House prices to keep rising for years

[bowseruni]

refering to house prices in sydneys west.

Increase - If more businesses move out there, the chances of many coming out past homebush or even parramatta is very slim IMHO.

decrease - westies travel into city by car, fuel increase, toll cost, car running cost, interest rate increase = not being able to afford it for much longer, public transport - too slow.

Therefore i see a divide in house prices, the inner city and CBD will increase as everyone moves closer to work to escape fuel costs and decrease in the west as fuel/travel cost hit.

I have noticed lately in the paper/tv that they are predicting house boom in the next 3 years. I'm wondering if the authors of these documents live under a rock as they clearly have no idea of how close to the borderline people are
at the moment. Krudd's tax cuts are useless as the increase in petrol has on average become greater than the tax cuts!

I think in the coming 1-3 years if current trends stay the same (inflation, fuel costs, interest rates) house prices have no choice but to go down.

 

[stock_man]

I know a few people (once again, lower end) renting a house for 200 a week - that's absolutely minimal, & quite easy to save up a lot of money. Another couple are paying off a mortgage .... very similar house, just a lot of new things (that all new home buyers seem to get); such as the marble kitchen tops, the new sofa, big screen TV ... This couple is paying off the mortgage at $500-600 a week - & at current interest rates, this only just covers the blooming interest! Talk about dead money.

The idea of saving to buy outright (or minimal mortgage) vs high gearing on your own home is definately a case by case sceanrio.

My real life example:

House value: $450K
Mortgage: $405K (10% deposit)
Repayments: $735 / week (@8.74% over 30 years)

Rent: $410 (equivalent residence)
Difference: $325 / week (between mortgage and rent)


If I was to rent, and save the $325 / week, it would take me 24 years to save up enough to buy the house outright.

Assumptions:
1) rent does not increase
2) house price does not fluctuate
3) 8.74% is the average interest rate over 24 years
4) interest on the cash is negligible as long term interest on cash is close to inflation after you take out tax

Any increases in income over the years is also negligible, as this could be used to either save more if renting, or pay of mortgage faster if owning.

Obviously if a cheaper, lower quality house was rented it would start to tip the scale a little bit more the other way. But 18 - 24 years is a long time....

It all comes to down to affordability. If you can not afford the $735 / week, as in this example, then a default is a high risk. But on the flip side, this means the average renter in the same scenario would not be saving the $325 / week, unless they wish to start defaulting on rent and get kicked out either way.

 

[Junior]

Stockman,

You need to take into account land tax, maintenance etc. for the home owner.

 

[robots]

hello,

anybody got info on the residex report out? from what I understand some fascinating results

the carry-on is still testament to the strength in property and is evident if you even use the layman's income to asset ratio as an indicator, fabulous

there must be a graph out there somewhere on one of those goon websites with 08 income to asset ratio or is it not worth publishing?

thankyou

robots

 

[nioka]

Stockman,

You need to take into account land tax, maintenance etc. for the home owner.

Homeowners don't pay land tax. It is paid on property you do not occupy. It is one of the costs that increase rents.

 

[Julia]

Ok, to get some better figures on this (for owners, not investors of course).. and going on the "18% capital appreciation in sydney in 3 years" - I've attempted a spreadsheet.

Not taking into account other miscellaneous buying costs + rates + any maintenance - which may add $20k+ onto this equation.

Purchase would be a $400k home. It would be assumed the buyer *had* a 10%, $40k deposit ready, leaving a $360k mortgage. Over 25 years repayments should be $719/wk (using mortgage calculator, may not add in extra loan fees)

--
Mortgagee

Interest Rate: 9.40%
Loan: $360,000
Interest /year: $33,840
Interest /wk: $650.77
Interest x 3 years: $101,520
Capital Appreciation: 18.00%
Capital Appreciation (3yrs): $64,800
Mortage (wk) - 25 yrs: $719.00
Capital Paid Off (wk): $68.23 (above - interest paid/wk)
Capital Paid Off (3yrs): $10,644

Net Mortgage Cost: -$26,076

(capital appreciation + capital paid off - interest)

Renter

Rent Equiv (wk): $400 (to rent approx $400k home)
Rent/year: $20,800
Rent x 3 years: $62,400

For renter, instead $40k deposit goes into term deposit.

Deposit: $40,000
Savings Account: 8.00%
Interest /yr: $3,200
Tax @ 30%: $960.00
Net Term Deposit Savings x 3yrs: $6,720

Extra Savings(wk) = (mortgage-rent): $319
Extra Savings x 3yrs: $49,764

Net Rental Cost: $5,916

Above is: income from term deposit + savings - rent

Difference to renter over 3 years: +$31,992

Above is Mortgage owner - renter. The renter is saving, it's costing the mortgagee here.

True, it's simplistic, in that compound interest is not calculated. Under the current environment, with high rates, doesn't look too attractive to buy until the equation tips the other way.

I know long term there are quite a few reasons why the mortgagee will be better off (longer term avg appreciation may be higher, not subject to rental inflation), but this is considering the current environment, where savings accounts pay high interest, and interest rates for property owners is high.

It's true, maybe renters will not save the money, but it's quite easy to have an automatic savings plan which will be the same as what a bank does anyhow. If they can't save each week in this fashion, maybe they shouldn't be buying at all.

In the above example, unless I'm missing a bit, what isn't pointed out is that at the end of the period the houseowner has an appreciating asset.
And yes, I know at present prices are down (though not here where I live) but the long term trend, as with the sharemarket, is always up. Can't say the same for cash.

 

[Macquack]

In the above example, unless I'm missing a bit, what isn't pointed out is that at the end of the period the houseowner has an appreciating asset.
And yes, I know at present prices are down (though not here where I live) but the long term trend, as with the sharemarket, is always up. Can't say the same for cash.

gfresh has included 18% capital appreciation over the 3 years.

 

[robots]

hello,

http://business.theage.com.au/building-salaries-rising-20080618-2sxs.html

very strange situation when "new starts" aus wide have been on a downward spiral since say 03-04,

great though for people who want to get out there and change their own circumstances,

thankyou

robots

 

[Naked shorts]

Why not get a loan from a japanese bank? the interest rate set by the bank of japan is 0.5%
http://www.bloomberg.com/markets/rates/japan.html

anyone tried doing this?

 

[gfresh]

In the above example, unless I'm missing a bit, what isn't pointed out is that at the end of the period the houseowner has an appreciating asset.

And yes, I know at present prices are down (though not here where I live) but the long term trend, as with the sharemarket, is always up. Can't say the same for cash.

As above, the capital appreciation is included ($72k: compounded @ 6% p.a. - there was an error in the first one posted) - so in my model the house prices are actually going up, even above inflation. The interest costs right now are so large, that they are much larger than the appreciation of the property, given a relatively flat market, or even slightly upward market.

Longer term, obviously savings accounts don't pay anywhere near that high, and interest rates aren't that high.

This is really only a short-term calculation based on the now, or near term if I was entering the market, and things staying as they are for the next couple of years. This is actually close to my situation, so this is why I was curious to run some figures.

For my situation, it seems it becomes profitable over rental (or the best time to enter) if rates go back under 9%. I assume this would encourage others to enter the market again, pushing prices back up further, and hence giving further advantages.

Although, obviously 'picking the bottom' or when house prices may turn around obviously is not so easy.

 

[Temjin]

Why not get a loan from a japanese bank? the interest rate set by the bank of japan is 0.5%
http://www.bloomberg.com/markets/rates/japan.html

anyone tried doing this?

That's a carry trade, it's been done by lots of ppls a long while ago, except that it backfired when the currency movement was unfavourable to those who are short JPY and long whatever currencies.

 

[pepperoni]

http://business.smh.com.au/beware-the-property-markets-slippery-slope-20080620-2u78.html?page=2


More fine print from bis shrapnels poor attempt at spruiking ....

In its report, BIS Shrapnel says Sydney house prices stabilised in 2006-07 after falls in 2004-05 and 2005-06, but are still much lower in real, or after-inflation, terms than in March 2004. The researcher expects the Sydney median house price to reach $550,000 this quarter and edge up to $560,000 by June next year, though it says that would still represent a 17 per cent decline in real terms from the March 2004 peak.


Not great, even as against lowly term depsits that are up over 16 percent in real terms.

 

[Mofra]

Not great, even as against lowly term depsits that are up over 16 percent in real terms.

16% in real terms? A depreciating asset up 16% in 4 years?

Lets assume a 3% inflation rate & 30% tax rate, with very generous 7% average gross return

$100 cash at 3% inflation = $88.85 today in 2004 dollars
Yr 1 $97.09
Yr 2 $94.25
Yr 3 $91.51
Yr 4 $88.85

7% gross return (assuming max interst payable upfront, being generous here)
$7.00 year 1 - $2.10 Tax = $4.90
$6.80 Year 2 - $2.04 Tax = $4.76
$6.60 Year 3 - $1.98 Tax = $4.62
$6.41 Year 4 - $1.92 Tax = $4.49

So $18.77 is after tax cash gains without taking into account deflation, which leaves us a real return of $7.62 over 4 years. No where near 16% in real terms

 

[robots]

hello,

massive day yesterday with auction clearance rate at 62% for melbourne,

just run of the mill, great time for people looking to buy a home still,

thankyou

robots

 

[Lucky_Country]

The worst is yet to come in the real estate market imo.
Higher unemployment, higher interest rates, and a general slowing in the economy with little chance of capital gains over the next 3 years.
Sitting tight waiting for the downturn.

 

[robots]

hello,

i am sitting tight waiting and waiting

thankyou

robots

 

[overlap]

hello,

massive day yesterday with auction clearance rate at 62% for melbourne,

just run of the mill, great time for people looking to buy a home still,

thankyou

robots

The clearance rate doesn't make housing good or bad.

 

[explod]

The clearance rate doesn't make housing good or bad.

Yep, I took him to task on it months ago but he continues to hang his hat on it.

In fact, there is an old saying, "never try to catch a falling knife". IMHO property is falling and one needs to wait till the "knife hits the floor."

But I dont' know much and have been wrong before

 

[tadpole]

hi

my parents sold their home a few days ago in brisbane. it was time to move into a retirement village. took them 6 months to get an offer and had to lower their price 150k. i'd say yes houses are coming down.

 

[Lucky_Country]

Unemployment is the key imo its been at record levels once a few start to default it affects all property.
Interest rates well whats happening there seems no clear direction for futher RBA moves.
Property is a 10 year cycle sp theres no rush to get into the market people are sweating.