House prices to keep rising for years

[Tysonboss1]

....I'm not, where have I said that the goal of this model was to COMPARE the return of home ownership verse renting + investment?

You don't seem to understand the whole point of this model. Yes, I may be bearish on the whole real estate market at this time, but the model was designed to view the whole thing from an unbiased, quantative perspective.



As above again, not designed for direct comparsion!

Just treat the model as, how much money invested, how much money in return! As simple as that.



Maybe it's the biases in you that is preventing you from making a sense out of this model. And like I said, the aim of this model is NOT renting vs ownership!!!!!



This discussion is almost worth another different thread. I am not going to bother talking about how much growth renting will increase along with whatever over the long term. 3.5% inflation was a guessmate, if you think rent will increase 10% over the next 30 years, that is 6% above wage growth (assumption on 4% growth), then so be it, add it into the model.

But do you really think this is sustainable in the real term?

Remember that the model is never an accurate representation of the real world. Just look at the intellectual nerds in rating firms designing Einstein's style computer model to price/predict mortgage backed bonds. The subprime event was something they called a 7 standard deviation event, or something that should not happen in their model every billion year or so.

This model I have cannot account for black swan events such as the subprime event. Imagine what will happen to your "return" if interest rate suddenly goes up to 15% in less than one year. It happened before, why it shouldn't happen again?

1, you your self said that you have shown this model to people to point out that they will not benefit much from owning their own home,... using this model for that purpose would not give a fair result,..... It says that they are only ahead by about 1% when the true figure is closer to 10% If that is not the point of the model then give me an example of a situtation where this model could be used, I can't see a reason for such a model that includes living costs such as insurance and rent.

2, what is the point of the model then,...

3, yes rent on a certain size and style of property can sustainablly increase faser tha wages,... look back at the example I gave, it's simple what is considered an average home today is likly to be considered above average in the future,....

meaning a average home getting average rent today,.... will be larger than the average homes being built in the future,.... there fore even if the average rent only increases with inflation, because this home is know bigger and on more land than the 2 bed aparments being built which are the new average then the house which once was average will be collecting a rent alot higher than the new average.

 

[wayneL]

I am not beating up the market,.... Just offering a different point of veiw and different ways to look at things in the face of an avalanche of negative veiws on this thead.

I am sorry if my opinion doesn't mold exactly with yours, I don't think it is fair to compare my coments with some sort of ramping.

1, you your self said that you have shown this model to people to point out that they will not benefit much from owning their own home,... using this model for that purpose would not give a fair result,..... It says that they are only ahead by about 1% when the true figure is closer to 10% If that is not the point of the model then give me an example of a situtation where this model could be used, I can't see a reason for such a model that includes living costs such as insurance and rent.

2, what is the point of the model then,...

3, yes rent on a certain size and style of property can sustainablly increase faser tha wages,... look back at the example I gave, it's simple what is considered an average home today is likly to be considered above average in the future,....

meaning a average home getting average rent today,.... will be larger than the average homes being built in the future,.... there fore even if the average rent only increases with inflation, because this home is know bigger and on more land than the 2 bed aparments being built which are the new average then the house which once was average will be collecting a rent alot higher than the new average.

That depends on a whole host of things. There are a too many jokers in the pack to state that definitively.

 

[wayneL]

The latest VI pronouncement from Londinium:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/07/bcnsavills10.xml

I was said that London would never fall, then it was said prime properties would never fall.

However I recall in the early nineties, it was prime that suffered most of all, in both Oz and The UK.

 

[CAFA1234]

1, you your self said that you have shown this model to people to point out that they will not benefit much from owning their own home,... using this model for that purpose would not give a fair result,..... It says that they are only ahead by about 1% when the true figure is closer to 10% If that is not the point of the model then give me an example of a situtation where this model could be used, I can't see a reason for such a model that includes living costs such as insurance and rent.

2, what is the point of the model then,...

3, yes rent on a certain size and style of property can sustainablly increase faser tha wages,... look back at the example I gave, it's simple what is considered an average home today is likly to be considered above average in the future,....

meaning a average home getting average rent today,.... will be larger than the average homes being built in the future,.... there fore even if the average rent only increases with inflation, because this home is know bigger and on more land than the 2 bed aparments being built which are the new average then the house which once was average will be collecting a rent a lot higher than the new average.

I think the spreadsheet is a great first attempt. However if the cost of home ownership is the point then assuming one has to live in a rental if not in an owned house, then the rental 'saved' MUST be taken into account. Likewise the electricity and contents insurance would be paid anyway even in a rental, along with water in many cases.

Therefore to get a 'true' comparison the electric, water, and contents insurance should be ignored, and the nominal rental factored in. Add in a variable to allow a user to select 'first time buyer', and if not then to ignore the grant but add in stamp duty etc and I think you have a reasonable model.

Allow the user to select Inflation rate, rental growth rate, and interest rate, and you have a good basic model that would give a reasonable outcome.

As a comparison it would be useful to show the combined return of the ASX200 over a similar period. e.g. if 10 years were selected, then show the total return (including dividends) over an average 10 year period. Because the stock market is more volatile this would have to be some form of weighted average to give a fair comparison. Anyone got any ideas how to pull all of this together?

As I said this is a great start and having done a few myself I am cognitive of the effort that was put in. Lets do the shareware thing and all help to make this a great little tool!

 

[CAFA1234]

WASHINGTON (MarketWatch) -- In a sign that the U.S. housing market may have further to weaken, an index of sales contracts on previously owned homes fell 1.0% in March from the prior month, the National Association of Realtors reported Wednesday.
The NAR's index, considered a leading indicator of existing home sales, was 20.1% below the March 2007 level.
The availability of affordable mortgages is uneven around the country, and the extent of a recovery depends on better access to affordable loans, said Lawrence Yun, the trade group's chief economist.

---------------------------------
For those of you that follow US data, Mr Yun must be the world biggest bull of real estate. It's comical at times and he takes a fair amount of stick in the press for being out of this world, but he does manage to put a brave face on bad figures. It's his job, I guess.

 

[professor_frink]

Let me know if you think there are any mistakes. Would love to continue to refine it further.

nice work on the spreadsheet Temjin

My on what you've done -

Electricity, contents insurance and getting a telephone connected probably shouldn't be included in this type of calculation, unless you can find a way to live without paying for them elsewhere(not very likely).

I'd probably add in some kind of maintenance cost(2% of the building's value per year maybe). Let's face it, things can and will break at some stage and needs to be factored in.

If you want to look at the true cost of buying a house, I'd be inclined to deduct the rent saved from the expense calculations before doing the calculation too. If you aren't going to add in the rent that you save by buying a house, then it's not really worth doing - half the point of buying a house to live in is so you don't have to rent anymore!

 

[CAFA1234]

A new tit-bit.
http://www.ft.com/cms/s/0/8be8bcb2-1c71-11dd-8bfc-000077b07658.html
US city council files for bankruptcy
The city council of Vallejo in California late on Tuesday voted unanimously to file for bankruptcy, sparking a downgrade on Wednesday in some of its municipal bonds and prompting fears that other cash-strapped local governments might emulate it.

Vallejo, near San Francisco with a population of 117,000, faces an estimated $16m budget deficit for the fiscal year that starts on July 1. This comes amid a decline in tax revenues related to falling house prices coupled with rising salary and pension costs.

The last city in California to file for bankruptcy was Desert Hot Springs in 2001 while Orange County sought protection from creditors in 1994 after making poor investments with interest rate derivatives
--------------------------------
A small and rare event - lets hope it's not a sign of worse to come.

What's this got to do with Aussie real estate - well if you have to ask then it should be a separate thread.

 

[nioka]

A new tit-bit.
http://www.ft.com/cms/s/0/8be8bcb2-1c71-11dd-8bfc-000077b07658.html
US city council files for bankruptcy
The city council of Vallejo in California late on Tuesday voted unanimously to file for bankruptcy, sparking a downgrade on Wednesday in some of its municipal bonds and prompting fears that other cash-strapped local governments might emulate it.

Vallejo, near San Francisco with a population of 117,000, faces an estimated $16m budget deficit for the fiscal year that starts on July 1. This comes amid a decline in tax revenues related to falling house prices coupled with rising salary and pension costs.

The last city in California to file for bankruptcy was Desert Hot Springs in 2001 while Orange County sought protection from creditors in 1994 after making poor investments with interest rate derivatives
--------------------------------
A small and rare event - lets hope it's not a sign of worse to come.

What's this got to do with Aussie real estate - well if you have to ask then it should be a separate thread.

At least that wont happen in NSW where the councils just keep increasing the rates and send the property owners to the wall instead. Or in the case of our council, which was in credit just amalgamate it with another so they can balance the books.

 

[CAFA1234]

At least that wont happen in NSW where the councils just keep increasing the rates and send the property owners to the wall instead. Or in the case of our council, which was in credit just amalgamate it with another so they can balance the books.

Yes, it's peculiar to the US and in particular California under Proposition 13.

http://en.wikipedia.org/wiki/California_Proposition_13_(1978)

Basically it prevents a council from increasing property taxes. They have to use the value of the house when you purchased it, which means the newest purchaser pay proportionately the highest levels of property tax. They (CA) are an interesting bunch

 

[gfresh]

Makes an interesting point if property values drop in some areas of Australia though. What happens if council rates have to actually *decrease* to the area where property values dropping 5-10%? say Western Sydney? That could squeeze some already very tight council budgets. Wonder how they'll get their way around that one?

I forget the exact councils, but a couple here have also been exposed to the whole US subprime via buying mortgage securities themselves and got themselves into strife.

 

[nioka]

Makes an interesting point if property values drop in some areas of Australia though. What happens if council rates have to actually *decrease* to the area where property values dropping 5-10%? say Western Sydney? That could squeeze some already very tight council budgets. Wonder how they'll get their way around that one?

I forget the exact councils, but a couple here have also been exposed to the whole US subprime via buying mortgage securities themselves and got themselves into strife.

Councils in NSW are given a figure percentage wise that they are allowed to increase the total rates collected for the year. They then allocate that over the ratepayers. The increase is usually in line with inflation. Individual councils can apply to the minister for permission to make additional increases. Councils also get around this by levying special charges apart from rates. Our council has introduced an inspection charge of $85 yearly on our septic system although they don't make annual inspections.

 

[stock_man]

Great work Temjin, loved the spreadsheet!

I had something similar myself, but not to that depth of inclusions. You should be stoked with your efforts!

I adjusted the figures slightly (reduced insurance as only house cover is needed - contents is negated as people have stated, LMI etc), and reduced from it the current rental amount I would pay indexed to inflation (as you have done with the other expenses).

Result - (5 year comparison)
Without rent: -21%
With rent: 15.22%

* Note this is based upon the default figures of inflation at 3% and growth rate at 7%

Seems I need to get 2.5% growth rate on my house to break even - pretty much what I had imagined

Thanks again!

 

[CAFA1234]

Great work Temjin, loved the spreadsheet!

I had something similar myself, but not to that depth of inclusions. You should be stoked with your efforts!

I adjusted the figures slightly (reduced insurance as only house cover is needed - contents is negated as people have stated, LMI etc), and reduced from it the current rental amount I would pay indexed to inflation (as you have done with the other expenses).

Result - (5 year comparison)
Without rent: -21%
With rent: 15.22%

* Note this is based upon the default figures of inflation at 3% and growth rate at 7%

Seems I need to get 2.5% growth rate on my house to break even - pretty much what I had imagined

Thanks again!

Another item to note. Most people 'improve' a property over time e.g. new kitchen / bathroom / garden etc etc. Just doing routine maintenance like having the gutters cleaned out.

I don't know the answer but I guess some reasonable amount should be factored in. I know that when I rent, I spend zero. I don't even buy a plunger for the sink! When I own (which I still do in Aus) I know that there is expenditure.

I don't want to put a figure on it, but the easiest way of factoring in, is to use the ATO guidelines for depreciation about 2.5% PA (this may be a tad out of date). So if you keep a property for 10 years it is reasonable to assume you will spend, on average, 25% of the initial cost.

To ignore this 'hidden' cost is folly as I'm sure most home owners know, over the years a few $ here and a few there all adds up, and things DO wear out. Do you know what it costs to outside paint a weather board house these days - $5-7K in NSW.

 

[CAFA1234]

The 2.5% in the last post should exclude land value. - Sorry.

 

[professor_frink]

Great work Temjin, loved the spreadsheet!

I had something similar myself, but not to that depth of inclusions. You should be stoked with your efforts!

I adjusted the figures slightly (reduced insurance as only house cover is needed - contents is negated as people have stated, LMI etc), and reduced from it the current rental amount I would pay indexed to inflation (as you have done with the other expenses).

Result - (5 year comparison)
Without rent: -21%
With rent: 15.22%

* Note this is based upon the default figures of inflation at 3% and growth rate at 7%

Seems I need to get 2.5% growth rate on my house to break even - pretty much what I had imagined

Thanks again!

The good thing about running these sorts of calcs when you are looking at buying a house is that you can find out what needs to be done for you to come out ahead compared with if you rent. Mrs Frink and I did something similar to Temjin's spreadsheet before we bought our house - we found our own financial sweet spot where we could buy a house without impacting our current lifestyle too much, whilst also putting ourselves in the position where we would pay less in interest/costs to own the place over the life of the loan compared with what we would pay to rent, without having to rely on the home appreciating to come out in front. The sweet spot for us was making payments that would have the mortgage gone in 9-10 years. And then if we manage to make some improvements to the house on top of that, then all the better

Do you know what it costs to outside paint a weather board house these days - $5-7K in NSW.

Really? Have never painted the outside of a house before but that sounds pretty extreme! Is that paying painters to do it for you or to do it yourself?

 

[CAFA1234]

Really? Have never painted the outside of a house before but that sounds pretty extreme! Is that paying painters to do it for you or to do it yourself?

Paying a painter! I've never spent $7 just on paint - my house is not that big

Yes, I do many jobs myself including gutting and installing kitchens, but the point is would I rather be out doing a cross Simpson trip or whatever your hobby is? Just because you DIY does not change the maths, all you are doing is supplying your labour at zero cost. Not a good basis for a mathematical model ?

 

[professor_frink]

Paying a painter! I've never spent $7 just on paint - my house is not that big

Yes, I do many jobs myself including gutting and installing kitchens, but the point is would I rather be out doing a cross Simpson trip or whatever your hobby is? Just because you DIY does not change the maths, all you are doing is supplying your labour at zero cost. Not a good basis for a mathematical model ?

ok that sounds better!

From a stictly mathematical point of view, yes you are 100% right.

Though many fortunes are built on cheap, dodgy labour, just look at China and India these days. Why would I want to be any different

If I can save a few thousand doing a job that I have the spare time to do, then I'll do it. Only if I don't have the time, or skills to do something will I run off and pay top dollar for it.

 

[gfresh]

Councils in NSW are given a figure percentage wise that they are allowed to increase the total rates collected for the year. They then allocate that over the ratepayers. The increase is usually in line with inflation. Individual councils can apply to the minister for permission to make additional increases. Councils also get around this by levying special charges apart from rates. Our council has introduced an inspection charge of $85 yearly on our septic system although they don't make annual inspections.

I see.. that's a bit different to QLD (e.g. http://www.goldcoast.qld.gov.au/t_standard.aspx?pid=10). QLD uses the unimproved property value in the area, and then charge you accordingly. In VIC (http://www.localgovernment.vic.gov....BDBF1B0C3885BC0FCA25718E0021E63E?OpenDocument) they slug you for the capital improved value, what they think the home is worth.

So if the property values are going up, so do the council rates.

I guess in those two states they could quite conveniently change the rules to NSW style rules if values turned against them.

 

[nioka]

I see.. that's a bit different to QLD (e.g. http://www.goldcoast.qld.gov.au/t_standard.aspx?pid=10). QLD uses the unimproved property value in the area, and then charge you accordingly. In VIC (http://www.localgovernment.vic.gov....BDBF1B0C3885BC0FCA25718E0021E63E?OpenDocument) they slug you for the capital improved value, what they think the home is worth.

So if the property values are going up, so do the council rates.

I guess in those two states they could quite conveniently change the rules to NSW style rules if values turned against them.

NSW is basically the same as Qld except here where it used to be unimproved value they now include in the value improvements to the actual land. There is also double whammy charges such as improvements that you have to "rent" from the lands department but they are then valued again with your property rating. I have a pontoon in the river for which I pay rent to the lands dept but the valuer says it adds $50,000 to my property valuation. The rent used to be $40 a year this year it has been increased to over $400.
The problem with rates is the unfairness of the system. We pay about $2,400 for less services (being rural) than some in town that will pay $450. Then because of the bigger land area we use more water. The water gets dearer per kl the more you use. (and we aren't short of water here)

 

[Temjin]

Thanks for the compliment guys.

Actually, please ignore that model for now. : I had a deep thought about it last night (yes, while sleeping!!) and I believed I've made some mistakes in terms of how the return of capital should be calculated from. So treat any values generated by this model with a grain of salt for now. I will come up with a new version and post it again in the future.

Meanwhile, keep it up with the thread, contain a massive amount of useful info.