House prices to stagnate for 'years'

[Uncle Festivus]

Uncle
So basically most Superannuation is a joke!
Currently 99% of people have no hope in hell of making time let alone getting ahead!

Super has probably been the main game for the last 4 years feeding off itself returning above (real?) inflation so getting ahead in real terms?
I guess what I was trying to imply was that, yes, the general population has no idea how they are getting fleeced by inflation, and when calculating the returns from any investment, namely real estate here as it applies to stagnating prices, then it should be inflation adjusted?

So apart from Perth & maybe SEQ on average, in inflation adjusted terms, has real estate stagnated since 2004?

 

[robots]

hello,

to the average home owner living in their home, the issue of inflation is irrelevant

even most property investors couldnt care less about inflation, it makes no difference

thankyou

robots

 

[WaySolid]

Uncle Festivus, I'm no expert but I suspect your view on inflation is wrong.

My simple understanding is you are not including the growth component in your view of inflation, so you can increase supply at 14% and if growth is 10% then you only have 4% inflation. Would be happy to learn if this thinking is wrong or learn more about the subject.

Also define real terms.. Most people just think CPI as a proxy for inflation when talking this way. In terms of gold ounces, CPI units ($/latest CPI figure) and working weeks my property has powered along in Brisbane since 2004.

Robots, Have to disagree with you on that one. Inflation is linked at the hip with property, depending on your strategy it can really be a fantastic friend for the property investor as well.

There are multi century studies showing the powerful mean reversion to inflation when looking at property returns, and investing is always about inflation + premium return, which is really the sauce on your hamburger.. What makes it all worthwhile in what can be called 'real terms'.

I find the issue of real value is rarely discussed while the focus is always on the nominal returns. I track the value of my investing portfolio in Gold ounces, working weeks, teacher's salaries and Big macs! as a method to try and generate more useful info.

 

[Kimosabi]

hello,

to the average home owner living in their home, the issue of inflation is irrelevant

even most property investors couldnt care less about inflation, it makes no difference

thankyou

robots

If we knew who really are, I'm sure we'd find an article about you on http://www.jenman.com.au/

 

[Judd]

Kimosabi, robots is only a little bit partially right but probably for all the wrong reasons.

If a home owner has paid off the mortgage and intends to reside in that residence for the rest of their days, then inflation is irrelevant.

However, inflation is very relevant to people paying off the mortgage for two reasons. It is the background to interest rates payable on the mortgage (Interest=cost of money+inflation+risk) and has the effect of attrition of the value of the mortgage payment over time.

In respect of the majority of property investors they "couldnt care less about inflation" mainly because they are generally financially illiterate.

 

[gfresh]

In respect of the majority of property investors they "couldnt care less about inflation" mainly because they are generally financially illiterate.

big call there.. I think many property investors would have a very good understanding of economics. But I guess too many are blinded by the simple affirmation 'house prices always rise' - and don't consider the broader issues.

 

[chrisdedavid]

Judd, you're a smart cookie

If anyone wants to learn about property investing, there is a guy called Steve McKnight who is an Australian Property investor, started from Melbourne and has wrote at least one book that I have "From 0 to 130 properties in 5 years"

 

[Kathmandu]

Hi all, new poster here and am amazed at the length of the thread and the amount of Doom and Gloomer's and dissbelievers here.

Would I be correct in thinking that a lot of you infact took krisbarry's advice a few year's back and did not buy property and missed the boat so to speak.

I note that Kimosabi is from Perth [apparently].

Did you miss out Kimosabi ???

Have you not seen evidence of a boom???

D

 

[robots]

hello,

yes thats right, some-one living in their own home for 10, 20, 30 or more years inflation is irrelevant even with a mortgage, and we are talking a straight out mortgage

you take mortgage of 250k in 2007 and pay it down by 2032

a hairdresser, supermarket worker, accountant or building worker income and what they can buy is critical

most people have to have a roof over their head, rent or mortgage, typically after 6-7 yrs, rent of equivalent property would equal payments of mortgage & outgoings

how are prices looking in Aus?

thankyou

robots

 

[gfresh]

Seems like this is going to be a hot election issue. Keep hearing it every day, in every form of media. Rudd seems to be missing the mark really.. and nobody is really willing to acknowledge the fundamental problem of reducing demand. Instead, apparently if you make it easier to get into the housing market, this reduces demand

http://www.theage.com.au/news/opini...ft-the-building/2007/07/11/1183833595640.html

Of course, the short-term effects would be catastrophic to investors, although you only have to look at what incentives are provided for housing investment at the moment. Even a more simple solution such as allowing equal 100% tax deductions for capital loss on share investment, rather than the current offset system - could encourage a great change in where money was distributed.

 

[Smurf1976]

Would I be correct in thinking that a lot of you infact took krisbarry's advice a few year's back and did not buy property and missed the boat so to speak.

My personal concern is simply that most people ultimately lose from inflation. And inflation is exactly what the property boom is all about - INFLATION.

Now we're starting to see real pressure on non-housing consumer prices. Everything from milk to electricity is threatened with substantial "overnight" rises and no offset. Same milk, same power but you pay more for it.

Next it will be business screaming when the big wage demands start. That's the only non-house price crash answer to the affordability problem (unless you count living in a shoe box) and most know it whether they admit it or not.

Then business will scream something about not being able to afford massive pay rises (at least partly true). Then the economy sinks - all thanks to the wonders of debt fuelled inflation.

Inflations historically end in tears and I see no reason whatsoever as to why Australia in 2007 is in some way special and exempt from the fundamental principles which apply everywhere else. Inflations do not end well for most people.

Personally, I'm invested in things that are quite profitable. Certainly doing better than real estate has done over the past 4 years. My concern is thus for the social and broader economic damage the housing situation will bring rather than any missing of boats. I suspect at least some others will be thinking likewise.

That said, I'm actually about to purchase some real estate. Just one house, to live in, but real estate nonetheless. And guess what? The last thing I want to happen after I buy is another boom. Do the sums, think about it and you'll know why (hint - I'm not about to be a "last home seller", real estate agent, developer or government).

 

[Kathmandu]

Personally, I'm invested in things that are quite profitable. Certainly doing better than real estate has done over the past 4 years. My concern is thus for the social and broader economic damage the housing situation will bring rather than any missing of boats. I suspect at least some others will be thinking likewise.

That said, I'm actually about to purchase some real estate. Just one house, to live in, but real estate nonetheless. And guess what? The last thing I want to happen after I buy is another boom. Do the sums, think about it and you'll know why (hint - I'm not about to be a "last home seller", real estate agent, developer or government).

But there have been a lot of people that have made a lot of money from property over just not the last 4 years, but over all time.

In the last 4 years property has gone through the roof, just like share's, if you brought the right stuff.

Just like mining stock, think WA, Mackay, Townsville ,Rockhampton , Darwin and Gladstone.

Some of these have gone up 30% per year for the last 4 year's with rent increases to match.

I honestly don't understand your last comment about not wanting your property to go up in value as the same annalogy can be used for stock.

Prices drop and the panickers rush for the exit and some get caught holding the bag.

The bold and smart few have reserves to buy more at the same time and pick up a bargain reaping the reward's in the next cycle.

Dave

 

[robots]

hello,

things are rollin' on nicely, 89% clearance in Melb over the weekend

hot hot hot, the rises people are experiencing is awesome

think a lot of the money is coming from family, inheritance, wills etc

with many couples purchasing existing property as opposed to a new house in new estate

look forward to the future

thankyou

robots

 

[TjamesX]

hello,

things are rollin' on nicely, 89% clearance in Melb over the weekend

hot hot hot, the rises people are experiencing is awesome

think a lot of the money is coming from family, inheritance, wills etc

with many couples purchasing existing property as opposed to a new house in new estate

look forward to the future

thankyou

robots

nice ramp robots...

happened to be checking out the homepriceguide sales from the weekend as well.....and of the 16 houses listed for auction.... 14 sold, so yes that would make a clearance rate of 88%. I have no idea why there were so few houses listed - but its hardly statistically relevant, and hardly time to start calling for another boom

I'm not saying prices have to go down, but lets not kid ourselves what the boom has been driven on.... debt. Not income, not productivity, good old 100% no doc, low doc heaven and low interest rates.... sure prices can rise, theoretically until 100% of our income goes to interest payments...

If you think the US is the only one with a problem, think again

 

[wayneL]

nice ramp robots...

happened to be checking out the homepriceguide sales from the weekend as well.....and of the 16 houses listed for auction.... 14 sold, so yes that would make a clearance rate of 88%. I have no idea why there were so few houses listed - but its hardly statistically relevant, and hardly time to start calling for another boom

I'm not saying prices have to go down, but lets not kid ourselves what the boom has been driven on.... debt. Not income, not productivity, good old 100% no doc, low doc heaven and low interest rates.... sure prices can rise, theoretically until 100% of our income goes to interest payments...

If you think the US is the only one with a problem, think again

Exactly!

And with a credit crunch just breaking from the starting gates...

 

[Awesomandy]

I've been looking at properties for a while now, and it seems to me that there are quite a few people looking to buy at the moment, especially new home owners who fear that not buying during the trough now would mean they will miss out on owning a home forever. Combine that with the fact that credit is still quite cheap and easily obtained, it looks like the housing market will, sooner or later, do what the share market has done last week - risks being re-priced. And, when that happens, we might just as well find a few people with negative equity, unfortunately.

 

[Smurf1976]

I honestly don't understand your last comment about not wanting your property to go up in value as the same annalogy can be used for stock.

The answer is simply that I'm not expecting to be a net seller of real estate for a long time to come. If I chose to trade up to a better property in 10 years time then I would be worse off if prices had risen.

Let's do some math...

2007 I buy a property valued at $300K and decide in 10 years time to trade up to a property valued at, in today's dollars, $400K. It costs me $100K plus stamp duty etc to make the swap.

But let's say house prices have doubled in that 10 years. I sell the existing one for $600K and buy the new one for $800K. It now costs me $200K plus stamp duty etc to make the swap.

The price of the existing house having gone up only benefits me if I sell it and either buy a cheaper property or rent. That's not what most are likely to do.

Think about it. I have enough money now to buy a certain house. In 10 years time that house has doubled in price. If I sell it then that doubling in price means I can buy... another identical house. I'm no better off.

Consider if car prices all doubled. I could sell my 2000 model car for enough cash to buy, in today's dollars, a brand new one. But with the new one also having doubled in price, I don't gain a damn thing on my existing asset. Meanwhile anyone looking to trade up or buy their first car has massively lost. An awful lot of people trade up their cars...

To benefit from the price of something going up then you need to be in the business of selling, rather than buying, whatever it is that has gone up. Those who are net sellers of housing (eg developers) benefit from rising prices just like the Arabs benefit from a higher oil price. They are sellers of the commodity.

But those buying their first home or trading up to a larger property lose when prices rise, just like those filling the tank with more expensive petrol aren't happy to see the price going up.

I think the greatest problem with real estate is that most people don't seem to have done the math to see how the price changes affect them personally. I'd be surprised if 1 in 100 people have given it any serious thought.

How, exactly, does the average family that just wants a roof over their head gain from higher prices? I can see how the banks, developers, builders, real estate agents and governments gain. But how does the home buyer gain? They buy the same house but pay more for it and then they pay interest on a higher debt.

 

[theasxgorilla]

but lets not kid ourselves what the boom has been driven on.... debt. Not income, not productivity, good old 100% no doc, low doc heaven and low interest rates....

I profoundly disagree with this and think blaming low interest rates and lending standards for this boom will cause you to miss some of the actual factors that drove the boom. The factors you mention, particularly the lower lending standards, came in much later and have helped the banks keep the ball rolling and have probably turned the situation into a Ponzi scheme we see now...but at the beginning it wasn't this.

And if you want to talk about low lending standards, take a look at how Steve McKnight made a fortune in the late 90's early 2000's lending to people that the banks refused to give credit to at 2-3% above the fixed bank rate. I believe low-doc loans arrived in response to "wrappers" like McKnight, BTW, but thats another story.

Children of the baby boomers reaching some level of maturity and entering the work force and then buying houses started the property boom back in the mid-to-late 90s.

People say that through supply/demand economics population increases ought to drive house price rises. But we also know that our population hasn't doubled when house prices did. What can and I believe did happen is that the internal demographics of the population changed around the mid-90s. The 2.3 kids that each baby boomer produced became 2.3 extra property owners. This is a situation of supply outstripping demand. Yes, interest rates made the fruit low enough to pick, but it wasn't the core driving force.

Then you have the PC and Internet revolution making many people very rich. Low interest rates also encourages money out of savings into investment or consumption eg. buy a new PC, a big screen TV, the new Commodore, house to live in, an investment property etc. "dotcom" was a bubble in the end...but there was also real actual wealth created. Hard to differentiate the two or even determine the proportions, but it was real. Income, therefore, also drove property prices into the late 90's and early 2000's. In inner and middle suburbs initially, where the IT consultants, and the business owners and the finance people lived...then the outer suburbs and apartments when they all started buying investment properties to save tax (remember, the 48.5% tax rate kicked in at $50k back then...you had to invest in property or give away nearly half your income in tax).

Then you had income tax cuts, a rising share market, skilled labour market shortages due to commodity price led mining boom, and subsequent wage increases in many core and ancillary industries...all this means more disposable income in the hands of people who want to buy property. With standard variable rates up around 8% in Australia surely you have to find a few more good reasons why property is still going up??

 

[tech/a]

ASX nice piece---all of it!

How, exactly, does the average family that just wants a roof over their head gain from higher prices? I can see how the banks, developers, builders, real estate agents and governments gain. But how does the home buyer gain? They buy the same house but pay more for it and then they pay interest on a higher debt.

Smurf.
Securing a first home 30/20/10 years ago or today means that you AT THAT TIME have an asset which by and large will keep pace with similar assets.As you point out ---on its own you just mark time.
The benifits are that in 10 yrs time it will appear cheap and the cost of ownership will be less than those starting in that 10 yrs time.

In 10 yrs time (But I'll call it X years time.) there will be a time when established housing is far cheaper than new housing----its happened 3 times in my 50 yrs that I can recall.This balance will return to the mean by seeing housing prices rise.As it did from 1996-2002 in general terms---and in some cases still is.

This is the time where those who have a home can use the Equity gained in the last X years to buy I/Ps that will also rise exponentially,simply continue to do the same thing,equity--purchase I/P or as time goes by 2 or 3 etc.
Then 1/3 years after the boom you get a second bite with Industrial and Commercial property.Tennent pay the Interest which we claim anyway and we pocket the Capital Gain.
Reading up on McKnights "Wrapping" is enlightening and I know a few of my clients (Re building work) who followed suit to a lesser degree.Have done well--not as well as a sole investor but less risk.Works even better in flat times.

Careful Forward Planning will put people in a position in which they can take advantage of these anomolies---both in Property/Trading and in some cases business.

There ARE clear cut goal posts of pending opportunity in ALL fields,trick is to be able to
(1) Recognise pending opportunity
(2) Know what to do to take advantage of it.
(3) DO IT

Personally, I'm invested in things that are quite profitable. Certainly doing better than real estate has done over the past 4 years. My concern is thus for the social and broader economic damage the housing situation will bring rather than any missing of boats. I suspect at least some others will be thinking likewise.

So am I BUT are you or I investing the sort of $s that most invest in Realestate?
For me its less than 10% of my Capitalised Real estate holdings.
Here in lies the difference between mediocrity and stellar performance in ALL fields of investment
DOING IT.

 

[TjamesX]

Well I profoundly agree to disagree!

I profoundly disagree with this and think blaming low interest rates and lending standards for this boom will cause you to miss some of the actual factors that drove the boom. The factors you mention, particularly the lower lending standards, came in much later and have helped the banks keep the ball rolling and have probably turned the situation into a Ponzi scheme we see now...but at the beginning it wasn't this.

But seriously I do agree that there were some fundamental reasons for the start of the boom, I'm not saying houses were not undervalued in the late 90's they were a good buy, add to that halving of capital gains tax, a growing economy with stable inflation, and a shift of money away from equities to real estate after the tech boom.

However I would debate that part of the initial spark for the worldwide appreciation in real estate was lit by easing fed policies throughout the world in response to the tech bust and subsequently september 11 (specifically the US) - Note that the RBA decreased the cash rate by 2% in 2001 when house prices were already running very fast

Initial fundamentals were amplified by easy fed policy (that assumes house price appreciation is not inflation) and continued to be facilitated through easy lending (in late 2002, 2003) and competition to lend people money since then.

Prices can be bid up through transactions of a relatively small % of houses (even if they are bid up on fundamentals) which requires little money, but over time they have to be supported by the weight of the whole market - this requires a lot of money, which is currently being funded mostly by debt (not savings or income)

And if you want to talk about low lending standards, take a look at how Steve McKnight made a fortune in the late 90's early 2000's lending to people that the banks refused to give credit to at 2-3% above the fixed bank rate. I believe low-doc loans arrived in response to "wrappers" like McKnight, BTW, but thats another story.

I Agree with this. Banks have been overly conservative in the past, I assume partly in response to some of them almost going bust in 1990's. However I believe the worm has well and truly turned the other way at the moment. S McKnight made his furtone buying undervalued (on fundamentals) property and watching them appreciate - wrapping helped the cashflow and accelerated the process... he is a very good investor

Children of the baby boomers reaching some level of maturity and entering the work force and then buying houses started the property boom back in the mid-to-late 90s.

Well I'm a child of a baby boomer but I was in my early to late teens at that time - and wasn't buying??

People say that through supply/demand economics population increases ought to drive house price rises. But we also know that our population hasn't doubled when house prices did. What can and I believe did happen is that the internal demographics of the population changed around the mid-90s. The 2.3 kids that each baby boomer produced became 2.3 extra property owners. This is a situation of supply outstripping demand. Yes, interest rates made the fruit low enough to pick, but it wasn't the core driving force.

That assumes each baby boomer kid buys a house by themselves (currently not happening amongst my peers) and does not shack up with other baby boomer kids (in marriage) to form a two person household??

Don't agree with this - population growth provides the fundamentals for a specific house over time to increase faster than wage growth (as the status of the house changes over time due to expanding city). If population growth didn't occur then fundamentals would be supplied by wage increases and/or decreasing hosuehold density.

Demand for quality houses is always there, price is what limits people on an average wage not to buy on Sydney Harbour. The fruit always gets picked, just depends what price it gets picked at.... interest rates and lending policies are allowing fruit to be picked at a price (whether that is good for the people doing the fruit picking or not).

Then you have the PC and Internet revolution making many people very rich. Low interest rates also encourages money out of savings into investment or consumption eg. buy a new PC, a big screen TV, the new Commodore, house to live in, an investment property etc. "dotcom" was a bubble in the end...but there was also real actual wealth created. Hard to differentiate the two or even determine the proportions, but it was real. Income, therefore, also drove property prices into the late 90's and early 2000's. In inner and middle suburbs initially, where the IT consultants, and the business owners and the finance people lived...then the outer suburbs and apartments when they all started buying investment properties to save tax (remember, the 48.5% tax rate kicked in at $50k back then...you had to invest in property or give away nearly half your income in tax).

Agree, so fundamentally you're saying wage and income increase (+ employment growth) allowed people to bid up prices. The funny thing is real average wages have gone nowhere for a long time

Then you had income tax cuts, a rising share market, skilled labour market shortages due to commodity price led mining boom, and subsequent wage increases in many core and ancillary industries...all this means more disposable income in the hands of people who want to buy property.

Agree this has kept it going (especially at the high end). But again on average this is not being reflected by significant average household income growth

With standard variable rates up around 8% in Australia surely you have to find a few more good reasons why property is still going up??

Well in a word.... on average..... increasing volumes of debt

and 8% home loans in a historical sense are still very cheap...

IMO

TJ