House prices to keep falling for years

[robots]

hello,

just reality token multimillionaire, the sort of talk that goes around the water cooler in most office blocks,

does anybody know if we still at 7x income to house prices?

have a great evening

thankyou
robots

 

[IFocus]

You do make money by negative gearing on property if you are paying a high rate of tax. The negativity on the investment property offsets your tax bill.

Julia I was always taught an investment has to stand up on its own before negative gearing is taken into account.

Negative gearing allows you to hold the investment for capital gain nothing more.

Negative gearing for the sake of tax relief alone is bad advice

 

[YChromozome]

does anybody know if we still at 7x income to house prices?

The above table has the number of Wage Years based on RP data and APM data.

Hugh Pavletich, co-author of the Demographia International Housing Affordability Survey says the Sydney multiple is now about nine (ie. average Sydney house prices are nine times average annual household income). This is just about the highest multiple in the world. Other countries with high multiples have seen drops in house prices recently. Pavletich agrees with Keen's figure of 40 per cent drop, saying, ``I think what we've really got to look at is California to get some indication of what's likely to happen in Australia but at a slightly slower pace, I would imagine. California got up to the same sort of multiples that Australia is sitting at now, which is quite unsustainable. ... I would expect [the drop in prices] to play out over probably a two to three-year period.'', ``California has really led the way with at least a 40% drop in the past 12 months,''

 

[Mofra]

That is the biggest flaw there. How is it possible for house prices to attract a premium in excess of inflation over a long time frame? How long are you projecting? 100 years? You should be fully aware of your recency biases in that past performance is no indicator of future return. Just because the average return of properties from 1980 to 2008 is approximately 6-7% p.a., it does not automatically mean that the next 30ish years will produce the same return.

In no way am I suggesting that the broader market will attarct a premium higher than inflation/wage growth, anymore than you can suggest that the entire property market moves at the same rate. There are different tiers within the market and that is a concept that is rarely discussed (or even acknowledged) here.
It should also be noted that recency biases also take into account demographic shifts that are unique over the past century: the percentage gain in dual income households. Whilst this isn't the predominately driving trend, it is a contributing factor to price growth.

I don't think I need to explain the reason why house prices CANNOT increase above wage/inflation rate over a long time frame due to the affordability issue. If this continue to occur indefinitely, an average priced house will eventually require a repayment of more than 100% of an average income earner. Some people seem to think this is possible forever by making assumptions that perhaps we will have sustainable lower interest over the long term or multi-generational mortgage loan.

Again, yes house prices cannot increase exponentially in the median sector of the market. Prices can rise in desirable areas where single income, average earnings households are as common unicorns.

By the way, I agree your point with how our cities are urbanised based on a central business hub with surrounding suburbs. This type of "unsustainable" living pattern will have to cease one day and one day people will have to start getting used to living in apartments and not mansions with a big background. The reason why we are still following such a pattern is because of political and social reasons, that is, everybody love to own a big nice house with a backyard.

There halt in urbanisation is not a phenominan I would dare suggest is likely in the forseeable future, although there is a rise in niche self-sufficiency that I have to admit grows more tempting by the day
The pattern IMO is driven as much by a desire to spend less (both money & time) in the pursuit of employment as it is by a desire to have a large house & backyard. If anything, a desire for space will drive some to the McMansion wastelands of new developments that lack the basic infrastructure to remain desireable places to live without further investment.

 

[nunthewiser]

Good to see you back NC, hope the leg is healing quickly.

I have bumped into nunthewiser on another forum - he's on a different side of the country for a start, and at a guess I'd list his "likes" as steak, bourbon and undervalued iron ore stocks . If I had to choose one to stay, well, sorry to robots, but it's not a difficult decision

gday mofra and yeah nothing wrong with a bourbon or 3 to go with my steak .perhaps i need typing lessons and reply to posts in a disrespectful manner that some here use just to not confuse some of the more slow witted here ...... lol ive been accused of many things for all the right reasons plenny of times down the track but this one kinda getting a lil tedious

trust all is well m8

 

[wallyt99]

Excellent post. You really summed it up well.


Good property in good areas (which also naturally have a lower debt to income ratio) will continue to rise due to strong demand and limited supply.

Overcapitalised propertys in areas which have poor infrastracture and higher than average debt to income ratio will suffer these significant drops.

 

[Indie]

Denial is a very powerful coping mechanism.

Robots, good luck to you. Even if there is a prolonged property downturn there will still be a few winners. I hope you're one of them.


My 2c:

Those still geared heavily into property are in for a rude awakening. This will play out like a slow motion car crash.

 

[nunthewiser]

And for what its worth as posted before i think property in for some major carnage and SOME property will return to PRE 03 prices if not less ... i do not agree with robots sunshine and lollipop view on property but i still like to hear his side of the fence

 

[numbercruncher]

Good to see you back NC, hope the leg is healing quickly.

I have bumped into nunthewiser on another forum - he's on a different side of the country for a start, and at a guess I'd list his "likes" as steak, bourbon and undervalued iron ore stocks . If I had to choose one to stay, well, sorry to robots, but it's not a difficult decision

heya Mofra - thanks !


These house price threads over the last cple years always turn into ****fights - by now considering the current financial climate a reasonable person would concude that price falls are by far the most likely situation ....


Considering the title of this thread it should be more bearish posts here and the more irrational (permabull) stuff in the other thread ! in my humble opinion that is !




ps - leg is pretty mangy im laying in hospital typing this !

 

[doctorj]

Bickering, multi-nicking and everything else that happened in the last 15 or so of posts that have been deleted are a waste of everyone's time. Can we get back on topic please.

One use has been banned for multinicking - but it wasn't nunthewiser or robots.

 

[steve999]

I've seen various predictions of house prices crashing anywhere from 40%-90% of current values.

I guess at the extremes range many houses would be valued well under replacement costs...

Does anybody have graphs of what the average construction costs vs average wages are?

 

[chops_a_must]

I've seen various predictions of house prices crashing anywhere from 40%-90% of current values.

I guess at the extremes range many houses would be valued well under replacement costs...

Does anybody have graphs of what the average construction costs vs average wages are?

Construction costs aren't the problem.

From what I've seen, it's the land costs.

 

[theasxgorilla]

Julia I was always taught an investment has to stand up on its own before negative gearing is taken into account.

Negative gearing allows you to hold the investment for capital gain nothing more.

Negative gearing for the sake of tax relief alone is bad advice

What about negative gearing to hold an asset until it becomes cash flow positive, either through rent increases, outgoing decreases and/or debt reduction? Sometimes its such a shame to miss out on an opportunity to hold a particular asset at a particular price.

 

[YChromozome]

Construction costs have inflated a little due to increased labour and material costs.

The good news is, material costs are now coming down and as construction gets more quiet or almost grinds to a halt in some areas, so is labour costs.

 

[moXJO]

Is this sensible? Suppose it will help hold the housing market up. Seems like throwing fuel on the fire to me. But meh

A SPECIAL Federal Cabinet meeting has signed off on a stimulus plan that is expected to include an increase in the first homebuyers grant.

http://www.news.com.au/story/0,23599,24493851-29277,00.html

 

[gfresh]

First home buyers don't make up a large proportion of the market, it's not going to be enough to stimulate demand on it's own.

In fact, doing nothing and letting the market fall however much is probably the best possible thing that could happen to first home buyers.

Providing incentives and the ability to pay higher prices, only supports present prices, further discouraging affordability in the long run.

 

[stock_man]

If house prices fall (especially 40% as some predict), will rent prices follow?
If people are not buying, then they are renting, thus placing pressure on the rental market? Or will these houses that can not be sold turn into rentals, thus adding extra supply to the market and dropping the current rental values?

As I see it, if values dropped 40% and rent stayed the same, we would have cash flow positive properties popping up everywhere.

Take Sydney's average house:
Current value: $540K
New value: $324K
80% LVR: $260K
I/O Repayments @ 7.84%: $390/week
Average Rent: $440+

And if Sydney becomes cashflow positive, I can only imagine the opportunities in regional areas. Time to start some serious savings.........

 

[YChromozome]

If house prices fall (especially 40% as some predict), will rent prices follow?

Rents have until the last year or two remained in line with inflation. Long term history shows this is the trend, otherwise renters would be unable to afford to rent.

Interestedly enough, long term history also shows house prices only go up in line with inflation, otherwise home owners in later generations would be unable to buy. Just imagine if house prices did double every 7 to 10 years, like the Real Estate agents portray. In generations to come, the power of compound interest would mean houses would be hundreds, if not thousand times wages. At that stage, even the most wealthy would have trouble affording a house. It should be clear that such trends are not sustainable.

So in a normal market, houses go up with inflation and investors make money out of yield, not capital gains. However in this speculative bubble, investors believed they make money out of capital gains, and didn't bother with yields. In fact, some investors brought houses and apartments purely for capital gain and left them empty - tenants would cause wear and tear, you couldn't have that!

So when this bubble corrects and things get back to normal trends, houses should fall quite a bit, actually I think 40 percent is a bit conservative. For arguments sake, Sydney houses are now 9.1 times wages. The historic trend is three times wages (when the economy is doing well). This means Sydney would have to fall 67.1% just to get back to normal trends. Some argue that if the economy is not doing well, 3x wages might actually be high! Just wait for unemployment to kick up about.

I would expect rents to fall a very small amount. Rent prices are not at bubble proportions, and it's only been really the last year that landlords have attempted to put rents up faster than wage growth/inflation. As such, some landlords are finding it hard to get tenants, so rents may stagnate for one or two years, then continue to increase in line with CPI.

 

[deadset]

I just saw a breaking announcement from Kevin Rudd.

The Government are going to increase the first home owners grant to $14000 and to $21000 if its a new home. I'm still thinking over the effect of the other details.

 

[Temjin]

I just saw a breaking announcement from Kevin Rudd.

The Government are going to increase the first home owners grant to $14000 and to $21000 if its a new home. I'm still thinking over the effect of the other details.

This is crazy! I'm in the live blog right now and almost everyone is happy with the payout...naturally! ...crazy ppls really!