House prices to keep falling for years

[kincella]

alan kohler is a prop bear...so what else do we expect from him...we dont expect him to talk up property...he talks it down....and makes out shares are better....
I wonder if he actually owns any shares yet...he does not have to own anything ..to make comment on it...
pretty certain I posted a ref to him at the weekend..about him being surprised that the prop market has stood up well so far....

I used to see the graphs that showed shares or prop...almost identically matched..dips and troughs at different times...but ended up the same...

it seems if shares tanked...then property must tank also....
it will be interesting to see if the alternate theory pans out...ie that the US and UK follow us in property..not the other way around,,,we peaked 03/04..the US did not peak until 05/06..Uk peaked 03/04 highest to scale 25

http://www.globalpropertyguide.com/real-estate-house-prices/A

 

[singlefished]

alan kohler is a prop bear...so what else do we expect from him...we dont expect him to talk up property...he talks it down....and makes out shares are better....
I wonder if he actually owns any shares yet...he does not have to own anything ..to make comment on it...
pretty certain I posted a ref to him at the weekend..about him being surprised that the prop market has stood up well so far....

I used to see the graphs that showed shares or prop...almost identically matched..dips and troughs at different times...but ended up the same...

it seems if shares tanked...then property must tank also....
it will be interesting to see if the alternate theory pans out...ie that the US and UK follow us in property..not the other way around,,,we peaked 03/04..the US did not peak until 05/06..Uk peaked 03/04 highest to scale 25

http://www.globalpropertyguide.com/real-estate-house-prices/A

You didn't read my post properly or check out the abc video did you....

AK didn't once mention property in the discussion, the comparison was made by me....

He was surprisingly "bearish" sounding though on the shares if that makes you feel better???

You're forgetting the dollar-cost averaging effect of the shares being reinvested through whatever dividend reinvestment plan is in place and the fact that the divvies buy you more shares once they are reinvested (since you want to mention peaks and troughs)... can't do that on a property though.

 

[Beej]

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....

No way - if you are counting dividends for shares you have to factor in rent for property. If an owner forgoes rent (holiday house etc) then that's a deliberate cost they are incurring and not a reflection of the available return from the asset. Land only doesn't count either as in your original post as you are using Sydney median HOUSE prices (not land values). Valuation of land is a different kettle of fish.

So in my example apples are being compared with apples - yours is apples to oranges...

Cheers,

Beej

 

[kincella]

I doubt a fund manager would try to compare land or beach hut...and use dividends as a return on shares....but not use the rent as a return on property.....
thats an absurb comparison...plus there is no return on residential land....
out of your depth here methinks.....pull the other leg...
and .....no way funds managers are smarter than that.....

 

[singlefished]

No way - if you are counting dividends for shares you have to factor in rent for property. If an owner forgoes rent (holiday house etc) then that's a deliberate cost they are incurring and not a reflection of the available return from the asset. Land only doesn't count either as in your original post as you are using Sydney median HOUSE prices (not land values). Valuation of land is a different kettle of fish.

So in my example apples are being compared with apples - yours is apples to oranges...

Cheers,

Beej

OK then.... in his report he was comparing share returns to bonds (and I assume he wasn't talking about "very cumfy undies")

I don't know much about bonds but I assume they will suffice for the cited example???

 

[singlefished]

I doubt a fund manager would try to compare land or beach hut...and use dividends as a return on shares....but not use the rent as a return on property.....
thats an absurb comparison...plus there is no return on residential land....
out of your depth here methinks.....pull the other leg...
and .....no way funds managers are smarter than that.....

I was doing you a favour by comparing Sydney to the ASX, a simplistic example you could understand... I should have really compared Sydney to a particular stock, or NSW to a particular market sector or compared the ASX to Australian median house prices....

How come there is no return on residential land? as an investor you should certainly understand that it's not the structure/building that appreciates.... or did you get your sums wrong again???

 

[Beej]

OK then.... in his report he was comparing share returns to bonds (and I assume he wasn't talking about "very cumfy undies")

I don't know much about bonds but I assume they will suffice for the cited example???

Yes I saw the original story when broadcast on Sunday morning - if I recall he pointed out the that 10 year share market return of ~6% was on par with the average yield from long term bonds over the same period. Ie the risk associated with the share market investment is now not anywhere close to being matched by the long term aggregate return when compared to lower risk options like bonds.

Property on the other hand it seems has provided a higher return with lower volatility and risk than shares - by a large margin (~6% vs ~10%).

Cheers,

Beej

 

[singlefished]

Yes I saw the original story when broadcast on Sunday morning - if I recall he pointed out the that 10 year share market return of ~6% was on par with the average yield from long term bonds over the same period. Ie the risk associated with the share market investment is now not anywhere close to being matched by the long term aggregate return when compared to lower risk options like bonds.

Property on the other hand it seems has provided a higher return with lower volatility and risk than shares - by a large margin (~6% vs ~10%).

Cheers,

Beej

so to conclude the discussion, in the book value comparison before factoring in returns (divvies or rent returns ~ apples to apples) it would be ~6% vs ~6%?

(assuming you're not implying property has appreciated at 10% per annum over the last 10 years???)

 

[Beej]

so to conclude the discussion, in the book value comparison before factoring in returns (divvies or rent returns ~ apples to apples) it would be ~6% vs ~6%?

(assuming you're not implying property has appreciated at 10% per annum over the last 10 years???)

I can see you are trying to be tricky by using "book to book", but I say the apples to apples comparisons are as follows:

* 10 year share market return INCLUDING re-investment of divvies = 6%pa.
* 10 year return from bonds (from yield) = 6%pa
* 10 year return from Sydney property (from your figures), INCLUDING rental return = 10%pa

"book to book" as you are trying to define it is meaningless if it means you include re-invested divvies but ignore rent.

Cheers,

Beej

 

[singlefished]

I can see you are trying to be tricky by using "book to book", but I say the apples to apples comparisons are as follows:

* 10 year share market return INCLUDING re-investment of divvies = 6%pa.
* 10 year return from bonds (from yield) = 6%pa
* 10 year return from Sydney property (from your figures), INCLUDING rental return = 10%pa

"book to book" as you are trying to define it is meaningless if it means you include re-invested divvies but ignore rent.

Cheers,

Beej

OK - lets put this into a context....

kincilla has stated already he is already helping out his kids buy a property.

Lets assume for this example, he just simply buys the properties outright and gifts them to his kids. Doesn't cost the kids anything ~ just like inheriting a property that many people do (and we can assume that this is how many people get into the property or investment property cycles in the first instance.... relatives generally gift their worldly possetions to their offspring on death)

Now, it's pretty fair to say that if hypothetically, you yourself thought this was a very generous gesture by kincilla, you may also have decided to match what kincilla has done with his kids by gifting your own offspring with an equivalent value of bonds, many parents do to help cover the costs of further education or to provide their kids with a lump sum when they get married and start their new life together....

See where it's going????

Comparing "book to book" is the minimum you should be looking at as returns from rentals or divvies (for example) can never be guaranteed and as we have seen recently, both are currently on the way down.....

Nothing tricky about it....

 

[MrBurns]

From Crickey.com.au

Australia's long-running property bubble has burst.

Land Values Research Group director Dr Gavin Putland writes:

Early data received by the Melbourne-based Land Values Research Group for the second half of 2008 indicate that the ratio of property sales to GDP in Australia has fallen almost 30% from its peak in 2007-8. This is the largest fall since the 31.4% plunge that preceded the recession of 1990-1. Since 1972, recession has followed whenever this ratio has fallen more than 17.5% year-on-year.

The PCA/IPD indices of Australian commercial property, together with the various indices of home prices cited by the RBA in its latest
Statement on Monetary Policy, show that the fall in sales is accompanied by falling prices, confirming that Australia's long-running property bubble has burst. Stephen Mayne's article further supports that diagnosis.

Australia is therefore on the threshold of a domestic credit crunch caused by falling collateral values -- the same mechanism that precipitated the "subprime" recession in the USA and similar recessions NZ, the UK, Ireland and continental Europe. We are entering recession not because of the rest of the world, but in imitation of the rest of the world, because we did what they did: we pumped up a property bubble.

By itself, the decline in the ratio of property sales to GDP indicates a recession starting no later than 2009-10, and possibly before the end of 2008-9. The speed of that decline, combined with auction data showing that it continued into calendar year 2009, suggest an earlier onset of recession. Combining this with more commonplace considerations (terms of trade, employment, retail sales, and capital expenditure), I have offered the following tip concerning the upcoming National Accounts release:

On balance, then, let us say that the chances of a recession beginning in the December quarter of 2008 are somewhat less than 50%, that the chances of a recession beginning in the March quarter of 2009 are somewhat more than 50%, and that the chances of avoiding recession through 2009 are somewhere between zero and Buckley's. In short, the question to be answered by Wednesday's release of the December-quarter GDP result is "When DID the recession start?"

Those who claim that the recession will be fully imported may well agree with me on the timing. But they have no idea how bad it's going to be.

 

[Glen48]

The Money Pit: The Untold Secret of Home Ownership February 18, 2009
Filed under: Hot Topics, Life, Whatnot ”” indiakonstanze @ 2:28 am
Tags: Economy, Finances, Money, Real Estate

I will now reveal to you, my dear readers, the secret about owning a home that no one in the whole freaking world will tell you: IT IS COMPLETE AND TOTAL BUNK. It does not make you any money. It will always cost you money. Don’t believe me? Keep reading.

First off, the people who say it’s a great investment do so because: (1) they think paying rent is like flushing money down the toilet””you don’t own anything and you’re not building equity; (2) they have no nomadic instinct whatsoever, and (3) they care deeply about paint color and/or the kind of tile on their countertops. Now, let me prove mathematically, why these arguments are all HOOEY.

Rent vs. mortgage: Okay, we all know that you pay a crapload of interest on your mortgage, and you pay it up front. You do not pay interest on rent. If you buy a house for $205,000 and had no interest and a monthly payment of $1200, you would pay off your home in 171 payments (14.24 years). But that doesn’t happen. Instead, following the strictures of my own home loan, you pay $1200 bucks a month for 30 years at a fixed rate of interest. That’s an extra 16 years of payments, for a total of $230,400 that you pay over and above your principal. That means you’re paying $435,400 to own your home in 30 years. At that rate, it has to more than double in value just for you to BREAK EVEN.

Now, let’s not forget about homeowner’s insurance. Mine currently runs about $650/year, and it goes up by about $50 a year. Even if we say the price rises $50 every three years, you will pay $23,850 in 30 years of ownership IF you have no claims that cause your rates to rise more than my built-in inflation. This brings our 30-year total to $458,850.

And we also have the delightful surprise known as property tax. My property tax is about $3,000/year. Some urban areas run as much as $10,000/year and rural areas as low as $800/year. If I use my own tax amount as an estimate and assume the amount due every year does not change. I will pay $90,000 in tax over 30 years. Our grand total is now $548,850, just for the bare minimum a homeowner has to pay.

This is not including homeowner’s association dues, maintenance fees, landscaping, yard service fees, remodeling, refurbishing, appliances, etc. Over 30 years, you have to expect some of that. How much? I have no idea, but $1,200 a year seems a VERY low estimate ($100 a month for lawn service/maintenance and association dues). So let’s throw another $36,000 in the pot, for a revised grand total of $584,850, all for a house that started with a $205,000 price tag.

Still with me? Now let’s compare this to an apartment. My rent will likely be a bit less than a mortgage payment, but just to be generous, let’s say I increase my standard of living throughout that 30 year period. Let’s use $800/month for five years, $1000/month for ten years, $1200/month for 15 years. That gives us $384,000.

Renter’s insurance will cost me about $120/year. Let’s use the same metric for judging this potential cost increase as we did for homeowner’s insurance, just to be fair (an 8% increase every 3 years). This puts us with a 30-year total of $5,205. Not too shabby. This boosts our total to $389,205.

With an apartment, we have no property tax, so nothing is added to our total. We also do not have homeowner’s association dues, maintenance fees, landscaping, yard service fees, remodeling, refurbishing, appliances, etc. Some eager beavers might beg their landlords to let them repaint, but let’s just say you’re content to call the manager when the toilet clogs and that’s it. You have no additional costs added to your total.

Let’s compare:

30 years of home ownership: $584,850

30 years of rental: $389,205

The renter saves $195,645 over 30 years.

Now, for those who say the benefit of buying is to have a rent-free place to live after their mortgage is paid, that $195,645 saved could either (a) buy a decent house in a lot of parts of the country, in cash, if that money were socked away over 30 years; or (b) pay for 13.5 additional years of rent at the $1200/month price.

If you buy a house when you are 30 and live there for 30 years, you are 60 when your rent-free livin’ kicks in. If you had rented those 30 years, your 13.5 free years would get you to age 73 and a half. Not too shabby. In those 43 years of renting, you would never have had to fix your own roof, toilet, stove, or refrigerator. You could save just as much, if not more, of your remaining paycheck as a homeowner could, giving you at least the same (if not more) savings to see you through from age 73 and a half to death.

Equity? Good luck getting that in today’s market, and good luck pulling it out of a bank when you want to use it. With markets tanking right and left, you can no longer count on an easy $30,000 whenever you feel like it. For that matter, good luck getting the steady 4% a year increase in value I projected to try and make my home’s value double just so I could BREAK EVEN on my investment.

And what happens if you want to move? If you rent, all you do is ride out your lease, and lose a portion of your deposit ($100? $200? Unless you let your dog crap on the carpet, you’ll probably get most of it back). If you own, you have to hope your home has appreciated enough to compensate for the commission you will need to pay an agent. After all, in some parts of the country (mine), agents will blackball “for sale by owner” homes, thus forcing you to pay them if you truly want to sell. Add in closing costs (full or partial, depending on your agreement with the buyer), and you might be even more screwed. Plus, if you want to buy again, you have to have another down payment…don’t tell me you didn’t save another $20,000 in between the insurance and property tax and general repairs?

So. We have established that renting does not flush money down the toilet…in fact, it saves you enough to buy a home, eventually, or rent 13.5 years longer for no extra cost. It allows you to move at will, without paying an agent $8,000 every time. It does not allow you to tear down walls and paint everything pink, but hey, if I want that, I can do it when I buy a house at age 60 with all the money I’ve saved in renting for 30 years.

So the next time I’m at a party and someone asks me why I don’t want to own a home, I will direct him or her to this blog posting and smile smugly. Then I will pay cash for the cosmetic surgery that erases my smug smile lines; after all, I’ve got $195,645 to burn.

 

[prawn_86]

Nice post Glen.

It was reading 'Rich Dad, Poor Dad' that made me realise a PPOR is not an asset.

My plan:
work, rent, save. When saved enough buy a positively geared property (hopefully before 30) and then go from there. If we want a house of our own we will re-assess after that....

 

[Largesse]

you forgot to deduct the initial 205k from the homeowners 'costs'
at the end of the 30 years the homeowner has his/her asset and the renter has nothing.

using this guys calculations,
if you assume ZERO capital growth over 30 years, at end of 30 years,

costs:
homeowner: 584000 - 205000 = 379000
renter: 389000

asset:
homeowner: house
renter: whatever they have saved.

will depend entirely on how well the renter saves money as to whether one option is better than the other

 

[MrBurns]

Nice post Glen.

It was reading 'Rich Dad, Poor Dad' that made me realise a PPOR is not an asset.

My plan:
work, rent, save. When saved enough buy a positively geared property (hopefully before 30) and then go from there. If we want a house of our own we will re-assess after that....

Yes I know the figures...... but .........for almost everyone you cant keep your eye on the ball all the time, life gets in the way, therefore the
SUREST way of getting something behind you is to saddle yourself with a mortgage and pay it off as soon as you can, at the end of the day ,even if you do nothing else, you will have a house.

It's called forced saving.

 

[prawn_86]

It's called forced saving.

Yep. And in the society we live in (instant gratification) forced saving is the only way a lot of people can save, even if it means paying off interest.

I like to think we're (my partner and I) savvy and determined enough to 'force' ourselves to save, without pumping it into a mortgage.

 

[Trevor_S]

SUREST way of getting something behind you is to saddle yourself with a mortgage and pay it off as soon as you can, at the end of the day ,even if you do nothing else, you will have a house.

It's called forced saving.

Lots of people get a little ahead and are then redrawing to purchase toys or cars, boats, jet skis etc so the loan payment goes on an on ie they never save either.

I think it's a misnomer to say all home owners pay their mortgage off and the have an asset, just as it's a misnomer to say all renters spend and don't save, to my mind both are generalisations with no foundation. My sister is the classic home owner that has a car, holidays etc tacked on top of her home loan , she'll be still be paying the current car and last years holiday off in 30 years.

Banks don't want home owners to pay the capital off, just pay the interest. If they repay it, the bank just has to go to all that hassle of finding someone else to loan it to.

 

[sinner]

you forgot to deduct the initial 205k from the homeowners 'costs'
at the end of the 30 years the homeowner has his/her asset and the renter has nothing.

using this guys calculations,
if you assume ZERO capital growth over 30 years, at end of 30 years,

costs:
homeowner: 584000 - 205000 = 379000
renter: 389000

asset:
homeowner: house
renter: whatever they have saved.

will depend entirely on how well the renter saves money as to whether one option is better than the other

Err what? Noooo. That 205k is now tied up into the house, it's not like homeowner get's that money cash in hand. You want to realise your 10k discount there, you need to sell the house and be in the same position as the renter while assuming the cost of selling is $0.

 

[Glen48]

Being a renter if you invest wisely you can move up market and live in the latest property and soon rents will dive as the market crumbles.
I reckon the best set up is to have a dump on the outside and a modern house inside that way when the mobs turn up they won't target you and maybe even leave a present if they feel sorry for you.
Land is down to 11K a block in Lost Wages.

 

[robots]

hello,

"house prices to keep falling"

still no clear evidence to support the title

Craigieburn up
Deer Park up
Ferntree Gully up
Boronia up
St Albans up
Thomastown up
Airport West up
Windsor up
Werribee up (245k median there too, hey hey 3 or 4x average earner there, must me an anomaly)

a small handful of the +ve results, well done those living it large top effort brothers the hardwork paying off

thankyou
robots