)
Sydney Median Dec 2008 = approx $536K

represents growth of approx 6.3% per annum before deducting rates, insurance, maintenance, etc, etc....

Pretty much on par with property growth it appears even after the doo-dad hit the fan for the share market.

And then considering that property still hasn't really had the big declines of the stock market, stocks must have been in a much better position prior to the 50% falls of the last 16 months.

Can't really tell what the stock market will do these days as the liquidity of the asset fuels it's volatility, but what I can tell you is that job losses and negative sentiment are still driving property prices down and will contine to do so until sentiment reverses and the stock market starts it's recovery....

These wild assumptions of yours really need to be backed up with something a bit more meaty than this mornings bacon and eggs....

Cheers....

 

[aleckara]

Affordability is easy to calculate IMO. Any capital growth on your asset means that you have gained and someone in the future has lost because most markets follow the "money-in, money-out". Of course if it is an investment it gets concessions, rent, etc but this is for your primary residence. Someone has to pay more for the same for you to have capital growth; meaning it is less affordable for them than for you.

If income's have risen you simply take into account, but I know for a fact that house prices has risen much faster than incomes particuarly in the last decade. Otherwise people wouldn't think they can get rich simply by investing in property during the boom. Also take into account location, sqm, etc.

Anything with IR, or any other monetary statistic is wrong. I refuse to believe that housing that be more "affordable" just because some bank (RBA) waives a pen. Just means the money is worth less meaning the prices go up to compensate normally. Eventually this extra money finds itself in wages as well. Hence there is a lag between hose prices rising and wages rising but more cerdit in the system is inflationary - just affects housing prices first because well that's where most of the debt is spent first.

 

[Beej]

Alan Kohler on Inside Business this morning stated that over the last 10 year period (even with the big 50% drops of the last year) stocks have returned just below 6% per annum when you include divvies, blah, blah... (I'm going to trust his numbers on this one...)

...

Sydney Median Dec 1998 = approx $290K (interpolated from graph in above document)
Sydney Median Dec 2008 = approx $536K

represents growth of approx 6.3% per annum before deducting rates, insurance, maintenance, etc, etc....

Nope - again if you are going to count dividends on the total share market return (as you should) you also have to count the rental return from property when comparing (which will represent rent received for an investor or rent SAVED for a PPOR owner).

So - try adding another 4%pa to your property figure for Sydney there, figure out how to include it in the compounding return to do it properly, but even with out calculating that properly you end up with at least a 10.3%pa growth/return from the Sydney property - which way trumps the sharemarket - for that period of time up to the present anyway. Deduct costs (which from my experience for a house amounts to <1%pa including allowance for a kitchen/bathroom reno every 10-15 years or so), and still looking pretty good. Now account for the tax benefits of the PPOR and it looks REALLY good.

By the way I'm not saying the above would always be the case, but given the current share crash it certainly is over the last 10 years.

Cheers,

Beej

 

[singlefished]

Nope - again if you are going to count dividends on the total share market return (as you should) you also have to count the rental return from property when comparing (which will represent rent received for an investor or rent SAVED for a PPOR owner).

Incorrect....

You are assuming that is how the property "could" be used to maximise your return or minimise your outgoings.

Why can't the property be a weekender that is neither used for rental return nor PPOR?

Why can't the property just be a vacant block of land?

I didn't specify how many shares I had.... I could be a fund manager receiving payments for renting out the portfolio to clients wanting to short the market....

Please, apples with apples ~ book value with book value (divies being reinvested at no cost as new share purchases)

Cheers....