House prices to keep rising for years

[trinity]

http://www.news.com.au/business/money/story/0,28323,25923902-5013951,00.html

http://business.smh.com.au/business/first-homebuyers-hopes-dashed-20090813-ejc6.html

2 articles on housing on the same day. One is housing affordability, other is prices have actually gone up.

 

[Beej]

Riddle me this.

If you had invested $400K in 2002 and it returned $425K in 2009 would you think this is a good investment?

Hint, if inflation was running at 3% you would need $480K



This would seem quite realistic, given the median is around $570K in Syndey this would mean a approx 45% increase or 4% p.a growth. Just 1% above inflation - heard that somewhere before.

Answer to riddle.

That was the result if investing in the Sydney property market over the last 6 years according to ABS weighted average figures for Sydney.

Disclaimer : calculation based on a nice bottle of Cab Sav from W.A

Note : past prices are not a forecast of prices in the future

Yep - but add 4%-5% rental return to your sums - either as rent actually received or as rent not having to be paid (even better as that's after tax dollars), and things look pretty good really even in this scenario

Cheers,

Beej

 

[Ben L]

Just a question... is there a source to find out if properties are purchased by a single person or for example a couple?

 

[Ben L]

I put it down to these factors as to why property prices are rising.

1)Shortage of new dwellings.
2)First Home Buyers Grant.
3)Banks overlending.
4)Low interest rates.

IMO the first home buyers grant is the worst idea ever concieved. All it does is put more money into the seller of the property. We need more homes and we need them now.

 

[Uncle Festivus]

That's true and something I have been pointing out here for nearly 18 months! All the house price growth (and all the angst!) in Australia has come from all other cities except Sydney. That is actually why I reckon that:

a) Sydney real estate in NOT in a bubble; it is poised for the next stage of growth, which will however be more moderate than the last stage (1996-2003; due to the one off factors that drove it then). I reckon in 10 years the Sydney median house price will be around $750k-$800k, assuming inflation/CPI remains at ~3% average levels through this period, and average full time wages will probably be ~$100k pa. If inflation breaks out, then things could look very different indeed and prices today will seem ridiculously cheap when we look back!

Well isn't that what inflation is - looking back and saying how cheap something was, but in fact when compared to todays value it was only a measure of currency value errosion, making today's value seem like a growth in 'wealth' when all it is is keeping pace (hopefully) with the increase in money supply from central banks, and retail banks then leveraging that money out into bubble world to continuously grow their business? (who, by the way, have increasingly relied on fees & charges to prop up the diminishing returns from bricks & mortar loan business)

Not many property advocates factor in 'inflation' into their sums when calculating their returns from their RE investments ie money supply inflation feeds price inflation, as in nearly everything else also. So has the 'value' of the property increased or just the money supply inflation? If 'inflation breaks out' then prices would only reflect that money supply increase; it may or may not reflect an underlying supply/demand premium as well?

Rising prices actually mean you will need to make a far greater percentage return after inflation if property is to be a growth asset in the future? As prices rise (due to money supply inflation) it will be harder to firstly service the loan but to then have the asset appreciate faster than that inflation as well as net of purchasing costs and then ongoing maintenance.

b) Prices in other cities are either in a bubble, OR they have gone up for the same reasons Sydney prices went up 5-10 years earlier, and the fundamentals behind that may be permanent? I suspect the Melbourne and Brisbane price rises might be more permanent than say the Perth or Darwin ones. The last 5 years in Sydney might give you a pretty good indication what these other markets might look like over the next 5 years.

PS: You have highlighted well the problem with labels like "permabulls" and "permabears". Why should they/we read from the same script? I have my own independent views thanks and will read from my OWN script! As I am sure will Kincella, and yourself UF!

Cheers,

Beej

So are you permanently bullish on property?

 

[Uncle Festivus]

Yep - but add 4%-5% rental return to your sums - either as rent actually received or as rent not having to be paid (even better as that's after tax dollars), and things look pretty good really even in this scenario

Cheers,

Beej

Are you saying you calculate (increase) your return by adding in a 'rent not having to be paid' factor? Where do you subtract interest payments & purchase costs?

 

[knocker]

Look what are all you nancies waiting for. Just hop right in and buy buy buy ok. There's never a better opportunity to buy ok.

 

[satanoperca]

Look what are all you nancies waiting for. Just hop right in and buy buy buy ok. There's never a better opportunity to buy ok.

Thats what the realestate agent told me yesterday, just before he told me he had sold his PPOR and was renting for the next year or so.

Never a better time to buy.

 

[kincella]

income is the division between inner city and the suburbs....
extracts from Bernard Salts article today
...............
To some extent the city has always harboured social and economic division.

That the demographies of Toorak and Double Bay differ to those of Broadmeadows and Redfern is hardly surprising. This has always been the case; indeed, there is a niche for both rich and poor suburbs in every city.

But what I am suggesting is more broadly based. I am suggesting that there is almost a regionalisation of wealth, income and culture based on urban geography.

Battlers, migrants and assorted low-income earners who formerly lived in the inner city are now being flung out, as if by some centrifugal force, to the city's edge.

What is left in the inner city is an odd coalescence of tribes - namely students, singles, couples, dinks, gays, expats, corporates, divorcees and, most important of all, the professional and entrepreneurial classes.

One of the key drivers of social division within the city is income. Between 1996 and 2006 the average income per person in Melbourne's Melton and Wyndham and Sydney's Blacktown and Penrith hovered a few percentage points above or below the Australian average. For this entire decade these edges of our largest cities represented the heartland of "average Australia".

However, it was a different story in the city centre. In Sydney's inner-western municipality of Leichhardt, income levels on a per-person basis jumped from 43 per cent to 73 per cent above the Australian average over the decade to 2006. Upwardly mobile Leichhardt moved mightily upmarket in a decade. The same upshift applied to Melbourne's City of Port Phillip, where income levels moved from 27 per cent to 50 per cent above the Australian average in a decade
http://www.theaustralian.news.com.au/business/story/0,28124,25920990-30538,00.html

 

[Beej]

Are you saying you calculate (increase) your return by adding in a 'rent not having to be paid' factor? Where do you subtract interest payments & purchase costs?

Well if you don't pay interest on your PPOR then the rent "saved" is a true after tax return on the capital invested - so if the value keeps pace with inflation, plus even 1%, plus the rent saved, = a pretty good low risk, inflation hedged and CAPITAL GAINS TAX FREE investment . On an IP, of course you factor interest in, but only the actual cost after accounting for tax deductiblilty etc.

Look let's use my scenario which as had been pointed out provides a 1% return above inflation (very conservative - of course there is a good chance that if you buy the *right* property in the *right* location you could gain a much greater return that this, but anyway....). Let's say you buy an IP, borrow 90% of the cost - fixed rate loan at say 6.5%, and your marginal tax rate is 45%. Rental yield is say 5.5% (Sydney average for units). Let's deduct 1% from the rental yield to cover annual costs, so net 4.5% yield. Interest cost after tax deduction is actually 3.25% of property value (90% x 6.5% x 55%) net.

So you NET gain from property = 4.5% (net yield) - 3.6% (net interest/costs) + INFLATION on capital, + 1% = 2.25% of total property value.

Doesn't sound like much, but remember that's with only 10% of the total value put in by you! If the place is worth say $300k, that's $6750 pa profit, or 22.5% return on your capital actually invested. That profit increases every year as the value of the property increases (even just with inflation) due to interest only being paid on 90% of the initial purchase capital.

Now of course there is risk as well - the value might fall in the short term, or maybe you have bought in the wrong location and you don't keep pace with inflation. Likewise you could also make a lot more money if you bought well. My example is also simplistic in that you have to account for buying/selling costs. My point though is that even with only 1% growth above inflation, over time a very good return on initially invested capital can be made. You can even borrow 100% and invest zero of your own capital But the risk rises accordingly as well.

I'm also not saying that my example would be the BEST long term investment at all times and at any time. Right now there clearly seems to be more potential in shares than in say Sydney property (or least that was the case 3-6 months ago!), but in terms of diversification and place to park personal wealth, property is still an important asset class IMO which is ignored at your own financial peril!

So are you permanently bullish on property?

Well depends what you mean - in the long term I believe property will in most cases provide at least the sort of returns I outline above, but of course prices occasionally fall as well. I don't think the fundamentals under-pinning the market in AU and Sydney in particular are likely to change anytime soon.

So what I DON"T subscribe to are the "property prices to crash up to 40%" type bearish outlooks. I think PPOR ownership over the long term is an essential part of the road to financial independence for 95% of people - the forced saving of having to pay off a mortgage plus the inflation hedging + real growth provided in the capital appreciation leaves most people in a much more solid financial position than the alternative.

Property investment is a different kettle of fish - timing is more important, as is buying the right property - but again, with a long term outlook it can be a very profitable investment, both in terms of ability to generate consistent, inflation hedged cash-flow (important if you are living off your investments) , and steady real capital growth as well. Additionally the potential to add value through your own work/effort (renovations etc) is another added benefit (if you are that way inclined). Property flippers and people that don't do their sums properly or who don't understand the risk should stay well clear of property investment.

Cheers,

Beej

 

[kincella]

another confirmation of what I have been saying for the past couple of years,.....its called upgrading the home
extract..................

The Stockland boss says residential sales are now starting to switch more to people trading up than simply entering the market for the first time, and commercial property buyers who were telling everyone they would wait until prices dropped 30 per cent are now back looking.

Quinn has just downsized his own property, shifting from Killara to McMahons Point in Sydney.

It's the same land size as most of his residential clients (about 530sqm) but he is paying more than 27 times the average Stockland lot price of $206,000 for the family home.
http://www.theaustralian.news.com.au/business/story/0,28124,25921256-25658,00.html

 

[Beej]

So you NET gain from property = 4.5% (net yield) - 3.6% (net interest/costs) + INFLATION on capital, + 1% = 2.25% of total property value.

Doesn't sound like much, but remember that's with only 10% of the total value put in by you! If the place is worth say $300k, that's $6750 pa profit, or 22.5% return on your capital actually invested. That profit increases every year as the value of the property increases (even just with inflation) due to interest only being paid on 90% of the initial purchase capital.

Actually a couple of errors in my example - net gain calc should be:

3.025% (rental yield of 5.5% after tax) - 4.15% (6/5% interest + 1% costs after tax deductability based on 45% marginal rate) = -1.125%. Then + inflation (say 3%) + 1% real growth = 2.875% net return.

That equals $8625 nominal return pa = 28.75% leveraged return on invested capital of $30k in the example. So although the nominal return is still just below the rate of inflation against the purchase price of the property, the leveraged return on capital invested is still way ahead of inflation in this scenario. Over time the return increases as the interest cost is constant while the rental return increases.

Cheers,

Beej

 

[Buckeroo]

Hey, what's the go? - Beej & Kincella in stereo

Cheers

 

[trainspotter]

Sunsine and lollipops boys, just smile and wave !

""This week we saw three key data releases that all suggested the Australian residential property market should continue to provide modest improvements over the coming months. Housing finance commitments again trended up, with the value of housing loans taken out in June at their highest level since June 2007. Investor activity is also ramping up, with investors now comprising one quarter of housing finance commitments. Both business confidence and consumer confidence also continued to rise with both indicators now above the all important 100 point mark where optimists outweigh pessimists. Consumer confidence is now at its highest level in two years. Business confidence hasn’t been this high for almost two years."

Lifted gratuitously with forethought and malice from RP DATA.

 

[Buckeroo]

Sunsine and lollipops boys, just smile and wave !

""This week we saw three key data releases that all suggested the Australian residential property market should continue to provide modest improvements over the coming months. Housing finance commitments again trended up, with the value of housing loans taken out in June at their highest level since June 2007. Investor activity is also ramping up, with investors now comprising one quarter of housing finance commitments. Both business confidence and consumer confidence also continued to rise with both indicators now above the all important 100 point mark where optimists outweigh pessimists. Consumer confidence is now at its highest level in two years. Business confidence hasn’t been this high for almost two years."

Lifted gratuitously with forethought and malice from RP DATA.

I'm feeling chirpy, great news, things couldn't be better

Snap, bang, crash, #&@##, it all falls down

Cheers

 

[trainspotter]

But wait .. there is more from the rainbows and silver lining bureau

On a national basis over the 12 months to May 2009 the average hold period for houses was 7.5 years and the average hold period for units was 6.6 years.

What this essentially means for houses is that 7.5 years ago the median value was recorded at $265,557 and in May this year the median house value was $495,700. Based on this, the average value of those houses sold last year has increased by $230,143 since purchased, at a rate of 8.7% annually.

For units the national hold period is 6.6 years and based on a median value 6.6 years ago of $279,785 and a current median of $406,587, the average unit vendor during the last year has seen the value of their property increase by a total of $126,802 since they first purchased or by 5.8% annually.

Go you good thing ! Ride 'em cowboy !!

 

[Buckeroo]

But wait .. there is more from the rainbows and silver lining bureau

On a national basis over the 12 months to May 2009 the average hold period for houses was 7.5 years and the average hold period for units was 6.6 years.

What this essentially means for houses is that 7.5 years ago the median value was recorded at $265,557 and in May this year the median house value was $495,700. Based on this, the average value of those houses sold last year has increased by $230,143 since purchased, at a rate of 8.7% annually.

For units the national hold period is 6.6 years and based on a median value 6.6 years ago of $279,785 and a current median of $406,587, the average unit vendor during the last year has seen the value of their property increase by a total of $126,802 since they first purchased or by 5.8% annually.

Go you good thing ! Ride 'em cowboy !!

I've already profited by this and it was greeeeat! - will it happen again over the next 7.5 years? Some people think so.

Cheers

P.S. good to see you back trainspotter

 

[trainspotter]

I am putting all my eggs back into property (and my balls) to capture the market in 12 months time. I like the idea of green titles sitting in the safe.

Hotspots to be considered:

Geraldton - Oakagee announcements - only "city" North of Perth
Ipswich - Fastest growing city in Australia - still bargains to be had
Gympie - Massive retirement belt - big blocks with strata potential (unit development)
Collie - Again - Due to doubling of power stations - surrounding areas

*Thanks Buckeroo for the pat on the back*

 

[Mofra]

http://www.news.com.au/business/money/story/0,28323,25927644-5013951,00.html

Rents to hold up / remain high over the next 12 months according to this article.

 

[kincella]

did a little exercise yesterday, checked out the realestate site for houses under 100k's in vic...there were thousands of them, nsw was similar, god help us if the sales of those homes were included in the median prices...which they are

at least the RBA was looking at providing more accurate data based on regions.....its copyright material so here's the link

Improving Median Housing Price Indexes Through Stratification

Anthony J. Richards
Reserve Bank of Australia - Economic Research
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=958159

http://www.anz.com/Aus/Promo/HomeEssentials008/Property1.asp