The future of Australian property prices

[trainspotter]

Agree UBI,

Looks like it's going to be a slow long painful grind, I pity the fool who is overleveraged into this property bubble.

Agree cutz .... "overleverge" is the adverb in this sentence that needs to be most taken heed of. There will be blood in the street. I can't wait.

 

[Mr Z]

what an afternoon of enlightenment, i know 11yrs ago when i bought the yield was 5.8% so tell us more on the 7% properties you owned MrZ

Oh gee a whole 11 years ago... WOW, all of history virtually!

not much changed really,

So do I take that as a claim that you are still getting 5.8%?

is there any chance the mods can have a word to MrZ about getting a photo of the bullion or some scanned share certificates, i need to push out real soon

Errrr ahem, maybe you mean contract notes, or CHESS holding statements. Pictures of bullion.... LOL. My dear chap only goldbugs keep bullion at home and take photo's.... remember, investor not bug. You will not find an oz anywhere near me... I like big vaults in safe insured places, gives me a warm fuzzy feeling.

I tell you what, after you scan and upload some evidence of your property holdings.... are you insane enough to do that?

oh yeah, it is different, have house prices crashed in Australia?

Not yet.... so what you think that means it is not possible? Hmmmmmm... never say never! Just suppose we had a CDO type debacle in the IRS market, man that would put the big 4's nuts in a vice, all sorts of interesting fallout could happen. Just suppose.... but I mean, that'd never happen... right? Like subprime was 'contained' to a small market

Anyway, multiples, yields, income ratios etc do tend to be mean reverting... in fact they tend to overshoot, after all that is how we get a mean number. There is always someone saying "its different this time", its structural, its a new paradigm yada yada yada..... that much is true.

Do you remember the big, short sharp correction we had when the Savings and Loans debacle was on? That was an interesting event, talk to an old agent.... you might be surprised at what went down with some deals!

 

[MR.]

I've read some nonsense in my time.

Ubi has anyone ever warned ya about posting after spending the arvo down the local?

Firstly, if you are going to talk about us being at average interest rates, perhaps you would also like to give the evidence that we are also at average borrowing levels over the last 12 years? Why would I do that? What change will that have on the average interest rates?

The RBA warned of interest rates returning to "normal"? I guess normal could be about now, so no real direction in rates. But thanks for your interest.

Secondly, it is ludicrous to assume that a p/e is a crystal ball. A P/E is not a crystal ball, got it. It is far more likely that the high p/e in the RE sector represents a major speculative over valuation, rather than the herd being correct that the p/e is a signal for future growth. Get out of here!If not, then why not go and invest in a stock with a p/e of 1000 - You'll be make a motza! Thanks for the tip

Easy. From the next sucker into Australia's biggest ever Ponzi scheme: Ok, so, where's your new investment property Ubi?

 

[robots]

hello,
Thought we had lost you for a while there MrZ. Always get a lot who come on to ASF spouting the usual doom and gloom

False prophecies, then they walk. Most times they are just mere followers of failed prophets.

Oh well, prices crashed yet?
Thankyou
Robots

 

[MR.]

Prices are being proped up by a commodities boom and cheap credit. When there is a sustained turnaround in either of the above, the bubble will burst.

The only question will be the extent to which governments try to stop the tide going out.

An example is the flood gates being opened to massive increases in immigration in recent times. Price crash may just not happen.... More to the point, a failed price crash just makes realestate (on average) look like a terrible investment for the near future.

I can go and buy a 2000m2 commercial property (vacant land) for $300,000. I then spend 250k building 2 sheds on the property for rental purposes. As banks want 40% deposit on commercial it costs $220,000 to play. Also approx 10k for fees to setup. My loan is $330,000 at say 8% (margin lending) = $26,400 per annum. I then rent these sheds for 25k each per annum. I am now positively geared to the tune of $23,600. Take out rates and outgoings of say $5000 per year I am in front by approx $18,600 per year. 8.45% return I believe. This is not allowing for capital growth either of say CPI at 3.1%

So tell me again what is so wrong with property?

Where do you buy commercial land (industrial) for $150- per metre?

The outlay of 550k with a 50k return isn't bad. Massive tin sheds rented out at what $50- per metre. Rental price sounds attractive too. Where are we?

Always get a lot who come on to ASF spouting the usual doom and gloom

False prophecies, then they walk. Most times they are just mere followers of failed prophets.

Oh yeah, left to wonder the worlds, lost in limbo.....

 

[Mr Z]

Now a 'what if' is a prophecy... and a false one a that. If it where, which its not, you'd not really be able to invalidate it until sufficient time has past for it to be tested. Sounds to me like some congenital property guru's around here had no real understanding of how close the 'GFC' came to destroying a few property dreams. They kinda remind me of the guy at the bar who has just a enough to feel 'ten foot tall and bullet proof', LOL, it may turn out to be just as illusory.

For anyone interested take a look at the way Interest Rate Swaps have mushroomed in open interest, take a look at what they mean for countries like Australia. Now its not too much of a leap of faith to imagine that the same optimistic modeling that became the Achilles heel of the CDO and CDS markets exists in the IRS market. It seems that the moral hazard here is that the more optimistic and less conservative the assumptions in the model that determines the pricing the greater the bonus received for writing the contract! This is a pile of derivatives that dwarf the others and have never been tested. They have been written in the benign climate of the latter years of a bond bull market. When the bond markets turns (yes Johnny they are cyclical) the consequences for this market could be quite interesting... interesting in a challenging way...: Now like all derivatives it is an opaque and arcane world full of geeks and quants so its impossible to know how it will play out if a failure occurs BUT just like CDO's, CDS's and the Carry Trade it looks like another accident waiting to happen. Not to worry, its not like these geeks are dumb eh? Its not like they would be silly enough to blow themselves up now is it? They are smart guys... so all is well. Its funny how LTCM looks like a minor blip now... it came so close too kaboom... the quants first big day out!

But hey, bonds, IRS's.... boring eh? Nothing to do with property eh?

So why are all these people selling in winter? Don't they know its quiet season? What gives with all this stock on the market?

Proziac Bots, its good stuff eh?

 

[Mr Z]

MR. I suspect we are somewhere up north in the direct line of fire of the mining boom. Certainly not a lot there I can relate too, RE markets are local in many/most respects.

 

[Agentm]

Now a 'what if' is a prophecy... and a false one a that. If it where, which its not, you'd not really be able to invalidate it until sufficient time has past for it to be tested. Sounds to me like some congenital property guru's around here had no real understanding of how close the 'GFC' came to destroying a few property dreams. They kinda remind me of the guy at the bar who has just a enough to feel 'ten foot tall and bullet proof', LOL, it may turn out to be just as illusory.

For anyone interested take a look at the way Interest Rate Swaps have mushroomed in open interest, take a look at what they mean for countries like Australia. Now its not too much of a leap of faith to imagine that the same optimistic modeling that became the Achilles heel of the CDO and CDS markets exists in the IRS market. It seems that the moral hazard here is that the more optimistic and less conservative the assumptions in the model that determines the pricing the greater the bonus received for writing the contract! This is a pile of derivatives that dwarf the others and have never been tested. They have been written in the benign climate of the latter years of a bond bull market. When the bond markets turns (yes Johnny they are cyclical) the consequences for this market could be quite interesting... interesting in a challenging way...: Now like all derivatives it is an opaque and arcane world full of geeks and quants so its impossible to know how it will play out if a failure occurs BUT just like CDO's, CDS's and the Carry Trade it looks like another accident waiting to happen. Not to worry, its not like these geeks are dumb eh? Its not like they would be silly enough to blow themselves up now is it? They are smart guys... so all is well. Its funny how LTCM looks like a minor blip now... it came so close too kaboom... the quants first big day out!

But hey, bonds, IRS's.... boring eh? Nothing to do with property eh?

So why are all these people selling in winter? Don't they know its quiet season? What gives with all this stock on the market?

Proziac Bots, its good stuff eh?

nice post


was looking at the broyhill letter a little while back, thought that grantham and these guys had some great views on things..

you can download the letter here i believe.. worth a read..

broyhill letter

now where have i seen the sentiment expressed in the first part of this quote around here??

"Australia has gone two decades without a serious downturn, leading most to believe that house prices move only in one direction, despite historical data which clearly indicates that the ratio of home prices to income has always fluctuated around a stagnant long term average. The reason is that income acts as an anchor limiting the price home owners are able to pay, and has always pulled prices back to earth in every instance. It is only a matter of time"

 

[Mr Z]

you can download the letter here i believe.. worth a read..

broyhill letter

Thanks, that is a new one on me... I will take a look see

 

[Bushman]

Its kinda hard to take you seriously given your responses.

Robots has been bullish property since the pre GFC. Track record is on this thread. He stared down Stephen Keen and Keeno blinked.

Go Robots. Investment is as often a 'smell test' as a complex quant model where your bias gives you the valuation that proves your bias right! Robots smelt the market in 2006/2007 and it smelt good! You made plenty brother, an ASF legend and a Victorian to boot!! God speed.

 

[MR.]

Oh yeah, left to wonder the worlds, lost in limbo.....

Wonder/wander whatever!

MR. I suspect we are somewhere up north in the direct line of fire of the mining boom. Certainly not a lot there I can relate too, RE markets are local in many/most respects.

With some of the reported prices of homes one might imagine industrial land would be well up there as well, not $150- per metre!

Must be in some small town that has no covenants or a council which wants built any quality. Perhaps the example is from a few years ago. If not, got to wonder if there's even enough work in town for the tenant to pay the lease!

ps: Bots is the man!

 

[trainspotter]

Wonder/wander whatever!

With some of the reported prices of homes one might imagine industrial land would be well up there as well, not $150- per metre!

Must be in some small town that has no covenants or a council which wants built any quality. Perhaps the example is from a few years ago. If not, got to wonder if there's even enough work in town for the tenant to pay the lease!

ps: Bots is the man!

26th March 2009 settlement date on 2012m2 commercial land. Sheds completed October 2009. Block across the road on the market 1878m2 for 280k.

Pest control company in the front shed on a 5 x 5 with 5% increase rental increase every year. They also pay all outgoings !!

Rear shed leased out 3 x 3 with 2 year option to fishing company.

Ooooopsies no mining companies here boys and girls. YET.

Council is unbelieveably strict with wheelchair access, all water runoff to be retained on block, car parking bays, landscaped areas and the sheds had to be of colorbond and not zincalume. Shed sizes are 330m2 and rented for $75 per metre.

Yep, country hick town alright ! Small population of 31,000 on the coast. Mining has not kicked in yet. Town is self sufficient.

Also have property in QLD performing similar.

HAHAHAHA HAH HAAAAAAAAA ... living the dream. Look around people. Not just in your own backyard.

 

[Mr Z]

From Broyhill...

While prices at home have already fallen 30% from their peak, they’d have to fall another 45% just to reach the long term trend, which according to Robert Shiller, has been flat in real terms for three and a half centuries!!

I love that quote! I still maintain that 99% of property investors don't understand why property works as an investment. Logically if they don't get what the major driver is then they will not recognize when it becomes a head wind. The phrase "in real terms" is critical! Invariably when asked people will point to the many local issues or even national ones that while they are a factor they are not the underlying truth of properties magic when its working well.

 

[explod]

From Broyhill...



I love that quote! I still maintain that 99% of property investors don't understand why property works as an investment. Logically if they don't get what the major driver is then they will not recognize when it becomes a head wind. The phrase "in real terms" is critical! Invariably when asked people will point to the many local issues or even national ones that while they are a factor they are not the underlying truth of properties magic when its working well.

What is your understanding or definition of "in real terms" and the best way you measure it Mr Z ?

 

[Mr Z]

Rambling thoughts... apologies to the impatient, I suggest you just don't read it!

What is your understanding or definition of "in real terms" and the best way you measure it Mr Z ?

Short answer is I don't know the single best way to work it out.

Long answer: Basically we are talking truly inflation adjusted (not CPI adjusted!) prices, easily said but not so easy to do because everything in our economy is in a constant state of flux. The idea is to compare the price of a house like for like over time and work out how much of todays price is due to inflation and how much is down to some other changing fundamental. For example in 1972 a house we once owned in WA sold for 12K, looking things up now a similar place would probably be 250-70K. Now we all intuitively know that isn't actually a 22.5 times increase in value as almost every other value in our economy has also moved significantly. So what is the true value comparison? We have very little that is constant to measure these things against! If you looked at Shillers methodology for arriving at a constant value basis on which to compare things I am sure that you could dispute his findings.

Some like to use measures like gold, but I think that is a little delusional. I would say that the fairest measure is actually the family income multiple. After all the average house cannot stray to far for to long from the average family wage earners ability to pay for it. However I can think of problems with doing that! CPI would understate it, most other value comparisons in terms of real goods are not valid due to technology improvements and general real price declines, cars for example are much cheaper now on a relative basis.

I guess that is what makes it such a contentious and interesting topic.

Numbers like M3 vs total housing stock would be interesting to see. Anywhooo I'd be surprised if someone could come up with a tight number, so in lieu I look at all the ratios.

This one is interesting...



It would suggest that my 12K house that is now say 250K probably should be around 125K (it would be below average now!) to have maintained its value in real terms. That would align with the rough multiples of wages we are at as I remember them. Now is that reflective of a stretched valuation or some other fundamental that has real changed on a permanent basis. What we really need to understand is what is underpinning that 125K extra... and how solid it is. The chart suggests we are stretched all round, I am sure there are local mitigating factors in many areas but?!

One thing to note is that during the inflationary 70's the price of a house was generally under the cost to build, (makes sense!) but look where we have come since easy Al started up in 1987! Something is wrong with that picture!

In the end its kinda simple IMO... you have...

1. Wages
2. Rents
3. Prices

In some combination they adjust to get us back to the long term ratios at some point. So if you are a bull and you expect line 3 to rise you must also make a case for lines 1 & 2 to rise further and faster. If you are a moderate bear you also must make the case for 1 & 2 to rise but nowhere near the same amount. If you are a real bear and you expect wages to fall then lines 2 & 3 must plummet! I suspect that prices will fall, wages and rents will rise with inflation, but how to assign %'s?

Anyway if you go from and income multiple of 6 to one of 3 and the house goes up say a further 30% are you really in front? The way some count around here the answer is yes, I am not so sure... I guess the answer depends on how wise you where with the money if it where invested elsewhere.

:

I will get to the other thing Explod... maybe tomorrow.

Cheers
Z

 

[trainspotter]

Oh well .... I'll keep making money out of real estate and the theorists can keep on theorising.

 

[explod]

Re: Rambling thoughts... apologies to the impatient, I suggest you just don't read it

I will get to the other thing Explod... maybe tomorrow.

Cheers
Z

A good take IMO Mr Z, look forward to your continued evaluation and thanks for your obvious efforts.

 

[robots]

hello,

yeah thanks MrZ top presentation

thanks Bushman, yeah great place Victoria still plenty of scope too and just trying to help others in life

graph source? so 12k into 250-270k, what suburb by the way MrZ? yeah thats flat as per shiller's view, get outta here, what a stooge

thankyou
professor robots

 

[robots]

From Broyhill...

I love that quote! I still maintain that 99% of property investors don't understand why property works as an investment. Logically if they don't get what the major driver is then they will not recognize when it becomes a head wind. The phrase "in real terms" is critical! Invariably when asked people will point to the many local issues or even national ones that while they are a factor they are not the underlying truth of properties magic when its working well.

Hello,

Strange this preceded the explanation on "real terms" and we have to wait for part two. Couple of interesting items in bold.

Oh well, i'm with you trainspotter, just keep rolling along actually doing something.

Thankyou
Professor Robots

 

[Mr Z]

Why strange, I was asked.

I think you are missing my point.... intentionally I suppose.

Ya like my gold robot?

PS: It quotes sources on the bottom of the chart ABS, RBA, REIA --> you didn't think I would post a questionable source now did you. More fun stuff where than came from!