The future of Australian property prices

[KurwaJegoMac]

How about the price of a house is relative to how much it costs to rent it...?

Recently while the capital gains tap has been flowing many buyers have been happy to pay the premium to buy over rent as they will make the difference back and more via capital growth. What happens when that scheme starts to fail and buyers are instead looking at stagnant prices (or even falling ones), do you think they will still be prepared to pay the premium to buy over rent?

Houses in capital cities currently have an average rental return of 4% on purchase price.... with mortgage interest rates around 7% and ongoing costs to buy running in at over 1% on purchase price this means that renters can live in a home for approximately half the cost of buying.

Some smart cookies (myself included) have sold property to rent while it makes sense to do so, investing capital into more prospective opportunities waiting for the right time to buy again.

You quote an average rental return of 4% on purchase price - but historically, rental yields have averaged 4% (refer to the document linked in my post above as well as DYOR). So relative to rental yields we're not overpriced and you need to consider another comparison.

 

[wayneL]

but historically, rental yields have averaged 4%

ROTFLMAO

 

[KurwaJegoMac]

ROTFLMAO

ROFLCOPTERZOMFGWTFBBQ

Guess I can't read graphs. My bad.

Interest rates below:



Also quite funny how 'coincidentally' the period of high interest rates from the 1980's to 1990's coincided with the highest rental yields (>7%)...

...and now that interest rates are low we're experiencing low rental yields (<4%) but the average across both periods has been 4%...

ROTFLMAO LOOK AT ME I DONT PROVIDE ANY EVIDENCE I JUST WRITE STUPID THINGS ROFLLMAOWTFBBQYAYPEWPEWLAZERRRZZZZZ

ROTFLMAO

 

[trainspotter]

Congratulations to all the ASFers for bumping this thread over the magical 3000 mark.

And now for some facts.

1) House prices are starting to fall in Australia, with the median national house price falling 0.2 percent in August according to the RP Data Riskmark Index.

2) In Melbourne, house prices fell 1.5 percent reducing the median house price to $470,000.

3) Brisbane house prices fell 2.3 percent to $434,000 for the quarter while Perth witnessed falls of 4.8 percent, wiping $22,000 of their medium house price in three months. Perth’s median price now sits at $460,000.

4) Also recording falls was Adelaide, down 0.2 percent and Darwin down 1.4 percent.

Now a lot of these facts are tremendously skewed as most of the falls were in the higher bracket price range which IMO were tremendously over valued to start with.

Now I can probably cope with the slight deflation we are currently witnessing in the RE market which is a far cry from the 40% "bug on a windscreen" wailing we were hearing not so long ago. The next thing to rise will be rents as the greedy property developers want a better rate than 4% on their return. This amongst other factors will keep the prices steady for awhile. Depends on RBA's next move on the IRs as well. If we see rates increase more than .5% in the next 6 months we will see a further leaking of the average home price. If you look at the graph you can see the value of prices vs rental income is not enough to sustain the price of houses.

 

[wayneL]

ROFLCOPTERZOMFGWTFBBQ

I'd like to see how those figures are derived please.

 

[mazzatelli]

I'd like to see how those figures are derived please.

Context
http://bubblepedia.net.au/tiki-index.php?page=GerardMinackArticle

 

[trainspotter]

Gerard Minack from Morgan Stanley is a dill. Here he is on one hand telling us not to invest in property and then he goes and does this !

THE US-based Morgan Stanley Real Estate fund that owns a stake in one of Australia's biggest office landlords, Investa Property Group, may face $US5.4 billion ($5.79bn) in losses through poor property investments.

The Wall Street Journal reported yesterday that it had reviewed documents showing soured investments by the $US8.8bn fund, Msref VI International, which has a stake in Investa.

If the Morgan Stanley fund did lose $US5.4bn in bad property deals, it would be the biggest dollar loss in the history of private-equity real estate investing, the Journal said.

http://www.theaustralian.com.au/bus...risks-579bn-loss/story-e6frg9gx-1225853802331

 

[mazzatelli]

Gerard Minack from Morgan Stanley is a dill. Here he is on one hand telling us not to invest in property and then he goes and does this !

Just to be clear:
The link is in reference to the figures Wayne is asking about - Exhibit 3: Yield as support

Who/what to trust, eh? :

 

[KurwaJegoMac]

WayneL my sincerest apologies for my behaviour over the past few posts. Very immature and you by no means deserved any of that attitude from me.

Had a particularly bad day at work today, and was in a foul mood whilst posting. Still, that's no excuse. An investor should maintain a clear and level head at all times right?

Once again, I'm very sorry and I will curb my stupid behaviour.

 

[explod]

Gerard Minack from Morgan Stanley is a dill. Here he is on one hand telling us not to invest in property and then he goes and does this !

THE US-based Morgan Stanley Real Estate fund that owns a stake in one of Australia's biggest office landlords, Investa Property Group, may face $US5.4 billion ($5.79bn) in losses through poor property investments.

The Wall Street Journal reported yesterday that it had reviewed documents showing soured investments by the $US8.8bn fund, Msref VI International, which has a stake in Investa.

If the Morgan Stanley fund did lose $US5.4bn in bad property deals, it would be the biggest dollar loss in the history of private-equity real estate investing, the Journal said.

To have the gut to learn and change your stance is not being a dill.

http://www.theaustralian.com.au/bus...risks-579bn-loss/story-e6frg9gx-1225853802331

If you read into the article properly you will see that the losses stemmed from the GFC of 2008. So Gerard Minack, having been burnt is passing on his hard earned lesson.

 

[KurwaJegoMac]

Just to be clear:
The link is in reference to the figures Wayne is asking about - Exhibit 3: Yield as support

Who/what to trust, eh? :

Also that data and analysis from Exhibit 3 is from 2008 and Trainspotter's article is from April 2010. 2 years can make a difference in outlook I guess. But you're right, who and what to trust?

 

[trainspotter]

If you read into the article properly you will see that the losses stemmed from the GFC of 2008. So Gerard Minack, having been burnt is passing on his hard earned lesson.

Article was written on April 15th 2010 explod. I was pointing out that he is incorrect on many occassions on his assessments.

Here he is again caught by his tongue.

In a note to clients this morning, Mr Minack recants: “Seems I was wrong to be so bearish on Australia.”

But the economist also thinks that while he might have been too pessimistic, markets are now too optimistic, especially in their forecast of a quick return to tighter monetary policy from the Reserve Bank.

http://www.theage.com.au/business/big-bear-recants-i-was-wrong-20090731-e3s3.html

 

[nunthewiser]

What a great thread

all this banter and not one cap busted in anyones A$$

bless you all.

 

[Uncle Festivus]

I can just imagine the boardroom meetings at the Big 4 banks this morning, not having an excuse to bump their rates up under the cover of the RBA. Having put more of their loan portfolio eggs into the resi prop market, from 43% to 58% over the last 10 years, they now find that they have to either put their rates up independently or take a hit to their (rather bloated) bottom line.

Not to mention prop prices are down again, 4 months in a row now.

 

[tech/a]

Contracts prepared for an Industrial property in the Seaford Rise Industrial Park
in Adelaide---another addition to my super fund.
Will eventually build 3 sheds on it for small business.

 

[financialdonk]

Posted this on another forum, but fits here just aswell

There is one factor that is going to cause more problems than any other. I will preface my comments by stating I am a property bear.

Regardless of short to medium term price movements within the next 12-48 months, there has got to be alarm at who is going to be capable of taking over the market to ensure price increases occur. Nearly all the people who were not in the market prior to the increasing FHOG's are now in the market. The only people not in the market are either incapable of taking any form of finance (either unemployed, have other debts, don't wish to buy in areas that would be affordable) or are bearish on property. My partner and I were both employed in good jobs (income of around 130k after tax combined), no children, mid 20s and were house hunting in Perth around May last year. We were looking at suburbs around 7-10km from the CBD (as that is where my partner worked) and could not find anything that I would deem worth the money that would be paid for it.

For $550k in Perth you get a 3x1 on a 2 house block front/back about 8km from the city, older house with design flaws. After going to a couple of home openings I could not justify taking on a loan of approx 500k even though I was given preapproval for an amount greater than that without including my partner's wage in the process. To me at least, working away, and my partner working in the city we do not view living 30km from CBD in the suburbs as desireable and I could not see myself 'living' between a surbuban development and a Westfields shopping centre for the next 30 years of my life. The concept seems absurd. Anyway, 18 months on and I am glad we came to the decision we did. I shifted our money that would have been going towards a property into PM's and we are either going to wait it out, or find alternate arrangements (live overseas).

My point is, with an increasingly aged population, and Australia's fatal fear of all things foreigner where does the growth come from? Baby boomers with multiple properties will be beginning to sell on masse as they downsize need funds live out their retirement years, or they will hold onto their property to pass onto their kin as inheritance. Immigration is always a hot topic and the general populace have raised severe concerns (regardless whether they are legitimate or not) about the current immigration intake.

If no one is buying how can prices continue to grow? If the only people who are largely left in the market are either bears or people pretending it is 2005 and thinking leveraging is still a significantly good move (because house prices never drop) then what is to become of Australian property prices? The large scale international investment in Australia may also see the rising AUSD as an excellent time to exit leaving the market open to a significant drop in a short space of time.

That our banks are so exposed to housing mortgages does not bode well for anyone. I am sure when they start to get itchy feet they will raise rates irrespective of the RBA and the market is likely to suffer from interest rate rises as opposed to mass unemployment (although this is possible if mining continues to be strong but retail collapses in the Eastern States). That so many jobs are caught up in housing from real estate to trades, a huge drop in building houses due to lack of demand could prove extremely costly. How many people laiden with debt and multiple properties are tradesman with a partner in retail? I shudder to think of how many people I know in this exact predicament.

The whole housing market scenario seems like a house of cards waiting for just one variable to send it crashing to the ground.

Very interesting times.

 

[tech/a]

The whole housing market scenario seems like a house of cards waiting for just one variable to send it crashing to the ground

To those crippled with fear it has seemed that way for around 10 yrs.
Then It was that way in the late 80s
Then again in the late 60s
It will remain that way through out time.

You'll either do something or do nothing.
Most do nothing and get the required result--nothing.
Understand risk--do due diligence.
Think outside the buy and hold square (although that's also fine if geared correctly).
Find a property/mentor and un shackle the fear.

 

[Uncle Festivus]

That our banks are so exposed to housing mortgages does not bode well for anyone. I am sure when they start to get itchy feet they will raise rates irrespective of the RBA and the market is likely to suffer from interest rate rises as opposed to mass unemployment (although this is possible if mining continues to be strong but retail collapses in the Eastern States). That so many jobs are caught up in housing from real estate to trades, a huge drop in building houses due to lack of demand could prove extremely costly. How many people laiden with debt and multiple properties are tradesman with a partner in retail? I shudder to think of how many people I know in this exact predicament.

The whole housing market scenario seems like a house of cards waiting for just one variable to send it crashing to the ground.

Very interesting times.

Deja vu al la USA - humans never learn from their mistakes?

A variable variable = China?

 

[Uncle Festivus]

To those crippled with fear it has seemed that way for around 10 yrs.
Then It was that way in the late 80s
Then again in the late 60s
It will remain that way through out time.

You'll either do something or do nothing.
Most do nothing and get the required result--nothing.
Understand risk--do due diligence.
Think outside the buy and hold square (although that's also fine if geared correctly).
Find a property/mentor and un shackle the fear.

It's called financial headroom - who's going to step up to the plate to ensure the returns from property continue at the pace we have seen? The headroom that existed in the past allowed the price increases, but it's harder to get 10% on $1M plus that it is on $500k ie diminishing returns the higher prices go, irrespective of whether wages keep up?

The banks are in a hard place now - charge borrowers at the market rate or make less profits. All on an expanded (unsustainable?) domestic property base. If they start moving outside the RBA then they risk a bank induced recession?

 

[trainspotter]

The banks are in a hard place now - charge borrowers at the market rate or make less profits. All on an expanded (unsustainable?) domestic property base. If they start moving outside the RBA then they risk a bank induced recession?

Could be the outlier that causes the Black Swan Event.

Reasons as to why it wont happen;-

1) Too much employment - Got a job and a mortgage? Mortgage gets paid.
2) CPI is under control - Inflation is not hurtling towards the stratosphere.
3) Export - Not the beer eeeejits - China wants what we got.
4) Low National Debt - Compared to other countries we are doing fine.
5) Regulated Banking System - Do the research peoples.
6) Government LOVES the housing system. Keeps the people in check and broke.
7) Aussies pay their mortgages - Granny is sold before defaulting on your house payment.
8) There are only 22 million people in OZ. The amount of debt carried by household finance is miniscule. EVERYONE would have to go broke to have an impact.
9) I could go on and on but I will leave my powder dry for the next round.

Now this is some of the conditions we currently have. It would be quite a few of the above list to happen before the property market gets the speed wobbles.