Sydney house prices due for 87 style meltdown?

[aleckara]

Suddend drop of demand will do the trick.

What will do the trick is affordability, particularly for low income areas. That's where it will start if it does, and if prices go down in low income areas then expect the problem to spread later to higher class areas. It depends a lot on many factors though.

All the same I'm happy to wait for now. I definitely feel that houses are overvalued atm and there are signs that people on current real wages can not take anymore debt strain. In other words no one to finance my capital gain.

I see money supply increasing; I don't want to jump in and finance the profits of generations before me.

Besides why do that when I can enjoy myself for awhile? When and if the market picks up again and is on a 'trend' I can jump in. Sure maybe a little bit higher but then I have more certainity in regards to the investment.

EDIT: If I don't see incomes rising (due to economic conditions deteriorating) or debt levels being able to be increased even in times aplenty then where is my capital appreciation going to come from?

 

[Glen48]

Bank card debt is still going up but are home owners using it to make house payments or buying Plasma TV's?

 

[Beej]

Sorry the title and content of this thread confuses me. In 1987 and 1988 Sydney house prices MORE THAN DOUBLED! That's not a meltdown folks....

In 1989/1990 they pulled back by about 10%-20%-ish depending on the area, then had a basically flat year in 1991, then started heading up again in 1992 onwards.

In terms of where we are at right now (late 08), I believe we are around late '89 or early '90 by the '87 Sydney property clock.

Cheers,

Beej

 

[pepperoni]

In terms of where we are at right now (late 08), I believe we are around late '89 or early '90 by the '87 Sydney property clock.

I would consider this a real possiblity, but then how do you reconcile being well into 10-20% falls with all the amazing sales you are seeing

 

[white_goodman]

is it true in 87 there was a vast supply of housing on the market? (i know this to be true for commercial) cos atm we arent seeing the large amount of supply on the market..


comparing apples with oranges perhaps?

 

[alwaysLearning]

The way I see it, prices for housing will come down. Global Recession is on the cards at the moment.

 

[cuttlefish]

Sydney seemed to have its run earliest - peaking around 2003 in terms of hype - and doesn't seem as overheated now as it was a few years ago. Vacancy rates have tightened pushing up rents and making yields a bit more realistic though still fairly low by historical standards. I still can't see prices going anywhere but flat to downward over the next few years unless we get some sort of inflationary scenario.

The level and pace of decline depends a lot on how well Australia weathers the US/European fallout - which also ties to consumer confidence and job security.

In 1987 I think we were leading the race in leverage and stupidity with "Bondy" winning America's cups and outbidding the rest of the world for Picasso's etc. I think our big 4 banks still have some corporate memory from those days so hopefully they've been a bit more prudent this time around.

I'm not so sure with the smaller banks and building societies/credit unions and also worry about the quality of loans written by the banks via third party mortgage brokers - but I don't think we've been anywhere near the level of excess of the US.

 

[Beej]

On rent returns, you guys all realise that for an owner-occupier a rental return rate of say 4% or better beats having your cash sitting in the bank (earning say 7.5% BEFORE TAX) and renting the equivalent house right?

This is because you have to pay tax on any $$$ earned from cash in the bank at your top marginal rate (40% pr 45% for high income earners). Rent has to be paid with AFTER TAX income. In Sydney rent returns are for most area's past the 4% point. So an owner with no mortgage, or who is thinking ahead towards their position when they have paid off the mortgage, is in a very strong position right now in terms of "return" on their investment at it's current value, and would be worse off if they sold and rented instead. That only becomes more tha case if you think prices are going to fall (which is of course why they won't!).

CHeers,

Beej

 

[Nyden]

On rent returns, you guys all realise that for an owner-occupier a rental return rate of say 4% or better beats having your cash sitting in the bank (earning say 7.5% BEFORE TAX) and renting the equivalent house right?

This is because you have to pay tax on any $$$ earned from cash in the bank at your top marginal rate (40% pr 45% for high income earners). Rent has to be paid with AFTER TAX income. In Sydney rent returns are for most area's past the 4% point. So an owner with no mortgage, or who is thinking ahead towards their position when they have paid off the mortgage, is in a very strong position right now in terms of "return" on their investment at it's current value, and would be worse off if they sold and rented instead. That only becomes more tha case if you think prices are going to fall (which is of course why they won't!).

CHeers,

Beej

If said person is saving specically for a house ... no longer the case
Look up the first home buyers savings account ... I could be wrong though It's either taxed at a flat 15%, or not taxed at all; seems rather unclear.

At any rate, I personally wouldn't use it simply because it's locked up for 4 years, there's a cap, and it can only be used for one purpose. The market would generally offer higher returns over 4 years ... imo

 

[Glen48]

IF you own a house outright which is going down in value why not cash it in and buy back later IF you think the market has bottomed.
Mortgage insurance is now paying out 446 Million PA compared to about 46 a few years ago.
It is always better to rent than to buy.
If the USSA share market can affect us here over night and 12 senators in USSA can decide on the World economy why won't OZ houses fall?
In Los Vegas they are forclosing on 250 house a day and casino's are going broke.
Houses dropped 16% in July biggest even and they look like over shooting the nmark.

 

[dubiousinfo]

On rent returns, you guys all realise that for an owner-occupier a rental return rate of say 4% or better beats having your cash sitting in the bank (earning say 7.5% BEFORE TAX) and renting the equivalent house right?

This is because you have to pay tax on any $$$ earned from cash in the bank at your top marginal rate (40% pr 45% for high income earners). Rent has to be paid with AFTER TAX income. In Sydney rent returns are for most area's past the 4% point. So an owner with no mortgage, or who is thinking ahead towards their position when they have paid off the mortgage, is in a very strong position right now in terms of "return" on their investment at it's current value, and would be worse off if they sold and rented instead. That only becomes more tha case if you think prices are going to fall (which is of course why they won't!).

CHeers,

Beej

Where are you getting your 4% rental return for Sydney residential property. All the evidence I have seen points to less than 3%. Commercial property is definately getting better than 4% (currently around 6% to 8% yield), but not residential.

 

[pepperoni]

On rent returns, you guys all realise that for an owner-occupier a rental return rate of say 4% or better beats having your cash sitting in the bank (earning say 7.5% BEFORE TAX) and renting the equivalent house right?

This is because you have to pay tax on any $$$ earned from cash in the bank at your top marginal rate (40% pr 45% for high income earners). Rent has to be paid with AFTER TAX income. In Sydney rent returns are for most area's past the 4% point. So an owner with no mortgage, or who is thinking ahead towards their position when they have paid off the mortgage, is in a very strong position right now in terms of "return" on their investment at it's current value, and would be worse off if they sold and rented instead. That only becomes more tha case if you think prices are going to fall (which is of course why they won't!).

CHeers,

Beej

You are not better off when you consider holding/transaction costs and you are tied in to what is now probably the most illiquid asset known to man after super yachts.

As for prices "of course" not falling, you said on this thread yest that we are in the middle of 10-20% falls We have posted the falls on the property price falls thread.

But ignoring the capital losses, some people do WAY better renting.

Im earning $2880 interest on $2m ... say $1500 after tax.

Im renting my dream $4m home that I couldnt currently afford in my wildest dreams 300m from balmoral for $750.

I pay no rates, maintenance, gardening so Id have to be $800 a week better off ignoring caital gain/loss ... and more importantly Im not sacrificing lifestyle in the mad hope for a capital gain.

Total no brainer.

With that $800 I could buy some crap property and rent it ... but I think that would be mad as its guaranteed to do worse than cash after considering interest/holding costs/transaction costs and a lacklustre property market at best.

 

[pepperoni]

Where are you getting your 4% rental return for Sydney residential property. All the evidence I have seen points to less than 3%. Commercial property is definately getting better than 4% (currently around 6% to 8% yield), but not residential.

As you move up from the bottom of the barrel el cheapo rentals returns trend down to below 1% for some $4m plus properties.

It almost never covers the 1.6% land tax let alone give a return ha ha.

 

[gfresh]

As a potential investor, still much better return on my money in the bank short term (1-2 years). It's not too difficult to build a spreadsheet to compare various scenarios... yes after tax, gearing, blah.

I think it was when rates are back down to under 8% and capital growth is above 4% p/a it makes sense again. And that was with a 5% yield too. Otherwise my money is better in the bank, and no doubt there are a lot of people sitting on this position right now also. They're getting ahead by *not buying* as their cash is building for the time when the market ticks up. No nonsense, no fuss.

Some may mention inflation, well unless the property is tracking at least CPI, then your real money is getting eaten away just as quickly as in the bank. So no difference there.

A simple spreadsheet will do the trick ..

Been having a look over the property investment forums. Some obviously have an idea, but some of the newbies, their sums are way out of whack. Mainly the extras they forget to consider, or afraid to even think about. If that's your typical "investor" then erk.

 

[Beej]

Where are you getting your 4% rental return for Sydney residential property. All the evidence I have seen points to less than 3%. Commercial property is definately getting better than 4% (currently around 6% to 8% yield), but not residential.

Lot's of stat's around - average Sydney rental yield = ~4+% right now, and well above that in many area's. http://www.smartcompany.com.au/Premium-Articles/Top-Story/20080908-Australias-property-hotspots.html has some info. Inner Sydney is averaging 6% yields according to those guys.

Two properties I am aware of intimately - current rental yield (based on estimated values) on one = 5.2% (unit), 4.1% on the other (more expensive house). Of course the lower the "supposed" value the higher those numbers get. Another example; my sisters house (Sydney lower north shore renovated 2 bed semi) - was rented out for $625/week, just sold 2 months ago for $837.5k = gross rental yield of just under 4%. It was her PPOR for some time as well so is a good example. My own PPOR, based on what I know it would cost to rent right now and estimated value, rental return = at least 4%.

Re price falls those are short term considerations only - in the long term, prices will rise, forever. Given the buying selling costs the worse thing you can do is try and "time" the property market and enter/exit all the time. Hardly anyone get's that right for shares and it is almost impossible to get it right for property. Some people here reckon they picked a good exit point and they may be right, but let's see if they pick the right re-entry point or will they miss out on the market turn?

Pepporoni - your multi-million dollar examples are different - what sort of capital gains have those properties got over the past 10 years and what are they likely to get in the next 10??

Re holding costs - if you own your own home you are still way better off. Holding costs on my house are around $2k per year (water rates, council rates and building insurance). Capital improvements and most maintenance add at least the same amount to value so you don't count them as holding costs.

Gfresh believe me I have spreadsheets as well for all this Whether you are currently "in" the market, and how long you have been in, makes a big difference compared to looking for an entry point. Remember MOST people are already "in" - ~67% of houses owned by their occupiers, half of those owned OUTRIGHT (no mortgage). And the spreadsheet doesn't factor in the intangible value of owning your own home - no landlord, no unplanned moves, security for your family, even being able to do what you want with the place in terms of decoration or improvements etc etc.

So as you can see the rent side ALONE justifies owning your own home. If you make a capital return over the long term as well (which you WILL, at least inflation, probably more if you buy well), then you end up way better off. The capital in the bank will not go up with inflation if you have to use the entire after tax return to pay your rent.

Cheers,

Beej

 

[dubiousinfo]

I disagree there are lots of stats around reflecting your claims. Your information posted amounts to little more than opinion, and in my view is not reliable as to the valuations. I stand by my original call.

 

[Beej]

You are not better off when you consider holding/transaction costs and you are tied in to what is now probably the most illiquid asset known to man after super yachts.

As for prices "of course" not falling, you said on this thread yest that we are in the middle of 10-20% falls We have posted the falls on the property price falls thread.

But ignoring the capital losses, some people do WAY better renting.

Im earning $2880 interest on $2m ... say $1500 after tax.

Im renting my dream $4m home that I couldnt currently afford in my wildest dreams 300m from balmoral for $750.

I pay no rates, maintenance, gardening so Id have to be $800 a week better off ignoring caital gain/loss ... and more importantly Im not sacrificing lifestyle in the mad hope for a capital gain.

Total no brainer.

With that $800 I could buy some crap property and rent it ... but I think that would be mad as its guaranteed to do worse than cash after considering interest/holding costs/transaction costs and a lacklustre property market at best.

Yes it works if you can get that Balmoral dream house for $750/week. But how many people get that deal? You are WAY under the market there - all advertised similar places are asking at least TWICE that rent. I also noticed you said in the other thread you are considering moving - to a 2 bedroom flat no less for not much less $$$ - why is that?? The sweet deal coming to an end? Owner wants to move back in as they were o/s for a short while or something similar? I bet it would be hard to repeat your current deal!

Cheers,

Beej

 

[Beej]

I disagree there are lots of stats around reflecting (Beej: presume this should be rejecting!) your claims. Your information posted amounts to little more than opinion, and in my view is not reliable as to the valuations. I stand by my original call.

Your prerogative, but you are wrong. My data and examples are good, and based on ACTUAL rent being achieved vs estimated property value (which means the numbers are probably conservative unless you think I am UNDER valuing our properties!), or actual rent achieved vs actual sale price achieved very recently - indisputable.

Cheers,

Beej

 

[aleckara]

Gfresh believe me I have spreadsheets as well for all this Whether you are currently "in" the market, and how long you have been in, makes a big difference compared to looking for an entry point. Remember MOST people are already "in" - ~67% of houses owned by their occupiers, half of those owned OUTRIGHT (no mortgage). And the spreadsheet doesn't factor in the intangible value of owning your own home - no landlord, no unplanned moves, security for your family, even being able to do what you want with the place in terms of decoration or improvements etc etc.

What we have here is a severe case of wealth redistribution. Since the income in the economy has been growing very little compared to house prices over the recent years it is simply debt driving the prices up. Basically someone has to buy it for more than you bought it for the profit to be had. Where does that money come from? If 67% of people have a paid off house as you claim then it is the other 33% approx that are giving them the eventual profit. They enter the market now; it may give them a return it may not. More likely it will stay stable and interest will kill them (i.e negative return).

However houses are illiquid and this is the paper profit that people have on their houses. Just like shares when they reach a peak, the people who bought last tend to sell first, driving prices down to the point where the people who bought second last no longer have a profit starting a trend. In other words there is not enough money floating in the economy probably to support house prices (houses x average price).

What's even worse is that all this borrowing didn't create any new houses, it just bid up existing housing stock. As a nation we are not any richer in terms of assets, but we are definitely in a lot more debt. Housing policies in my opinion have been the most self serving, and will probably prove to have a range of social factors including intergenerational wealth divides, homelessness, and many other factors. If we are destroyed by the sub prime crisis it will be because our banks are too exposed to debt due to a housing bubble.

 

[Beej]

What we have here is a severe case of wealth redistribution. Since the income in the economy has been growing very little compared to house prices over the recent years it is simply debt driving the prices up. Basically someone has to buy it for more than you bought it for the profit to be had. Where does that money come from? If 67% of people have a paid off house as you claim then it is the other 33% approx that are giving them the eventual profit. They enter the market now; it may give them a return it may not. More likely it will stay stable and interest will kill them (i.e negative return).

However houses are illiquid and this is the paper profit that people have on their houses. Just like shares when they reach a peak, the people who bought last tend to sell first, driving prices down to the point where the people who bought second last no longer have a profit starting a trend. In other words there is not enough money floating in the economy probably to support house prices (houses x average price).

What's even worse is that all this borrowing didn't create any new houses, it just bid up existing housing stock. As a nation we are not any richer in terms of assets, but we are definitely in a lot more debt. Housing policies in my opinion have been the most self serving, and will probably prove to have a range of social factors including intergenerational wealth divides, homelessness, and many other factors. If we are destroyed by the sub prime crisis it will be because our banks are too exposed to debt due to a housing bubble.

Houses have always been bought with debt always will. You can call it what you like but things that have intrinsic value (assets) go up in value over time. You can't stop it. You have 2 choices - save your whole life and buy a house at the end when you retire and don't have as much income any more, or borrow and buy now and pay of the mortgage off before you retire. The latter option gives you the added security of owning your own home and all the intangibles mentioned earlier that go with that.

You are completely missing the point though that the cost of the house is not really the issue, especially for existing owners. It's about the cost of the alternative to owning - Ie renting. If house prices fall as you seem to think they should it only makes the case for owners of existing property to hold even stronger, thereby ensuring that prices won't actually fall, as no-one will sell (in established area's where people already own and live)! There is nothing that can be done about this unless you legislated to cap rents or something which will never happen.

PS: The stats for home ownership are approximately 1/3 rented, 1/3 owned with mortgage, 1/3 owned outright.

Cheers,

Beej