Returns on real estate

[luutzu]

Interestingly present time, it is hard to comprehend multiple house prices compared to the past. My dad sold his low quality home for 7 times the bought price. It is hard to imagine that multiplying again for 2.1 million dollars in 30 years. As SKC noted it is inflation that skews the numbers to seem phenomenal wealth is being created when everything of worth has gone up in price too.

It's not just inflation with the current property prices.

Inflation-only would bring the median property prices in Sydney - around $120k? - some 30 years ago to be about $518k if we take inflation at 5%p.a. all those years.

Median house prices in Sydney now is some $1.2m?

Won't end well.

 

[Value Collector]

It's not just inflation with the current property prices.

Inflation-only would bring the median property prices in Sydney - around $120k? - some 30 years ago to be about $518k if we take inflation at 5%p.a. all those years.

Median house prices in Sydney now is some $1.2m?

Won't end well.

Inflation + population growth (add 2% to your 5% inflation figure and see how much that changes it)

both create upward pressure.

Eg,

even in a world of zero inflation, the population growth would have caused prices to rise

even in a world of zero population growth, inflation would have caused prices to rise.

 

[luutzu]

Inflation + population growth (add 2% to your 5% inflation figure and see how much that changes it)

both create upward pressure.

Eg,

even in a world of zero inflation, the population growth would have caused prices to rise

even in a world of zero population growth, inflation would have caused prices to rise.

But won't most property prices ultimately be dictated by the buyer's ability to pay for them?

I don't think property, with maybe a few exceptions in the likes of Point Piper or some place, I don't think they can sustainably grow at that 7% of inflation+population growth.

I mean, if that were to happen the current median property in Sydney will grow from $1.2m to $4.6m in 20 years.

Unless wages grow at a couple of percentage point above that too, I don't see how the median income Sydney barbarians can afford it. So they will either rent in ever smaller rooms, buy a tiny apartment to raise a family... or pressure will be put on politicians to release new land... or prices will have to drastically be corrected.

The last two are most likely to me. Particularly further out a bit from Sydney CBD, say 20km out.

Then there's the death and dying problem. We will all go there... can't take it with us. Potential land release, apartment glut coming... no new population growth as high private debt will naturally curb that dream too.

Heard someone quoting a famous book on the GFC saying that during the boom in the US... for every $1 gained in property prices, Americans borrowed $0.40. I don't know the figures for Australia, but from a couple of anecdotal experiences, people with a few properties do kind of splurge a bit lately.

 

[Value Collector]

But won't most property prices ultimately be dictated by the buyer's ability to pay for them?

I don't think property, with maybe a few exceptions in the likes of Point Piper or some place, I don't think they can sustainably grow at that 7% of inflation+population growth.

I mean, if that were to happen the current median property in Sydney will grow from $1.2m to $4.6m in 20 years.

Unless wages grow at a couple of percentage point above that too, I don't see how the median income Sydney barbarians can afford it. So they will either rent in ever smaller rooms, buy a tiny apartment to raise a family... or pressure will be put on politicians to release new land... or prices will have to drastically be corrected.

The last two are most likely to me. Particularly further out a bit from Sydney CBD, say 20km out.

Then there's the death and dying problem. We will all go there... can't take it with us. Potential land release, apartment glut coming... no new population growth as high private debt will naturally curb that dream too.

Heard someone quoting a famous book on the GFC saying that during the boom in the US... for every $1 gained in property prices, Americans borrowed $0.40. I don't know the figures for Australia, but from a couple of anecdotal experiences, people with a few properties do kind of splurge a bit lately.

The price of each "dwelling" will be dictated by the ability to buy or rent it.

But more and more dwellings are being put onto the land.

Eg, a median home used to sit on a 1/4 acre block of land, but if a developer is going buy that 1/4 acre block and then put 6 new dwellings on it, then the price of that 1/4 acre can grow faster than the wages that people would intuitively think limits its price.

 

[Toyota Lexcen]

What amazes me is what the big 4 Ausi banks have done in the last 10 to 15 years, compared to the house prices and expansion of the housing market in general.
It's ridiculous how badly they have done in comparison. Maybe their not really funding much of it at all?
ANZ hit $30 in 2006, today 30
WBC hit $30 in Sept 2007, today 32
NAB hit $30 in May 2001!!!! today 30
CBA hit $62 Sept 2007 today 84 not so bad, but hardly has the whole market. Nor is it 130 which it should be if it kept up with price growth in the housing market.

yes just amazing, your capital has gone nowhere, property could drop 10,20,30% and still be well ahead of share investment

 

[luutzu]

The price of each "dwelling" will be dictated by the ability to buy or rent it.

But more and more dwellings are being put onto the land.

Eg, a median home used to sit on a 1/4 acre block of land, but if a developer is going buy that 1/4 acre block and then put 6 new dwellings on it, then the price of that 1/4 acre can grow faster than the wages that people would intuitively think limits its price.

Yea that's true. And I agree with you that if a block can be made more "useful" or productive than just a single house etc., it'd be more valuable.

But the average $1.2m block nowadays are still nowhere near the kind of zone council or nsw gov would permit that kind of density.

There's not the need for it outside a 500m or max 1km radius of only the few very busy/inner city stations. And maybe crowds around one or two bigger shopping centres in each suburb.

Besides that, the most that council would allow would be a duplex/triplex subdivision if each block is over 450m2 [fairfield council, depend on density zoning]. And the subdivision may have other requirements that will add $50k just like that.

There's the stormwater easement required if the land slopes backwards. If the neighbour permit you, it'll cost you at least $30k just to get that permission. Then construction costs and other fees and charges.

So if we take that average block in suburbia, zoned for medium density [r2?], costs $1.2m and we split it into a duplex. The costs to design, plan and construct the two double-storey duplex within the Floor Space Ratio permitted by most councils [45% to 50% of land]... totals would be around $600k easy.

After a year's work, interests etc., an investor would need to flock them off for at least $2m total to break even.

Closer to the city, maybe a young couple can afford it.

In suburbia where most earn about $50k to $60k a year working in the trades or a factory... I just don't see it happening all that much.

----

But say an investor buy $1.2m and rent it out. Most of those $1.2m detached houses are 3-bedrooms... some even just 2.

Say they put in another $100k to build that granny flat. Maybe get creative, put in another $100k for an "extension"... turning that single property into 3.

Assume the neighbours don't complain and all goes well, rental would be say $400k a week on average for each... that's $1200x52 = 62/(1200+45k stampduty +$200k) = 62/1445 = 4.3% return a year.

I guess there's all that negative gearing and tax plays...

For my money, I'd put the cash in the bank (or some good stocks) and save all the stress of buying and managing the construction.


That's not saying that property is a bad investment... just at current prices, I just can't work out how it can be a good investment. Maybe if it halved and I still have cash.

 

[Value Collector]

But the average $1.2m block nowadays are still nowhere near the kind of zone council or nsw gov would permit that kind of density.

.

It doesn't have to be.

As the developers buy houses on 1/4 Acre blocks and demolish them to build town houses or Apartments, it reduces the total number of detached houses sitting on 1/4 acre blocks, so the remaining stock of houses (even those away from development) will have their prices bid up by the people on higher incomes that don't want to live in Apartments.

You also have demographic factors.

Not only has the population grown, but the number of people in each dwelling has reduced.

You have elderly living longer, so you have a bunch of 3 bedroom houses being tied up by single elderly people who want to stay in the family home.

You have smaller families, So where as 5 people used to live in every house, now it might be average of 2 or 3 so even though population might have grown by 50%, demand for dwellings has grown 100%.

There's the stormwater easement required if the land slopes backwards. If the neighbour permit you, it'll cost you at least $30k just to get that permission. Then construction costs and other fees and charges.

So if we take that average block in suburbia, zoned for medium density [r2?], costs $1.2m and we split it into a duplex. The costs to design, plan and construct the two double-storey duplex within the Floor Space Ratio permitted by most councils [45% to 50% of land]... totals would be around $600k easy.

After a year's work, interests etc., an investor would need to flock them off for at least $2m total to break even.

These costs increase prices, they don't reduce them.

 

[luutzu]

It doesn't have to be.

As the developers buy houses on 1/4 Acre blocks and demolish them to build town houses or Apartments, it reduces the total number of detached houses sitting on 1/4 acre blocks, so the remaining stock of houses (even those away from development) will have their prices bid up by the people on higher incomes that don't want to live in Apartments.

You also have demographic factors.

Not only has the population grown, but the number of people in each dwelling has reduced.

You have elderly living longer, so you have a bunch of 3 bedroom houses being tied up by single elderly people who want to stay in the family home.

You have smaller families, So where as 5 people used to live in every house, now it might be average of 2 or 3 so even though population might have grown by 50%, demand for dwellings has grown 100%.

I gotta think a bit about that one.

I guess it is true. But then that would only be if we think about it on a purely economic or able-to-afford [what's the neat word for that? ] point of view. I mean there are speculators who buy not because they are making returns from the rental yield, or buy a house because they can afford to and thinking of holding long-term. There are people who buy on speculation that "soon" they can flip it for a lot more.

So that speculation would also drive up prices, not simply demand/supply and enough firepower.

Then there's that death and deceased estate factor too. Japan got into a lot of trouble back in the days when they over-build [to meet demand]... Then I'm guessing those who buy can't afford to have too many children, then soon enough a generation passes and they have that perfect storm of high supply, high private indebtedness, sluggish economic growth due to scaled down in consumptions [due to need to repay the mortgages].

But yea, property as an investment never really make much sense to me. I mean a person should have a home, maybe another property if they can afford it. But property as an asset class doesn't make much sense unless you have cash and it's a why-not kind of thing.

[stormwater easement, subdivision etc....]
These costs increase prices, they don't reduce them.

I think those are just sunk cost. The owner might want to charge more but unless there's a property boom, forget about it. They might be lucky to spent all that cost just to bring the property value up to par with a similar property with better Feng Shui.

 

[Value Hunter]

Shares are better than property in most regards. The real reason to invest in property is the borrowing power and the interest rates on property mortgages. If you want to borrow to invest in shares e.g. Margin loan, the LVR will be much lower and the interest rates you pay much higher and there would be the risk of a margin call. Other ways for leveraging into shares such as options, etc typically have expiry dates. I have invested in both so I am not biased.

 

[Value Collector]

I mean there are speculators who buy not because they are making returns from the rental yield, or buy a house because they can afford to and thinking of holding long-term. There are people who buy on speculation that "soon" they can flip it for a lot more.

Yeah, But that happens with shares, commodities, cars, antiques, foreign currency you name it.

But yea, property as an investment never really make much sense to me. I mean a person should have a home, maybe another property if they can afford it. But property as an asset class doesn't make much sense unless you have cash and it's a why-not kind of thing.

are you talking all property or just residential?

Because you would be hard placed to operate any business without at least some property, and the people running the business don't always have the capital or the desire to own the property them selves.

Eg, Woolworths and Coles rent most of their stores, Some farmers rent their farms, hotel operators often lease their hotels.

I think those are just sunk cost. The owner might want to charge more but unless there's a property boom, forget about it.

Prices are affected by supply and demand, right.

So anything that increases the cost of building new supply, is going to be passed through.

For example, most developers are pretty switched on to all the costs they face, they aren't going to start new projects until the market price of the finished product is higher than the cost.

So there is a whole lot of potential supply that sits un developed because of the input costs are to high to justify the project.

If you eliminate a bunch of costs, more projects would be done and the market prices would adjust lower.

 

[Value Collector]

Shares are better than property in most regards.

I agree, the return on equity you can get in a good business is generally much better than property.

But, property is much better than cash or gold.

I see property as a place to hold capital, where it will earn a return similar to government bonds, but where the capital and income is protected some what from inflation.

I see it as a bit like gold, but better because it produces income.

 

[Toyota Lexcen]

property is far better than shares, look at the previous post about the bank shares (supposedly well run top20 companies)

capital has gone nowhere in ten years versus medium prices in capital cities

 

[Value Collector]

property is far better than shares, look at the previous post about the bank shares (supposedly well run top20 companies)

capital has gone nowhere in ten years versus medium prices in capital cities

I don't won't to get into the whole shares vs property debate because its been done.

But the people who often state property is better are not looking at the full picture.

they often forget 2 things things.

1, They don't include dividends in their calculations, which often include a tax credit and are net income after cost

2, They include the rental income of the property, which is before costs, and a portion of this rental income must be reinvested to maintain the value of the property.

So when you say the median prices of houses has risen, Part of this is due to some of the rent being used to keep the property in good condition.

However, 100% of the dividends from the shares has been available to the shareholders as income, e.g. CBA went from $12 to $80 over the last 20 years, with out requiring the investor to add back his dividends to maintain it.

So if you bought a CBA share in 1996 for $12, you would have been paid $50.50 in dividends, along with $20.21 in franking credits, and you now have an $80 share.

So $12 grew into atleast $150.70 worth of value (actually a lot more if you reinvested the dividends over that time), you would struggle to find a property that provided that sort of gain.

 

[Toyota Lexcen]

be interesting to what happens in the next 10yrs,

 

[Value Collector]

be interesting to what happens in the next 10yrs,

It always comes back to return on equity, business in general has a better return on equity, so over time, through all the fluctuations, it should deliver a better result for the share holder, provided it is not purchased a silly price to begin with.

I own property as well, I am not saying its bad.

 

[Value Collector]

What amazes me is what the big 4 Ausi banks have done in the last 10 to 15 years, compared to the house prices and expansion of the housing market in general.
It's ridiculous how badly they have done in comparison. Maybe their not really funding much of it at all?
ANZ hit $30 in 2006, today 30
WBC hit $30 in Sept 2007, today 32
NAB hit $30 in May 2001!!!! today 30
CBA hit $62 Sept 2007 today 84 not so bad, but hardly has the whole market. Nor is it 130 which it should be if it kept up with price growth in the housing market.

They haven't actually done to bad, NAB is the worst, but it has paid out about $34 in dividends and about $14 in franking credits since 2001, So any investor that paid $30 for hasn't had a star result, but its not a terrible result, compounding the dividends would give you a return of over 7%, not bad for the dog example.

The others have performed much better, the numbers you quoted e.g. 2006 and 2007 include the peak from just before the GFC, if you took prices from either 2 years before or after that you would get a much better result.

looking at a 20 year period, that includes the full lead up to the GFC, the crash and recovery, the results are very good, much better than property.

 

[Toyota Lexcen]

The capital has gone nowhere, even if you put +- 2yrs into it compared to median prices

And yes you have to deal with the GFC, trump, govt regulation, boards, asian crisis, poor management, crook traders

If you bought house with cash back in 2001 you get a "dividend"?

Great discussion, a lot of theory

 

[Value Collector]

The capital has gone nowhere, even if you put +- 2yrs into it compared to median prices

Which capital are you talking about? as I said CBA since 1996 went from $12 to $79, and paid out about $70 of dividends and franking credits.

But since 2005

ANZ went from $17 to $30
WBC went from $18 to $32
CBA went from $32 to $79 (the star)
NAB went from $27 to $30 (the Dog)

All while paying gross dividends totalling the entire purchase price,

When it comes to 5 year compounded returns,

ANZ is 10.2%
WBC is 12.4%
NAB is 11.6%
CBA is 13.7%

Again that a very good return, it's just the 10 year figure that looks mediocre, because as I said thats where the GFC was, you may very well find that property prices become over valued at some stage (maybe now) and when you look back at the peak in 10 years you will also get mediocre 10 year figures.

If you bought house with cash back in 2001 you get a "dividend"?

Yes, but you don't get to keep all that "Dividend", you have to use a lot of your rent to pay expenses and maintain the property, and there is no franking.

Where as 100% of the dividends paid by the banks has been the shareholders to keep, especially because of the tax credit.

 

[Joules MM1]

(counter balance "2018 offered one of the best opportunities for real estate purchases since 2008"):

SYDNEY (Reuters) - Australian home prices skidded nearly 5 percent in 2018, marking their worst year since 2008, led by tighter credit conditions and waning investor interest, and analysts expect the weakness to persist this year.

https://www.reuters.com/article/us-...3695&utm_medium=trueAnthem&utm_source=twitter

 

[SirRumpole]

Negative gearing should exclude wealthy property investors from tax breaks: AHURI

https://www.abc.net.au/news/2018-03-07/report-reveals-new-negative-gearing-proposal/9519586