House prices to stagnate for 'years'

[nizar]

I predict that you are totally, utterly, and completely wrong.

There's no way a $500,000 apartment in Sydney will be worth $8M in 26 years.

No way in hell.

I read somewhere that over the last 30 years in the UK (london); an apartment costing 100k pounds in 1976 would be worth 3m pounds in 2006.

Thats 30-fold, an outperformance of the FTSE-100 which was up only 19-fold in the same timeframe.

Obviously since i have no link theres no credibility for this post but im sure i did read that somewhere

Wayne; what were average wages 26 years ago? relative to house prices?

 

[Bronte]

These are the suburbs we concentrated on.....thanks to Jans book
South Perth
Victoria Park
Scarborough
Mount Lawley
Innaloo
Inglewood
East Vic Park
Leederville
Dianella

It is not all good news.
We bought into the "Chocolate Factory Apartments" some 5km from Sydney CBD back in 2000. You would think we made some money....No way!
Six years later we will be lucky to get our money back

 

[wayneL]

Wayne; what were average wages 26 years ago? relative to house prices?

I don't know nizar.

But I do know the average yearly wage to average house price ratio is about 3.5 times.

We are at about 6-10 times now, depending on the area

 

[NettAssets]

The growth in housing above inflation has been an anomoly, a statistical abberation of the post ww2 period. Over the long term there have been enourmous lengths of time where housing stagnated and/or moved down.
Most housing trend charts are conveniently truncated at the post ww2 beginning of the baby boom giving an inaccurate picture of the long term trend.

Have not really started looking at the trends yet but I would have thought that the post WW2 period pretty well picks the point where the "working class" really started to join in home and land ownership so in essence to compare prices before this time might be an even greater folly. I think we have not had a period in history before when so great a portion of the population where able to accumulate "wealth"
Maybe the period prior to WW1 was a precursor for what was to come but a fair percentage of the private ownership starting then was transfered back to the banks and landlords in the great depression.
I may be making too many assumtions here I'll have to go for a google and see if the private ownership in the 17 and 1800's was more than I think.
regards
John

 

[wayneL]

....I'll have to go for a google and see if the private ownership in the 17 and 1800's was more than I think.
regards
John

John,

I actually had a webpage saved that had all those statistics, graphs, the whole bowl of wax. But through various hard drive crashes and computer changes I lost the link.

Do you think I can find it again via Google? Haha, Fat chance!!

I'll keep trying though.

Hows the coutryside looking out your way?

Cheers

 

[NettAssets]

John,
Hows the coutryside looking out your way?

Cheers

Pretty dry although not as bad as up your way. Drove up a couple of weeks ago for a funeral and there is a lot of pain between here and there.
A lot of stock are getting sent to the coast on agistment because there is no feed here but the crops will probably break even - if we keep getting these little spots of rain.
Does not help us contractors much - my June/July income is down to about 10% of last year and there will not be any harvest to speak of and the little extras we usually pick up have dried up (pun intended).
I just hope Legend can get Mt Gibson going so I can get some rigs in there and at least pay their rego.
The farmers are going to be in a worse plight of course but they haven't felt it yet around here because they wouldn't be expecting any income until December - Jan anyway
Regards John

 

[Smurf1976]

I don't know nizar.

But I do know the average yearly wage to average house price ratio is about 3.5 times.

We are at about 6-10 times now, depending on the area

Markets generally revert to the mean eventually. The question is how we get there? Wages up 100% or house prices down?

Judging by what I'm seeing around me, house prices are falling for those not obsessed with buying a specific house but who just want, for example, a 3 bedroom brick house in a given suburb.

 

[robots]

hello,

if you call the current trend in property stagnate, then I would have it any day

quality property is solid across AUS

look out for 10% interest rates though, hold on

thankyou
robots

 

[Big Jim]

hello,

if you call the current trend in property stagnate, then I would have it any day

quality property is solid across AUS

look out for 10% interest rates though, hold on

thankyou
robots

10% is optimistic but I hope you are right.

 

[WaySolid]

I predict that you are totally, utterly, and completely wrong.

There's no way a $500,000 apartment in Sydney will be worth $8M in 26 years.

No way in hell.

Units have compounded at a rate several percent under houses. Your example reflect a CG rate of 11.25% so perhaps you might check your maths.

http://www.investopedia.com/calculator/CAGR.aspx

There is data going back a long way backing up these compounding figures. I have personally looked as far back as the 1850's for one of the suburbs I track (Toowong in Bris). Some of the data I have collected includes hundreds of years of pricing information and studies from such places like Norway, Holland and the US. Apparently there is data going back to the domesday book in England around, I can't verify this however as I haven't dug that deep with my research. The rule of thumb is inflation + a tad (1-2% in the long term studies) for the compounding figures. Survivorship bias is the biggest thing to consider in such long term studies, consider for example a mining town that might no longer exist, the long term CG for this town would not be so flash.

I would be interested in any research you have backing up your contention as I collect data involving historical investing as a hobby. I like to think it helps my investing but thats harder to quantify

With the age of fiat currencies I wouldn't be at all surprised if we do indeed see your 500k unit in Sydney actually priced at 8M in 26 years, but I would still lean towards a prediction based on historical compounding rates.

This following is an interesting bit of data from Barry Pickering who runs a property group called onsite direct in QLD. Predictions made late 2004, make of it what you will. His point which was very valid is how back in 1970 people would have said no way in hell Sydney property in 2004 would average above 500k and so on.

1970:
Average house price: 12k
5.5% yield
$13/week rent
$55/week average income
Rent is 23.63% of average income
Kingswood's sell for 2k
Milk cost 8 cents

2000:
Average house price: 180k
5.5% yield
$190/week rent
$780/week average income
Rent is 24.35% of average income
Commodore's sell for 30k
Milk costs $1.19

2030:
Average house price: 2.7 million
5.5% yield
$2855/week rent
$11,700/week average income
Rent is 25% of average income
Kingswood's sell for 450k
Milk costs $18

 

[WaySolid]

If we are to analyse holistically then we then must consider factors such as peak oil, environmental concerns, climate change. The American/Australian style of sprawing city is absulutely unsustainable and this will become apparent in an uncomfortably short time frame.

The farmers in my area having the worst season in living memory... climate change? Will Australia even be able to feed itself under the twin burden of expensive energy and changing agricultural conditions?

The growth in housing above inflation has been an anomoly, a statistical abberation of the post ww2 period. Over the long term there have been enourmous lengths of time where housing stagnated and/or moved down.
Most housing trend charts are conveniently truncated at the post ww2 beginning of the baby boom giving an inaccurate picture of the long term trend.

Further rises in R/E above inflation are not economically sustainable. It's been a fantastic game, but the game is over.

Hi Wayne,

Just read your post, good to see some data (well at least a graph)

It's an interesting discussion which I don't fancy getting too involved with. I can however dig up the historical data I have to show evidence for inflation + 1-2% over longer term in Holland and Norway, which would trump your data in terms of a longer time frame, what is really the statistical abberation I wonder?

I guess being flimsy machines that live not so long compared to the length of these studies it's all a bit academic perhaps.

My research in Toowong revealed how massive the Aussie RE bubble of the 80's was (The 1880's that is). It took a long time for that round of speculation to be smoothed over, perhaps it could be argued that something similar happened up till 2003 in Aus.

I have plenty more thoughts on the subject but my girlfriend is getting angry at me for wasting my time at the moment so I gotta run...

A quick cut n paste from my research about Toowong in Brisbane..

I sourced these brief notes from a book I recently read on the history of Toowong in Brisbane. AA.

1823 - Oxley first surveyed the land around the river
1841 - Brisbane was a run down penal settlement with 161 convicts and 59 free people.
1842 - Moreton Bay first opened to free settlement.

A quote from the time I particulary like.

"The Brisbane River was abundant with fish (137 species) including the now rare (of not extinct) Brisbane River Cod, one of which is estimated to weigh 36.5 kg. As the clear water, sand and shingle bottom and sandy beaches disappeared from the Brisbane River, so to did these fish and the deep swimable holes go from Toowong Creek."

Population Toowong :

1900 = 4,700
1920 = 10,000

Total Valuation of Toowong Land in Pounds

1881 = 151,619
1893 = 359,000
1895 = 285,000
1900 = 271,000
1907 = 214,000
1924 = 429,976
2003 = 2 Billion

* Represents the collapse of the 1880's land speculation bubble.

Cheers,
Andrew.

 

[wayneL]

I have a problem with the hypothesis that housing increases at 2% greater than inflation.

Lets take the starting point of a house at 3.5 x earnings.

After 20 years houses will be 5 x earnings
After 50 years houses will be 8.7 x earnings
After 100 years houses will be 23 x earnings
After 150 years houses will be 60 x earnings
After 200 years houses will be 160 x earnings
After 300 years houses will be 1,118 x earnings

Clearly this is ridiculous, and this observation, even if apperantly axiomatic during our lifetime thus far, must be punctuated by a calamatous breakdowns in said axiom. In other words the axiom is problematical.

We do see this from time to time and is evident in such markets as Japan, Hong Kong, Argentina, and the west during the great depression/WW2.

Prices will trend ever upwards so long as we have fiat currency and governments willing to debase them for short term political ends. ( and so will the measurement of inflation be understated) However, there will be oscillations in this trend around the concept of "value".

Overvaluation will elicit corrections, undervaluations will incite reactions. So it is in any market. We here on this board observe the truth of that every day.

Many believe a correction is imminent.

 

[clowboy]

WayneL,

I actually got it to be ~4.5 after 20 years but my calcs where very rough.

They also neglect to account for wage growth.

Im not sure about waysolid's 2000 avg wage either as I am pretty sure that the avg wage was/is not $40,000PA although that is based on WA Stats

Based on his stats though housing has gone from 4.19*earnings to 4.5*earnings and I would be comfortable saying that while it may not be as high as 2% housing does increase at a rate above inflation over the longer term.

I guess though that your main argument lies in the fact that the reported rate of inflation is a load of ****

 

[WaySolid]

I have a problem with the hypothesis that housing increases at 2% greater than inflation.

Lets take the starting point of a house at 3.5 x earnings.

After 20 years houses will be 5 x earnings
After 50 years houses will be 8.7 x earnings
After 100 years houses will be 23 x earnings
After 150 years houses will be 60 x earnings
After 200 years houses will be 160 x earnings
After 300 years houses will be 1,118 x earnings

Clearly this is ridiculous, and this observation, even if apperantly axiomatic during our lifetime thus far, must be punctuated by a calamatous breakdowns in said axiom. In other words the axiom is problematical.

We do see this from time to time and is evident in such markets as Japan, Hong Kong, Argentina, and the west during the great depression/WW2.

Prices will trend ever upwards so long as we have fiat currency and governments willing to debase them for short term political ends. ( and so will the measurement of inflation be understated) However, there will be oscillations in this trend around the concept of "value".

Overvaluation will elicit corrections, undervaluations will incite reactions. So it is in any market. We here on this board observe the truth of that every day.

Many believe a correction is imminent.

Ok my memory. http://www.somersoft.com/forums/showthread.php?t=24714

It turns out that it's a lot less than 1-2% over inflation (which I quoted from memory), and the excess performance is indeed in modern times (post ww2).

What you said makes sense to me.

 

[clowboy]

Interesting article in todays west (page 3). Not sure if you caught it WayneL.

Have attached the table(hopefully) that accompained the articles.

It clearly shows that the cost of housing has increased by comparison to wages over the last 60 years. From a base of 2-3*earnings to 6-26* earnings. These figures fit rather well into your cals I would think greatpig.

Also interesting to note the lack of groth in wages in the last 20 years.

Over 60 years there was growth over 400% then 740% then a mere 150% for each sub 20 year period. Also the last period includes the recent boom in housing, I wonder if this data indicates that wages are likely to increase rapidly in the near term?

Also it should be noted that the suburbs in the table are the more premium suburbs for perth but the article also contained some stats for more avg suburbs like the one I live in and in 1946 a block of land would have cost you $30 for an 1000m2, now it would cost you $250,000 for 400m2 while the avg wage has gone from $600Pa to $50,000 PA. So roughly speaking the land component of property has gone from 0.05* earnings to 12.5*earnings.

Cheers

 

[Realist]

What goes up must come down!!!

 

[Smurf1976]

The blame game is well and truly underway. More importantly, the thinking has changed from "rising house prices are good" to "how to REDUCE house prices and who to blame for them being so high".

The Prime Minister is publicly stating that high prices are a problem. If that isn't a warning of impending falls then I don't know what is. Love him or hate him, John Howard is pretty good at politics - he wouldn't be "wanting" lower prices if it wasn't likely to happen. He needs to prepare the masses to see lower prices as "good" and thus keep voting for him...

And now WA has jumped ahead of the rest by doing exactly what the PM wants by increasing land supply. Whilst WA prices will probably rise for a while yet, someone living on that new land obviously means someone NOT living somewhere else - even in another state. And of course there's a fair chance that the other states will follow in due course rather than cop too much blame. More supply, same demand - you know the story...

http://www.abc.net.au/news/newsitems/200608/s1719179.htm
http://www.abc.net.au/news/newsitems/200608/s1719352.htm

 

[Freeballinginawetsuit]

Ok my memory. http://www.somersoft.com/forums/showthread.php?t=24714

It turns out that it's a lot less than 1-2% over inflation (which I quoted from memory), and the excess performance is indeed in modern times (post ww2).

What you said makes sense to me.

Reply intended for WayneL

If a correction is immenent, why do punters camp out for days at new land releases in West Oz. You were probably considering the same in Gero ( youre home town) when land in Wandina went from 68k to 120k to 180k and finally 250k all in 2 and a half years. More so you probably didn't buy any being the Bear you are. I did on Barrett Drive, bears always dip out in the end.

 

[Freeballinginawetsuit]

Its also interesting to note the date this post commenced. Since August last year the average/decent suburb price of a home in Perth has gone up a further 100k.

 

[markrmau]

Not in all markets.

http://www.smh.com.au/news/national...-in-debt-crisis/2006/08/20/1156012414995.html