The future of Australian property prices

[explod]

No its much easier to save your money, invest it in something else and have a stupid amount of cash on hand when the music stops.

Amen

 

[sinner]

I bought my first house back in 2001, and it was renting for $250/week but to service the loan cost $435/week,

So the repayments were 74% higher than rent.

Today the rent is $425/week and the loan would cost $850 / week to service.

So the payments are 100% higher than rent,

So your right the gap has widened. But the big difference that I see as causing this is that rents tend to rise steady year on year with inflation. Where as the price of houses booms and stagnates. when I bought in 2001 it was following a period of several years of stagnated prices, so the gap between rents and prices slowly narrowed.

After I bought prices boomed for serveral years widening the gap again. I think one things is clear though. rents will overtime increase and the interest you pay decreases

So given the first example 10 years later renting is still $10/week cheaper than the payments on the loan, However the owners repayments only have $252 worth of interest so $182.00 / week is repaying the loan. so reverse compound interest is on his side.

Not to mention every year the rental increases will compound against the renter, where reverse compound interst is working for the owner.

Also should he sell he would have a lump sum of over $200,000 capital gain + over $40,000 of forced savings from reduction of the loan.

Nothing wrong with your numbers Tyson, nothing wrong with your example of investing in property for the long term and I would actually prefer that to holding a bond.

However like all investments calls for due diligence. Did mine and decided long ago the numbers didn't stack up and that there were actually far larger implications for the country at large in the real estate market than my own personal choice of dwelling or attempts at wealth generation. Your own calculations show that so far I'm nominally no worse off (slightly better in fact) over a long horizon so so it's not like the market disagrees!

You did your dd and decided it was a good idea, nothing wrong with that imho, two views make a market, someone sold the house to you after all.

However it seems like discussions about the larger implications of the issues at hand are just nonsense and rubbish? Commonwealth Treasury views reliance on short term foreign funding as the highest risk for the banks, but here it is simply a non-issue in regards to property market funded almost entirely on the credit growth
of these banks.

To me that is a bright red alarm going off!

 

[white_goodman]

Nothing wrong with your numbers Tyson, nothing wrong with your example of investing in property for the long term and I would actually prefer that to holding a bond.

However like all investments calls for due diligence. Did mine and decided long ago the numbers didn't stack up and that there were actually far larger implications for the country at large in the real estate market than my own personal choice of dwelling or attempts at wealth generation. Your own calculations show that so far I'm nominally no worse off (slightly better in fact) over a long horizon so so it's not like the market disagrees!

You did your dd and decided it was a good idea, nothing wrong with that imho, two views make a market, someone sold the house to you after all.

However it seems like discussions about the larger implications of the issues at hand are just nonsense and rubbish? Commonwealth Treasury views reliance on short term foreign funding as the highest risk for the banks, but here it is simply a non-issue in regards to property market funded almost entirely on the credit growth
of these banks.

To me that is a bright red alarm going off!

I see no direction but down to be honest...

1) strains on foreign lending sources this year (debt more expensive for banks) ie higher mortgage rates
2) wage to house ratio is unsustainably high.
3) at the current rates of income growth, for property to double in 10 years (old myth) servicing costs would be 90% of the median wage for median house...ie impossible.
4) due to zoning policies and restrictive practices on land release and developers aswell as mainpulation at all forms of govt on the supply side has created a bubble... due to nature of the supply any reduction in demand will cause large swings in prices to the downside.
5) demographics, baby boomers who are asset rich and income poor will all head for the exit at the same time... the "baby boomer property squeeze of 2012-2016"

what we need is less govt involvement keeping this ponsi going and stop the catalyst of cheap lending.. they just started a rule allowing to use rent and deposit.. the game is up... the last trick is to let superfunds leverage up and buy large amounts of residential property.

 

[white_goodman]

A research paper from an asset manager, read mid last year, will try find it this afternoon. And I did mean negatively geared speculators, but said "property investors" given that statistically, the majority of property investors are indeed negatively geared speculators. And that is the heart of the problem.

then they arent investors, negatively geared is speculation... i look forward to the correction, and I have no sympathy for the retiring class.

 

[sinner]

Great posts white, can't help but agree with all statements, would love to hear the discussion of those who disagree.

To be honest, if I could buy a house using my Super and rent it to myself, I almost certainly would. Why can't people do that sort of thing?

 

[FxTrader]

then they arent investors, negatively geared is speculation

Such a distinction is usually suspect without a context. Investment incurs various levels of risk, including bonds and fixed interest just less so, and is made with an expectation of future gain. Geared (leveraged) investing is no different just higher risk and since the govt kindly gives us a tax break for investment in certain asset classes then why not exploit it.

Speculation, when used in the negative sense, is usually more about seeking quick, short term profits without any research, strategy or plan, because an asset class is say "going up". Such speculation is more about gambling than investing since you have no edge.

Just because you negative gear into property doesn't necessarily mean you're a speculative gambler. If you're just getting into the market because property always goes up or because the govt gives you a tax break then yes, this constitutes reckless speculation. No doubt some do this but the market will shake them out eventually.

 

[white_goodman]

Such a distinction is usually suspect without a context. Investment incurs various levels of risk, including bonds and fixed interest just less so, and is made with an expectation of future gain. Geared (leveraged) investing is no different just higher risk and since the govt kindly gives us a tax break for investment in certain asset classes then why not exploit it.

Speculation, when used in the negative sense, is usually more about seeking quick, short term profits without any research, strategy or plan, because an asset class is say "going up". Such speculation is more about gambling than investing since you have no edge.

Just because you negative gear into property doesn't necessarily mean you're a speculative gambler. If you're just getting into the market because property always goes up or because the govt gives you a tax break then yes, this constitutes reckless speculation. No doubt some do this but the market will shake them out eventually.

in my eyes

investment = returning an income
speculation = any venture where you profit from appreciation

of course if you are doing some value add development style its shades of grey. The Australian property market is categorised by investors buying long term in places that return less than repayments. They are banking on appreciation generally, its also why they are forced to work until older age, effectively locked into a job to service debts.

I dont want to have to work harder for my 'investments'. However if you are able to turn the property into positive CF, through making highest and best use then renting or some other strategy it could work. The question would then be is the minimal % return that you could get compared to safely in the bank worth it, ie is the probability skewed towards appreciation or depreciation in prices.

 

[Tysonboss1]

Such a distinction is usually suspect without a context. Investment incurs various levels of risk, including bonds and fixed interest just less so, and is made with an expectation of future gain. Geared (leveraged) investing is no different just higher risk and since the govt kindly gives us a tax break for investment in certain asset classes then why not exploit it.

Speculation, when used in the negative sense, is usually more about seeking quick, short term profits without any research, strategy or plan, because an asset class is say "going up". Such speculation is more about gambling than investing since you have no edge.

Just because you negative gear into property doesn't necessarily mean you're a speculative gambler. If you're just getting into the market because property always goes up or because the govt gives you a tax break then yes, this constitutes reckless speculation. No doubt some do this but the market will shake them out eventually.

Investment = An operation which upon thorough analysis promises safety of principle along with an adequate return.

Speculation = An operation that does not promise safety of priciple but does offer the chance of both significant gains and losses under varying likely outcomes.

I do not have a problem with using the word speculator to describe some one purchasing negativly geared property if they are banking on capital gains to make the operation turn a profit, because if the capital gains do not arise within a certain time frame the negative yield will wipe out their initial principle. So by adding excessive debt the participent has turn an otherwise sound investment into a speculative big win or big lose operation.

There can be intelligent speculation just as their is intelligent investment. But in many ways speculation is very unintelligent.

Speculating through the use of margin when the market is allready hitting high P/e's is probably not intelligent.

 

[wayneL]

There can be intelligent speculation just as their is intelligent investment. But in many ways speculation is very unintelligent.

Speculating through the use of margin when the market is allready hitting high P/e's is probably not intelligent.

What's the PE on property?

 

[FxTrader]

investment = returning an income
speculation = any venture where you profit from appreciation

Differing definitions and usage of terms are frequently a problem. Investment is a far more general term in usage than "returing an income". Speculation is about levels of risk in proportion to potential gain, short or long.

The Australian property market is categorised by investors buying long term in places that return less than repayments. They are banking on appreciation generally, its also why they are forced to work until older age, effectively locked into a job to service debts.

It's correct to say that income is required to offset negative gearing costs but the desired end result for the true investor is positive cash flow now or in the near future. Price appreciation is just a bonus. Being "locked" into a job that you enjoy and/or pays well isn't a burden.

Unfortunately most of the property "investors" I know don't treat their property investments like a business investment decision but as a retirement nest egg that will hopefully pay off many years later. Perhaps it will but property investment has many and varied risks, just ask IP owners in the flooded areas of QLD.

 

[Tysonboss1]

What's the PE on property?

price to earnings ratio,

 

[wayneL]

price to earnings ratio,

Umm, yeah I know. The question is what is the PE on property?

 

[FxTrader]

Investment = An operation which upon thorough analysis promises safety of principle along with an adequate return.

Speculation = An operation that does not promise safety of priciple but does offer the chance of both significant gains and losses under varying likely outcomes.

Creative definitions Tyson but not applicable to common usage or correct by explicit definitions. Thorough analysis can never promise safety of principle or "adequate" return (I can provide examples). Yes, speculation is about taking considerable "calculated" risk for significant gain as opposed to gambling.

I do not have a problem with using the word speculator to describe some one purchasing negativly geared property if they are banking on capital gains to make the operation turn a profit, because if the capital gains do not arise within a certain time frame the negative yield will wipe out their initial principle. So by adding excessive debt the participent has turn an otherwise sound investment into a speculative big win or big lose operation.

The reality is that reckless property speculation is about adding as many properties to one's portfolio as possible in the shortest period of time. This "formula" is sold by spruikers nation wide and soaked up by the masses, it's the OPM principle taken to the extreme with the assistance of the banks and govt. The familiar refrain, I own 5 investment properties and plan to own 10 more in the near future. The reality, I owe the bank 2 million but hope to owe 10 million in the future. Property is a sure thing after all!

 

[matty77]

Bring a new law in and remove FHOG.

When you buy your first house you pay no stamp duty, or when you only own 1 house, you pay no stamp duty on that house.

When you buy your second house (investment, holiday house whatever) you pay 15% stamp duty.

When you buy your third house etc you pay 25% stamp duty.

What does this do? It gives the FHO a chance to get into the market, they would effectively have 25% or cheaper cost to purchase a house if they were bidding against an investor. It makes it harder for an investor to get into the market place, forcing price to slow or go lower. Everyone wins.

Discuss.

 

[Agentm]

The 7th ANNUAL DEMOGRAPHIA INTERNATIONAL HOUSING AFFORDABILITY SURVEY (data 3rd Qtr 2010) has just been published and is downloadable from this link

http://www.demographia.com/dhi.pdf

extract............

SURVEY INTRODUCTION – ACCLAIMED AUTHOR JOEL KOTKIN

Joel Kotkin, a California based writer on urban issues and executive editor of New Geography, contributed the Introduction “Why Affordability Matters” stating –

“Little discussed have been the social and economic implications of such policies (strangling urban expansion). Although usually thought of as “progressive” in the English speaking world, the addiction to “smart growth” can more readily be seen as socially “regressive”. In contrast to the traditional policies of the left of center governments that promoted the expansion of ownership and access to the suburban “dream” for the middle class, today regressive “progressives” actually advocate the closing off of such options for potential homeowners.”

“……..It is a very dangerous concept, essentially promoting a form of neo feudalism which reverses the great social achievement of dispersing property ownership.”

“…..But perhaps most remarkable has been the shift in Australia, once the exemplar of moderately priced, high quality middle class housing, to now the most unaffordable housing market in the English speaking world.”

The Introductions to earlier Surveys had been provided by Australian environmental scientist Dr Tony Recsei (2010), American housing authority and author Dr Shlomo Angel (2009) and the former long term Governor of New Zealand’s Reserve Bank Dr Donald Brash (2008).


lets hope for a real buoyant and event filled 2011 in housing, so far we are being told property prices will flatten,,, no one believes that.. the bubble will just grow and grow.. imaging if auction clearance rates begin to increase here in melbourne..

this bubble has it own journey to follow.. the median prices just break records month in month out..

no sign of any bubble flattening in melbourne imho...

keep on buying.. lol

 

[medicowallet]

Bring a new law in and remove FHOG.

When you buy your first house you pay no stamp duty, or when you only own 1 house, you pay no stamp duty on that house.

When you buy your second house (investment, holiday house whatever) you pay 15% stamp duty.

When you buy your third house etc you pay 25% stamp duty.

What does this do? It gives the FHO a chance to get into the market, they would effectively have 25% or cheaper cost to purchase a house if they were bidding against an investor. It makes it harder for an investor to get into the market place, forcing price to slow or go lower. Everyone wins.

Discuss.

Discuss, it is a ridiculous idea, all it will do is allow FHB to pay more than the average person, akin to what the FHBG does. What we need is a level playing field for all investment classes, so that people make investment decisions, without making them depend on government involvement.

Market forces should be dictating the direction of investments, not government handouts and protectionism.

1. Remove SD.
2. Remove CGT exemption.
3. Remove any government involvement.
4. Never allow SMSF to purchase residential property.
5. No foreign ownership.

 

[freddy2]

My solution:
Remove stamp duty
Land tax on PPOR: 1% per year
Land tax on IP : 2% per year

Would remove many distortions in the property market but unfortunately a land tax is not even close to being politically feasable.

 

[prawn_86]

Land tax on PPOR: 1% per year
Land tax on IP : 2% per year

A % of what? Purchase price? Valuation? Who does the valuations? etc

 

[matty77]

Discuss, it is a ridiculous idea, all it will do is allow FHB to pay more than the average person, akin to what the FHBG does. What we need is a level playing field for all investment classes, so that people make investment decisions, without making them depend on government involvement.

Market forces should be dictating the direction of investments, not government handouts and protectionism.

1. Remove SD.
2. Remove CGT exemption.
3. Remove any government involvement.
4. Never allow SMSF to purchase residential property.
5. No foreign ownership.

I totally agree with:
2. Remove CGT exemption.
4. Never allow SMSF to purchase residential property.
5. No foreign ownership.

would make a great difference.

I guess my point is this, how do you bridge the gap between rich investor bidding on his 10th property with money to burn and the FHB with 2 kids, bidding on his first house?

 

[Tysonboss1]

The question is what is the PE on property?

I don't really understand what the exact question you are asking me is.

As I said before pe is price to earning ratio,

Are you asking how you calculate the pe on property or what a a fair pe is to expect when purchasing.